A non-fungible token (NFT) is a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify ownership and authenticity.[1] The ownership of an NFT is recorded in the blockchain and can be transferred by the owner, allowing NFTs to be sold and traded. NFTs can be created by anybody, and require few or no coding skills to create.[2] NFTs typically contain references to digital files such as photos, videos, and audio. Because NFTs are uniquely identifiable assets, they differ from cryptocurrencies, which are fungible.
Proponents of NFTs claim that NFTs provide a public certificate of authenticity or proof of ownership, but the legal rights conveyed by an NFT can be uncertain. The ownership of an NFT as defined by the blockchain has no inherent legal meaning and does not necessarily grant copyright, intellectual property rights, or other legal rights over its associated digital file. An NFT does not restrict the sharing or copying of its associated digital file and does not prevent the creation of NFTs that reference identical files.
The NFT market grew dramatically from 2020 to 2021: the trading of NFTs in 2021 increased to more than $17 billion, up by 21,000% over 2020's total of $82 million.[3] NFTs have been used as speculative investments and they have drawn increasing criticism for the energy cost and carbon footprint associated with validating blockchain transactions as well as their frequent use in art scams.[4] The NFT market has also been compared to an economic bubble or a Ponzi scheme.[5] In 2022, the NFT market suffered a major collapse, with prices sharply falling; a May 2022 estimate was that the number of sales was down over 90% compared to its 2021 peak.[6]
An NFT is a unit of data, stored on a type of digital ledger called a blockchain, which can be sold and traded.[7] The NFT can be associated with a particular digital or physical asset such as images, art, music, and sports highlights[8] and may confer licensing rights to use the asset for a specified purpose.[9] An NFT (and, if applicable, the associated license to use, copy, or display the underlying asset) can be traded and sold on digital markets.[10] The extralegal nature of NFT trading usually results in an informal exchange of ownership over the asset that has no legal basis for enforcement,[11] and so often confers little more than use as a status symbol.[12]
NFTs function like cryptographic tokens, but unlike cryptocurrencies such as Bitcoin or Ethereum, NFTs are not mutually interchangeable, and so are not fungible.[a] NFTs are created when blockchains concatenate records containing cryptographic hashes—sets of characters that identify a set of data—onto previous records, creating a chain of identifiable data blocks.[14] This cryptographic transaction process ensures the authentication of each digital file[clarification needed] by providing a digital signature that tracks NFT ownership.[14] Data links that are part of NFT records, that for example may point to details about where the associated art is stored, can be affected by link rot.[15]
A diagram showing the right to own a non-fungible token and linked file. In most cases, it is heavily dependent on the token's smart contract.
An NFT solely represents a proof of ownership of a blockchain record and does not necessarily imply that the owner possesses intellectual property rights to the digital asset the NFT purports to represent.[16][17][18] Someone may sell an NFT that represents their work, but the buyer will not necessarily receive copyright to that work, and the seller may not be prohibited from creating additional NFT copies of the same work.[19][20] According to legal scholar Rebecca Tushnet, "In one sense, the purchaser acquires whatever the art world thinks they have acquired. They definitely do not own the copyright to the underlying work unless it is explicitly transferred."[21]
Certain NFT projects, such as Bored Apes, explicitly assign intellectual property rights of individual images to their respective owners.[22] The NFT collection CryptoPunks was a project that initially prohibited owners of its NFTs from using the associated digital artwork for commercial use, but later allowed such use upon acquisition of the collection's parent company.[23]