Unlike cryptocurrencies like bitcoin a non-fungible token (NFT) is something that cannot be exchanged in the usual way. The easiest way to try and explain this is probably to look at the difference between ‘fungible’ and ‘non-fungible’.
If I was to lend you a £5 note and that note was fungible, it wouldn’t matter whether you gave me back a different £5 note or five £1 coins. They’d be worth the same.
However, if that £5 note was non-fungible, the note you give back would have to be completely identical in every way. It would have to have the same serial numbers, the same rips and tears, the same finger prints on it and the same ownership history.
In crypto terms most tokens and most cryptocurrencies are fungible.
If you were to send someone a Bitcoin and you get one back, you wouldn’t notice the difference but this all changes with non-fungible tokens. Each non-fungible token contains totally unique information, its own instantly identifiable DNA.
This means that NFTs are proving particularly popular within crypto-collectibles, crypto-art and crypto-gaming where the integrity and individuality of an asset has to be beyond question. There are 3 reasons why NFTs are seen as the more attractive option within these markets:
- The ownership cannot be disputed
- They can be freely traded on specialist markets
- They reduce the likelihood of fraud as the underlying can recognise counterfeiting
One of the earliest examples of non-fungible tokens was CryptoKitties. This blockchain-driven platform allows players to breed and collect digital cats with the same unique appearance and personality a real pedigree cat would have. These ‘genetics’ are then stored on the supporting blockchain.
Other players could then buy and sell the cats using Ethereum and in 2019 the platform became so popular that annual sales hit $12 million last year, including one CryptoKitty that reportedly sold for an incredible $120,000.
Since then there have been reports of even more eye-watering sums being achieved by other platforms.
The F1 Delta Time Apex Race Car 1-1-1 sparked a fierce auction that ended with the digital car being bought for 415.9 ETH ($113,124).
Premium virtual real estate in Decentraland only achieved 56% of the expected price but that price was a cool 1.3M MANA ($80,663).
A top of the range Crypto Space Commander Battlecruiser was bought for 250 ETH ($45,250).
And a Gods Unchained Prometheus Card (of which there is only a million to one chance you’ll ever find one) sold for 235 ETH ($35,250).
This level of activity has prompted other games to follow and more fantasy titles are planning to enter the fray along with major soccer and baseball franchises who have recognised how much income they could be generating from launching their own collectables.
Although gaming has up until this point generated the highest and most public returns, longer term art could be the real winner.
Historically, it has been almost impossible to monetise digital art. Blockchain could well resolve that. On 21st September 2020 - two days before Christie’s auctioned their first non-fungible token Anthony Pompliano, co-founder of Morgan Creek Digital, went on record to say he thought the digital art market will soon eclipse the physical art market.
Coronavirus has of course contributed significantly to the growth of digital art as people simply can’t go to galleries or museums. Collectors are forced to share digitally and, as a digital image can easily be replicated, there is a greater need than ever to track the original so the value isn’t decimated.
This is where NFTs could provide the perfect solution.
An artist would be able to add a digital version of their work to a digital gallery at which point a token would be generated by a smart contract and deposited in their personal wallet. That token – with all the underlying data - would then be permanently linked to the artwork. This guarantees its ownership and authenticity so it can be bought, sold or exchanged in exactly the same way as a physical piece of art.
And this is where artists really benefit.
They will be able to reclaim the full lifetime commission from their work rather than just the commission on the initial sale. For example, on the Asynchronous Art platform an artist is paid a 10% commission the first time their work is sold but would then earn a further 20% the second time it’s sold. As this is written into the software, it is impossible for them to lose out because of oversight or unscrupulous practices.
Moreover, thanks to process of ‘layer’ selling (creating derivative works with different colours or a different perspective), NFTs could enable the artist to recoup an almost limitless future revenue stream.
However, while advocates believe NFTs are the “ultimate vehicle for putting every significant asset on a public or hybrid blockchain with 100 percent immutability and security” given so much authenticated data regarding the item’s provenance can be stored, there are also potential downsides.
Firstly, the ERC-721 protocol (the standard that describes how to build non-fungible or unique tokens for us within an Ethereum blockchain) is very new and therefore has not yet enjoyed the expected level of take up, especially as the theory is often hard for new market entrants to get their heads around.
Secondly, it can be complicated, expensive and time consuming to build decentralized applications for non-fungible tokens. This can put off all but the most dedicated.
Another concern is that NFTs cannot yet tokenize real-world assets like land and property although work is ongoing to launch peer-to-peer marketplaces for NFT mortgages and rentals. From a media perspective there is also a plan to insulate journalists against fake news by ensuring news is filed through an NFT so the full responsibility for the story to the person who uploaded it. However, all of this work it is at an early stage and there is currently no indication as to when we may be able to benefit from using these NFTs in this way.
The key concern is of course whether the claims made about the strength of the security of an NFT can be substantiated and supported long term.
As with all digital assets, fraud has to be a possibility. If scammers haven’t yet worked out how to exploit NFTs, our experience - particularly within the art world, a market that has always been plagued with fraud and counterfeiting - has taught us it eventually will be and that this level of risk will only rise as more and more money is involved.
In the meantime if you are looking to make your first foray into NFTs here are a few tips which should help make your entry a little bit safer:
- Always approach with caution and perform all the checks you can. For example if you’re interested in a piece of art, reverse image search the piece. Right click and select “Search Google for image.” This is far from infallible but it will provide a first warning if the scam isn’t hugely sophisticated.
- Use established and well regarded marketplaces like SuperRare, KnownOrigin and MakersPlace rather than DIY minting platforms on which anyone can mint their own NFTs.
- Do Your Research. You will be safer collecting proven pieces or proven artists or participating in already popular games but that doesn’t mean you can’t take a chance on something new. It just means you need to do more homework if you do decide to go that way.
- Be prepared for failure. This is a very new technology so you need to be aware that many NFT projects will fail through no real fault of the technology or won’t meet market expectations because they couldn’t maintain the excitement they’d built up pre-launch. This is the gamble with all high risk/high reward opportunities.
If you are thinking about making any type of purchase using non-fungible tokens (NFTs) and would like to discuss the due diligence tips above in more detail with the solicitors in our digital fraud team, please get in touch. As both our solicitors and litigators are international recognised as the legal experts in cryptocurrency, we can explain different ways to spot a potential fraud before you invest.
Alternatively if you feel you have been a victim of or involved in an NFT fraud and don’t know what to do next, contact us. Regardless of the circumstances or the legal jurisdiction the fraud occurred in our lawyers will talk you though the next steps.
If you would like to discuss anything related to NFTs (or any other cryptocurrency or digital issue) please call us today on 020 7792 5649 or email us at This email address is being protected from spambots. You need JavaScript enabled to view it..
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