Elon Musk recently tweeted that he was selling a song about NFTs as an NFT. Elon’s wife, Grimes has made upwards of KSh.600 Million selling NFTs. Twitter CEO Jack Dorsey sold his first tweet as an NFT for upwards of Ksh. 3 Billion shillings in cryptocurrency. A popular NFT artist Beeple recently auctioned NFTs worth Ksh.7.5B. To put that into perspective, the allocation by the national government to county governments for free maternal healthcare in 2018/2019 was Ksh. 4.3 billion. We could have funded free maternal Healthcare in Kenya at the county level for close to two years, for the price of a few NFTs. If you are sitting there wondering what in the artsy arts is going on or thinking the world has finally gone mad, let’s try to make sense of it.
NFT stands for non-fungible token. An NFT is a unique digital certificate that prescribes ownership of digital media or unique virtual items, through blockchain technology. If you are familiar with property law, there is a concept that property is not a singular concept but rather a bundle of rights. For example, I can own a car but you may borrow it from me. My ownership of the car is not extinguished because of your use of it and at the time of your possession, you have certain rights over the car that a third party does not have. NFTs can be seen as the prescription of certain property ownership rights to the buyer through blockchain technology while leaving other people to enjoy other aspects of the property (You can retweet Jack Dorsey’s NFT tweet and share the digital art on which an NFT is based). In some cases, the original artist retains copyright and royalty rights over the property so they can sell copies and earn a certain percentage when their work is resold.
How Is an NFT created and how do they work?
Blockchain technology works so that we can keep track of the ownership of an asset on the shared ledger known as the block chain. When artwork is created, we can assign a token or unique digital identity to it and that derivative token or certificate is what is bought and sold in the market. The artwork itself may be copy-pasted online but the token is unique, scarce and is assigned a value. Since the ledger is operated by a decentralized system of thousands of computers as is the case with bitcoin and other cryptocurrencies, it cannot be duplicated.
The problem with NFTs
Like art, the value of an NFT mostly depends on how much value people choose to peg on it. There are questions on the valuation of NFTs due to issues with their commercial value, authenticity, ownership, and scarcity.
The commercial value of NFTs is best understood when compared to works of art such as Mona Lisa or collectors’ items that present no tangible value other than that which the buyer or markets decide to place on it. Society has advanced beyond the practical utility of items. We can assign value to an asset arbitrarily and decide to recognize its value as such in much the same way paper money makes sense because it is collectively agreed upon. It is also a speculative asset in this sense because the value assigned to NFTs is usually arbitrarily set either at auction markets or by the artists themselves. The NFT artist Beeple for instance has sold some of his work for practically nothing.
The scarcity and authenticity of an NFT is not based on the artwork itself but rather on the blockchain token created. The nature of blockchain technology is such that the ledger is maintained on a decentralized system and therefore forging ownership of an NFT is close to impossible.
The ownership of NFTs is best understood as illustrated before by understanding that property law recognizes property as a bundle of rights. The artist who creates the digital artwork has copyright, the right to earn from the disposal of that asset, the right to create other work from it, and so forth. She can then sell the NFT in the artwork to another person to transfer ownership. However, she can have it on contract what rights she retains and which she sells. This is why an artist who has sold an NFT can still profit from the resale of the NFT if they retained a right to earn royalty from the resale of such rights.
The general public still gets to enjoy the artwork much like we can enjoy and take photos of artwork in the museum without it losing value. Children and artists can take inspiration and recreate the Ma Jolie without it losing value.
I am not convinced, this is the emperor’s new clothes
If you are not convinced about how this works, many people are not convinced either. First, blockchain is a recent technology and we have yet to accept cryptocurrency, much less NFTs. The assets are also quite speculative and the media attention has served to create what is feared to be a bubble. However, the market is founded on plausible grounds; it would not be the first time we are selling “thin air”. We have seen dust, dinosaur bones and celebrity's clothes sold for way more than their market valuation. You would think you know the price of bananas but a banana duct taped to a wall recently sold for KSh.13 Million. One day, the Kenyan government may even sell the NFT in the face of the thousand shilling note and pay for maternal healthcare, but that remains to be seen.