Non-fungible tokens: Unique digital values are conquering the crypto world

On March 11, 2021, the renowned auction house wrote Christie's art history. Not with the auction of a physical painting or piece of jewelry, but with the first auction of digital art. For the equivalent of 69 million US dollars, an anonymous buyer auctioned off the EVERYDAYS: THE FIRST 5,000 DAYS collage by designer Mike Winkelmann (“Beeple”), which represents 5,000 days of digital art. It was the first time that an auction house auctioned off a cryptic token. But certainly not the last time, because the so-called non-fungible tokens (“non-exchangeable tokens”) have the potential to revolutionize the art market and other areas of application.

What are Non-Fungible Tokens?

NFTs are unique, cryptographic tokens that, unlike well-known, “fungible” tokens, such as bitcoins or other crypto coins, are not interchangeable. While Bitcoin and Co. are created in a total amount and a variety of individual computing units of the relevant crypto value exist, with NFT, a single, unique token including a token ID is created via a smart contract. Each NFT contains a unique identification number that remains unique with every transaction. In contrast to Bitcoin, different prices can also be charged for different NFTs.

The unique ID of an NFT is stored on a platform and, when the NFT is entered, acts as a kind of “converter” that displays content about the relevant token. 
For example, NFTs are suitable for platforms that offer collectibles, access keys, lottery tickets or numbered seats for concerts and sports games. There is usually no real connection to assets with NFT. Most NFT and associated smart contracts are built on the Ethereum blockchain, but further blockchain developments will incorporate the NFT standard, such as TRON.

NFT: Digital Originals

In the form of an NFT, values can be displayed, such as virtual works of art, trading cards or in-game items. But which legal framework applies to NFT and which liability claims apply? Despite many unanswered questions, the market is flourishing:

• Virtual art and collectibles

Currently, NFTs are particularly inspiring artists and collectors with a completely new perspective: In the traditional world, works of art are an investment, an object of love or prestige, which usually also has a physical presence. For example, it hangs in the living room, is displayed in a gallery or stored in a locker. In contrast, NFTs are tokenized certificates of authenticity that are assigned to a purely digital asset and thus uniquely identify the owner — they represent verifiable, digital rarity. This property allows NFTs to than Proof of origin to act and to be able to prove the ownership and authenticity of virtual and potentially real assets.

An art form of non-fungible tokens already dominated the crypto world in 2017. As one of the first large decentralized applications (DApps), the game CryptoKitties on the Ethereum blockchain caused a sensation. Users were able to create small, colorful kittens that differ in their shape, eye color, coat, background, etc. Depending on their “rarity value” and demand, CryptoKitties are sold at huge prices. For example, “Dragon” currently has the equivalent of almost one million US dollars.

Digital works of art and collectibles worth millions of euros are being auctioned on specific trading platforms such as OpenSea, Art Blocks or Sorare. Artist Grimes, wife of Tesla founder Elon Musk, recently auctioned off her digital art collection “War Nymphs” for a total of almost six million US dollars. Twitter CEO Jack Dorsey's auction was particularly eye-catching in the media. He auctioned his very first tweet dated March 21, 2006 with the content: “Just setting up my twttr.” The tweet, packaged as a digital NFT certificate, has changed hands for 2.9 million US dollars.

NFT is also popular in the sports trading card world. For example, the NBA offers licensed, digital collectibles — The Top Shot Moments — some of which are traded for the equivalent of over 200,000 US dollars per piece.

• In-game items

Collecting or buying virtual objects (in-game items) or optimizing your own character is an important aspect of many online and PC games. However, most game manufacturers regulate their trade and therefore enjoy full control over the creation and pricing of virtual items. Many game producers are therefore likely to have no monetary interest in trading with NFT. But the technology would provide more transparency and ensure fair and transparent transactions in the gaming environment.

• Data verification and storage

In addition to selling or auctioning ownership claims, NFTs also represent an interesting solution for storing, transmitting and verifying sensitive data. Patents, contracts or licenses could be issued forgery-proof in the form of an NFT and give the owner the opportunity to access them digitally and decentrally and to assert claims. In this way, NFTs could simplify communication with and between authorities and speed up the creation of identity documents or visas, for example.

Trading platforms are booming — blockchain on its way into the mainstream

One Analysis of Nonfungible.com shows that the NFT market volume in 2020 was around 338 million US dollars — after around 141 million US dollars in 2019 and 41 million US dollars in 2018. This growth may accelerate even more in 2021. Non-fungible tokens can reach the mainstream when artists, speculators, game producers, influencers or brands use the NFT as a new innovative marketing channel in addition to their traditional marketing channels.

Digital collectibles in the form of NFT may just be the door opener for further, innovative, blockchain-based areas of application beyond Bitcoin & Co. NFTs are therefore rightly a hype. However, it remains to be seen to what extent legal principles provide clarity about specific applications. As a result, investors currently only have to rely on their common sense when deciding whether to buy a virtual NFT. If the value of this token is based exclusively on excessive expectations, the invested capital may be lost in the end.