Forward thinking: David Thornton on non-fungible tokens

Non-fungible tokens represent the newest chapter in the blockchain story. They can cost a fortune, but are they really worth anything?

NFTs are non-fungible digital assets, which means they are unique and therefore not interchangeable. They’re essentially a digital record that confers ownership of any digital item. That could be digital art, an MP3 or even a tweet.

“It can’t be altered, so you can’t delete any information or data, you can only add data,” says Ralph Kalsi, CEO of Blockchain Australia. “You can’t swap it, but you can trade it, because every NFT is unique.”

Herein lies the touted benefit of NFTs. Other people can view or listen to the digital asset, but they can’t prove ownership. Anyone can hang a print of the Mona Lisa on their wall, but only the French government can claim ownership rights.

This system, it’s claimed, allows owners of NFTs to protect and potentially commodify their digital asset. Imagine, sometime in the future, houses with paper-thin monitors hanging from the walls, projecting digital art for which the homeowner pays a nominal fee to a licence holder.

They are already big business. In March, an NFT was sold by Mike Winkelmann – the digital artist known as Beeple – for $US69 million ($92 million) at Christie’s.

But it’s not all smooth sailing. NFTs have drawn widespread criticism for a few reasons.

One is the amount of energy it takes to verify an NFT, through a process known as “proof of work”. Using this method of verification, a computational problem needs to be solved by miners – the blockchain participants who verify crypto assets – and this uses energy, a lot of energy.

Research from Digiconomist has found that one Ethereum transaction uses the same power as an average household in two-and-a-half days.

But NFTs can also be validated using “proof of stake”, whereby blockchain participants mine or validate NFTs according to their quantity of holdings in the blockchain. It still requires a computation problem to be solved, but ultimately it uses a lot less energy.

“That is where we could solve the problem of high electricity usage,” says Kalsi.

But another, more fundamental problem is whether NFTs protect creators of digital art at all. Anyone can view or listen to a copy of digital art, and the experience is the same.

It’s really no different from the problem faced by movie studios fighting counterfeit DVDs. As we’ve seen with movies, legally fighting copies is a mug’s game.

So, practically speaking, owning an NFT confers little more than bragging rights.

But this isn’t a new problem. Indeed, paintings still sell for millions despite hundreds or thousands of copies adorning walls all over the world. The value comes not in the act of looking at a painting in and of itself, but in the claim of ownership.

So, what’s stopping people from creating an NFT of copied art? Technically nothing, but it won’t be “authentic”.

“If I’m creating a fake digital art and create an NFT, you need to still verify it,” says Kalsi. “Imagine I try to tokenise someone else’s tweet; it won’t be verified by other people in the community that it’s authentic.”

As law firm Bird & Bird puts it: “Acquiring ownership of an NFT representing a work in which copyright subsists does not, without more, grant the new owner of the NFT copyright in the underlying work.”

“More” could include a smart contract. For instance, Mike Shinoda, the co-founder of the band Linkin Park, outlines on his website that: “Only limited personal noncommercial use and resale rights in the NFT are granted and you have no right to license, commercially exploit, reproduce, distribute, prepare derivative works, publicly perform, or publicly display the NFT or the music or the artwork therein. All copyright and other rights are reserved and not granted.”

In the end, whether the protection offered by NFTs will be worthwhile will depend on the value people give to original ownership. Either it goes the way of the art world, or it suffers the same fate as the music and film industry.

Paintings still sell for millions despite hundreds of thousands of copies adorning walls all over the world