The market for non-fungible tokens is evolving

JOURNALISM IS ABOUT telling a story, rather than living it. Yet sometimes these realities collide. When a new technology shows promise, experimenting with it can help tell the story. In September we wrote that non-fungible tokens (NFTs) and the crypto infrastructure they sit on could transform finance and the digital economy. Our cover image that accompanied the article, inspired by the illustrations for the first edition of “Alice in Wonderland”, shows Alice peering over the edge of the rabbit hole, into this weird new world.

Now she will become part of it. The Economist has created an NFT of that cover image. On October 25th at 5pm BST (noon EDT/9am PDT) we opened an auction for the token, which will run for at least 24 hours. The proceeds of the sale, less the fees, transaction costs and potential tax liabilities*, will be donated to The Economist Education Foundation, an independent charity that teaches young people to analyse current affairs. In addition to raising money for a good cause, the auction allows us to better grasp the potential of this technology.

An NFT is a record, typically on the Ethereum blockchain, that represents a piece of digital media: an image, say, or some text, or a video. Invented in 2014, NFTs enjoyed a mini-boom in 2017 as “cryptokitties”, collectable images of digital cats, began selling for thousands of dollars (one such kitty is pictured below). But the tokens grabbed the headlines in March this year, when Christie’s, an auction house, sold an NFT of a work by Beeple, a digital artist, for $69.3m (it is also pictured below).

Today the total value of NFTs issued on the Ethereum blockchain is $14.3bn, according to DappRadar, a research company, up from around $340m last year. According to a poll conducted in March by Harris, a market-research firm, 11% of American adults say they have purchased an NFT (only a percentage point less than those investing in commodities). Analysts at Jefferies, an investment bank, expect the value of NFTs to double next year, and to approach $80bn by 2025. Moreover, the tokens’ use is expanding beyond cats and collectables. In time, they could prove useful for all sorts of activities in both the digital and the real worlds.

NFTs are crypto-tokens, like bitcoin or other cryptocurrencies. Bitcoin, however, is fungible: one token is worth the same as any other, much like a dollar bill or a print copy of the latest issue of The Economist. NFTs, like plane tickets and baseball cards, are not. The tokens store a unit of data, often including the name of the NFT and a link to a digital image. The token is unique and can be held only in a single digital wallet. The image, however, can be viewed, copied or downloaded by anyone.

Why would such a set-up exist? NFTs were invented by Anil Dash, an entrepreneur, and Kevin McCoy, a digital artist, to help convey that an item was a digital original. They provide proof that the holder owns that specific token, even if it does not give them copyright or exclusive use of that work. Even Mr Dash seems a little bemused by their popularity. “If you liked an artwork, would you pay more for it just because someone included its name in a spreadsheet? I probably wouldn’t,” he wrote in April. But, he added, “Putting artworks on the blockchain is like listing them in an auction catalogue. It adds a measure of certainty about the work being considered.” Being able to separate the artist’s creation from mere copies does confer some value.

NFTs have other potentially useful features. Because they live on an open blockchain system, the history of transactions involving them can be viewed publicly. That makes it possible to code features into the contracts that govern how they are bought and sold. Digital artists can retain a stake in their work, exposing them to a share of the proceeds if the digital original goes on to be sold. This is something that small artists might struggle to enforce through conventional means. (The Economist will retain a stake of 10% of all future resales of its NFT, which will also be donated to the educational foundation.)

In theory, an NFT could link to text including a legal contract that confers a specific type of property right or ownership. In practice, however, nothing is included. The property rights for art NFTs are instead typically set out by the specific platform used to issue them. Some make clear that the issuer of an NFT must have copyright over the work they are minting. The terms of Foundation, the platform that The Economist is using, spell out that the buyer of an NFT has rights that resemble a licence to use an image in limited ways: they can publicly display and copy the NFT for personal use, for instance, but cannot use it for commercial purposes.

Monthly NFT-trading volumes on designated art platforms, including Nifty Gateway and Foundation, reached $205m in March this year, with the sale of Beeple’s opus marking the height of the frenzy. The ardour for artwork has cooled since. But the wider market for NFTs is evolving. The idea of issuing a unique token that contains information, proves ownership and has some ownership rights has taken hold for other uses. Secondary trading on OpenSea and Rarible, two platforms that offer all sorts of NFTs, has been stable (see chart).

Many venture capitalists and developers are attempting to build a new kind of digital economy, in which everything you do online will be run through “decentralised” applications that can be owned and operated by users. The distribution of all kinds of digital content, like pictures, videos and even articles could eventually be dispersed through something like NFTs.

Something akin to this is already happening in gaming. One of the most valuable categories of tokens are those used in “Axie Infinity”, a game with 250,000 daily active users. Players collect, breed, battle and trade little creatures, which are digitised as NFTs, and earn other tokens, some of which give them a stake in how the game is developed. Dom Hofmann, a creator of Vine, a video-sharing app that has since shut down, is launching Supdrive, a video-game platform in which the games are sold as NFTs. And some of the biggest types of NFTs are those used to trade virtual plots of land in immersive online worlds known as “metaverses”.

But the tokens could also be useful for activities conducted in the real world. Some universities are experimenting with using them to fund research. The University of California at Berkeley raised $50,000 by selling an NFT based on documents relating to Nobel-prizewinning research on cancer immunotherapy as a collectable item. It is planning another, similar auction. The country of San Marino has approved the use of the tokens as digital covid-vaccine passports.

The fact that they signal proof of ownership could make NFTs useful for financial activities. Much as they enable virtual-land transfers, they could become a way to exchange real-life property deeds, or other sorts of contracts. In June Michael Arrington, the founder of TechCrunch, a media company, sold a flat in Kyiv in this way (the platform listing the property got agreement from Ukraine’s government that the sale of the NFT would be registered as a transfer of a property deed). NFTs would also allow buyers and sellers to tap into a growing number of decentralised-financial applications that are based on blockchains and can make loans without the need for trusted intermediaries.

Like any new technology, NFTs have flaws. Technical limits when they were first created meant that they contain a link to the image, rather than the image itself. That can be a weakness: unscrupulous sellers have broken or changed links after a transaction. Blockchain technologies consume electricity wantonly. And the identity of a buyer of an NFT, and the provenance of their funds, cannot always be known. Yet some solutions are in the works. A decentralised storage system tries to fix the problem of broken links. Some applications try to touch the blockchain as little as possible, generating fewer emissions.

Will cryptokitties prove to have been the start of a revolution in how people live their lives online? Time will tell. But the potential for a new kind of digital economy seems great enough to warrant closer examination. ■

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_{*The auction platform, Foundation, will keep 15% (including value-added taxes) of the total winning bid as a fee for providing the auction service. There is uncertainty concerning the indirect-tax liability on sales of NFTs. The Economist will withhold 16.67% funds from the winning bid in the event that the firm has to settle such liabilities. The result is that we expect 68.33% of the funds to be available to donate to The Economist Educational Foundation. However, The Economist reserves the right to withhold additional funds from the proceeds in order to meet its indirect tax liabilities in respect of the sale of the NFT, if it is required to pay such taxes by law in any country. The Economist also reserves the right to deduct any transaction costs associated with issuing the NFT from the ultimate donated funds.}

_{The Terms of Service and Privacy Policy that apply to the Foundation platform are incorporated by reference into the sale process for the NFT. By participating in the auction, you agree to, and acknowledge, these terms.}

_{The buyer of the NFT will have the right to use, publicly display and copy the NFT for personal, non-commercial use and the right to re-sell the NFT. The buyer of the NFT will have no right to license, commercially exploit or prepare derivative works of the NFT or the artwork therein (the exact scope the buyer’s rights are set out in the Terms of Service). All copyright and other artistic rights in the NFT and the artwork therein are otherwise reserved by The Economist.}

_{By purchasing the NFT, your capital is at risk. NFTs are volatile and can lose some or all of their value. NFT trading is complex. This NFT is not supervised by any regulator.}

_{For more details on the process of the auction and the terms and conditions, see our Explainer.}