What is an NFT?

An NFT is a kind of certificate of ownership with which someone can show they own that NFT. In short: an NFT is in fact part of a code pointing to a digital file (object) held online.

The digital artist Kevin McCoy made his first NFT (non-fungible token) on 3 May 2014. It was a digital image of a grainy octagon that changes colour hypnotically. That first NFT was sold in 2021 for one and a half million dollars.

But what is an NFT?

NFT stands for non-fungible token. The token points to securely stored data and represents a unique value on the blockchain. An NFT is nothing more than a digital file linked to a digital ‘object’. Think of a drawing, an image, a tweet or a video. Blockchain is a decentralised ledger in which all transactions are recorded and where anyone can buy and sell tokens. Information is stored on the blockchain about the owner, the digital file, when the NFT was made or sold, and by whom and when it was purchased. An NFT is therefore a kind of certificate of ownership with which someone can show they own that NFT. In short: an NFT is in fact part of a code pointing to a digital file (object) held online. The NFT is not an image or a video, then, but a code with a link to an external digital file.

What do you get when you buy an NFT?

NFTs are only for sale on a dedicated marketplace and must be paid for in cryptocurrency. So if you want to buy an NFT, you need a crypto wallet. Where you buy an NFT on such a marketplace, a photograph for instance, you receive in your wallet a code with a link to an external digital file. You then get a block on the blockchain recording that, from the date of purchase, you are the owner of that token. You do not get the photograph itself; you only become the owner of the token connected to the digital artwork (that photograph). The copyright in the object, in this case the photograph, remains with its original author. That also means you may not reproduce or communicate the image to the public without permission, by using it on your website for instance. You have not been given a licence for that. It is possible, though, to make arrangements with the author of the object and to attach a licence to the NFT.

What is an NFT worth?

The value of an NFT depends on a number of factors. It is not limited to any intrinsic value attached to it, as it is with a painting, for instance. It is also what the buyer or buyers are willing to pay for it, and it has to do with supply and demand. But what the digital content does, how many posts about it appear on social media for instance, plays a part in determining the value as well. The object, the photograph in this case, can be seen and downloaded by anyone, but cannot be altered or changed. Anything that can be digitised can be turned into an NFT. There are NFTs that have sold for millions of euros.

NFTs are made possible by blockchain

NFTs, like cryptocurrency, are made possible by blockchain. In this digital ledger all transactions are securely stored and tracked. The difference between cryptocurrency and NFTs is that a non-fungible token is not interchangeable, whereas cryptocurrency such as bitcoin is. One bitcoin looks the same as another and both have the same value. Every NFT has a value of its own and is unique thanks to the blockchain’s special code. Blockchain is an online database distributed worldwide in which information is stored. In blockchain that database consists of blocks. Each block added contains information from the previous block. The blocks fit together, and where a block is added or removed, that information is changed everywhere. Blockchain transactions include payments in a digital currency, contracts, title deeds and digital art objects.

Is blockchain secure?

The information is stored in the blockchain using cryptography. That creates a long, unalterable chain of information. Blockchain is secure and powerful. It should be noted, though, that what is distinctive about blockchain is that new blocks have to be approved by a majority of the participants, who are rewarded for doing so. Once a transaction is far enough along the chain, it is almost never reversed. With blockchain, every transaction or piece of stored data is handled securely and efficiently. That is because blockchain uses hashes, unique mathematical codes, together with algorithms and cryptography.

Want to know more about NFTs?

Would you like to know more about NFTs, crypto law or blockchain? Do you have questions about the legal side of NFTs? Please get in touch, without obligation, with one of our experts on NFTs and blockchain. They can tell you all about copyright too.