A Thing Unlike Any Other: A NFT Primer
Basically, a non-fungible token, or NFT, is an indivisible unit of data that certifies a digital asset to be unique and therefore not interchangeable. (By contrast, a dollar bill is perfectly interchangeable — or fungible — with every other dollar bill, which makes dollars useful as currency.) Each NFT contains computerized code verifying it as the only asset with that specific digital identity.
If NFTs can’t be used as currency, what good are they? The answer lies in their uniqueness. Digital assets are easily duplicated. You could cut-and-paste this article, for example, and your copy would be indistinguishable from my original. (Please do not do this.) However, if I were to convert this article into a NFT, that would indelibly mark my original as the original.
This indisputable authentication has made NFTs a perfect fit for the art world. Scammers can forge a physical painting, but a NFT is original by definition. For this reason, a high-profile artist like Mike Winkelmann, also known as Beeple, can sell a NFT for $69.3 million, because the buyer knows and can prove that the NFT is a Beeple original.
Buying a NFT does not necessarily confer a copyright over the represented artwork, or even sole ownership. To the contrary, copies of the digital art associated with the NFT can remain on the internet. (Click here to watch the $69 million Beeple video.) Moreover, unlike a physical art piece, a NFT can include code giving the artist a royalty every time the art changes hands; Beeple made a 10 percent royalty from the sale of his NFT, so he was quite pleased when his work was profitably resold. But NFTs provide inarguable authenticity and provenance — the lifeblood of the art world — so they can offer a profit stream for digital artists.
NFTs have gone beyond the art world. You can now buy and sell NBA highlights via NBA Top Shot, a NFT trading platform that sells video clips in packs like baseball cards. A San Francisco landlord is selling leases as NFTs starting at $300,000, through which the buyers will receive the right to rent a room for $1 per month for 75 years. If you’re not in the market for an apartment, you can race digital horse NFTs for prize money; one NFT horse recently sold for $125,000.
Needless to say, pitfalls abound. Anyone can convert any digital asset into a NFT, whether they own the asset or not. Recognizing this, scammers have begun impersonating artists and selling NFTs of their work. You can verify details about the contract used to create a NFT, but that alone does not guarantee that Beeple actually created it.
Also, just because you bought a NFT does not mean that it is the only NFT associated with that digital asset. The owner of the asset can convert it into as many NFTs as they want. This has particular implications if you buy, for example, a NFT lease, as you may end up in a hostel instead of a bachelor(ette) pad.
NFT buyers also have to look out for old fraud tactics in the new NFT environment. Fake websites have popped up with names mimicking well-known NFT marketplaces, and these sites collect users’ personal information and/or sell them nonexistent NFTs. Scammers also impersonate the social media presence of NFT marketplaces to do the same thing.
Finally, NFT marketplaces are just as susceptible to hacking as any other website. Premier NFT site Nifty Gateway recently announced a hack in which scammers allegedly stole NFT art or used victims’ credit card information to purchase NFTs, which the hackers then stole and resold. Although Nifty Gateway returned at least one stolen NFT, it could not return any NFTs removed from the site, due to the decentralized nature of the marketplace.
Notwithstanding the dangers, you can protect yourself in the NFT world.
Research your NFT marketplace’s data security protocols before you sign up. If you cannot tell what protocols the marketplace has, move on to the next one.
Enable two-factor authentication in your chosen NFT marketplace. Nifty Gateway reported that none of the victims of its hack had enabled two-factor authentication, which would have alerted them to the hack.
If the NFTs value depends on having bought it from the creator, ensure the seller is who they claim to be and whether the seller has the right to sell the asset upon which the NFT is based.
If you are in the market for a unique NFT, determine whether the creator reserves the right to create additional NFTs of that work.
If you are buying NFT artwork, do a reverse image search to see if other NFT marketplaces are selling the same image.
In short, the NFT market is like any other IP market. It contains a risk of fraud and data breaches, but with the proper precautions, you can navigate it safely and profitably.