Non-Fungible Tokens & Art

On the 12^th March 2021, Christie’s Auction announced the sale of artwork that was not a physical item.  The artist was Michael Joseph Winkelmann, known professionally as Beeple.   The buyer got a non-fungible token.  This is taking digital currency a step further.  A non-fungible token is a tokenisation of all manner of assets, some of which do not exist in the physical world. 

When we talk finance, the attribute of fungibility is the ability of an asset to be interchanged with other assets of the same class.  Fungible assets simplify exchange and trade processes because fungibility implies equal value between assets.  Money is a prime example of fungibility.  A $100 bill is easily convertible into $10 dollar bills, for example.  Every $1 is exactly the same value, and is interchangeable with an equivalent amount.  Commodities of the same type, common shares and share options, and common bonds, are all examples of fungible goods.  Cross-listed stocks, shares of a stock listed on multiple exchanges, are still fungible, because they represent the same ownership interest in a company.  Not all like assets are necessarily fungible.  For example, cars, and property are non-fungible, even when they look exactly alike.  Art is definitely non-fungible. 

Non-fungible tokens are unique digital assets that can be bought and sold, even though the underlying asset may not have a physical form.  These tokens function like certificates of ownership.  This is an interesting dichotomy.  Traditionally, works of art such as paintings and sculpture are valuable because they are unique.  However, digital files can be easily and endlessly duplicated.  With the use of non-fungible tokens, even digital artwork can be tokenised to create a digital certificate of ownership with a secondary market.  This record is stored on a blockchain.  Blockchains are shared ledgers maintained across thousands of computers, and cannot be forged, because changing data involves all these computers.  The advantage of non-fungible tokens is that they can also contain smart contracts with specific terms such as guaranteeing the artist a portion of every future transaction of the token. 

The image sold by Beeple has been seen by millions, and shared innumerable times.  There is no exclusivity to it.  The artist even retains the copyright, so they can produce more copies.  In this case, the non-fungible token is the only proof that the buyer owns the original work, and we are taking that loosely.  In essence, they actually bought nothing, merely an entry in a blockchain that they own a digital print with no exclusivity, and therefore, no real value beyond what the buyer is willing to pay. 

Non-fungible tokens are here to stay.  Beyond this bubble with artwork, there are uses beyond on the fields of asset ownership and transfer, smart contracts, and ledger security.  We are moving towards zero trust systems.  The concern about non-fungible tokens is that there is an environmental impact of maintaining ever lengthening blockchains, because all that data must be stored somewhere, duplicated many times.  It takes up space, it takes up energy, and there is an impact by the hardware.  More importantly, blockchains can be manipulated if someone has the resources to control most of the computers sharing that ledger by slowing down transactions, for example.  While non-fungible tokens have a future, we should embrace them with some caution.