Introduction: Decoding the Nomenclature
A non-fungible token is principally an economic term representing ownership over unique digital assets. More precisely, a unique digital identifier immune to duplication, substitution, or subdivision, is recorded in a blockchain certifying authenticity and ownership. The characteristic uniqueness vested in the NFTs signifies that no two digital tokens shall ever be similar, as is also suggested by the very name afforded to said tokens, i.e., non-fungible. Additionally, the non-fungible tokens are the unexchangeable counterpart of cryptocurrencies, like Ethereum, bitcoin, among others, built on the same programming and digital database, that is, blockchain, however, unlike the latter, NFTs are not tradable or mutually interchangeable with another of their kind, defined by their unique properties and not the inherent value, these tokens shall have one and only one official owner. The buzz-word reigning in the digital sphere –minting -is most essentially associated with NFTs being registered under one’s possession on a digitalized record/ledger, i.e., blockchain, which is then published over online marketplaces funded through crypto wallets, and reserved for said tokens in order to make them purchasable.
Tokens in (trans)action
Non-fungible tokens authorize the ownership over digitally scarce goods or assets, representing both tangible and intangible artefacts, including but not limited to, art, collectables, GIFs. The creator of any digital art, asset, collectable has the option to bring their creation into the digital market at the minuscule ‘gas’ fee required to publish it and subsequently generate a valuable revenue and royalty stream through the auction bids not only for the initial sale but also through sales on secondary marketplaces. The tokenization of content hitherto accessible through the public domain for the copy-paste demographic has now balanced the scales between creators and bona fide users. Through NFTs, the rights of ownership are intravenously transferred to the buyer of such a token. The aforementioned marketplaces have the potency to obliterate the intermediary between the artist and the connoisseur who shall be able to take possession of said NFT with the click of a mouse. Marketplaces like OpenSea.io, Mintable, Foundation, Rarible, et al, host tens of thousands of creators and collectors of rare digital items minted as NFTs, however, like any other transaction, the sale and purchase of non-fungible tokens shall be subjected to capital gains taxes too, in addition to the taxation on the medium of exchange, viz., the cryptocurrency. Furthermore, owing to the idiosyncratic feature of such tokens and the subject they tokenize, their demand is contended to be wary from the rules of the usual market and its fundamental economic indicators, and be at the mercy of investors’ whims and fancies.
With the ownership of the NFTs being regulated and protected through unique IDs linked directly to an Ethereum address and metadata immune to replication, the innate utilities of the blockchain are greatly enunciated in the smart contracts which shall facilitate the transferability of these tokens. On registration or minting of an NFT, the creator is assigned a private key and a public key, which are essentially certificates/proofs of ownership and authenticity, respectively, both of which are secured against any mutation or fraud owing to being underpinned by the blockchain technology. The artist is vested with the sole discretion to decide the scarcity of the asset, in other words, whether to retain the copyright and auction the ownership through the creation of replicas or to forever store the NFT in the safe harbours of the blockchain network as a one-of-a-kind.
The ‘chain’ reaction
With the sales of NFTs reaching approximately $25 billion in the year 2021 as reported by Reuters, the speculative crypto asset has engulfed for itself quite a market-frenzy. The unprecedented chain reaction can, by and large, be attributed to the reinforcing roots of the blockchain technology intertwined with the NFTs. Third-party validations removed from the cycle, the NFT operations can be performed as swiftly as ever while accruing royalty every time the token changes hands or rather IDs. The ease of access offered through the decentralized ledger system enables transparency of exchanges while conforming to the standards of security. The concerns over manipulation and cyber frauds pertaining to digital creations have been mitigated through the genesis of NFTs, which has transcended the theoretical possibilities of rarefication. Through the vesting of extensive power and control in the hands of the artists, previously devoid of attribution, compensation or context, the intended digital revolution to distinguish the artist’s original creation from the nearly indistinguishable copies is profound, at the very least and capable of taking the society by storm, at its very best.
Albeit being the new fad of the cryptic market, the exponential surge in the popularity of NFTs raises economical, ecological, legal and philosophical questions. The mere exchange of original traceability without a physical manifestation of the artefact is a social dilemma, in that it offers bragging rights tending to the vanities of a privileged class. While the upsurge has motivated the creator community, it has considerably depressed the environment through the gigantic carbon emissions involved in generating cryptocurrencies facilitating their transactions. Could the investments in NFTs not be yet another mechanism to park funds alike the huge crypto wealth that blossomed when Bitcoin was the reigning force? Economic analysts respond in affirmative. The world of NFTs is termed as frothy by Jon Sharples, art and intellectual property lawyer at Canvas Art Law, underlining the opportunist consumerism that constitutes the world of tech. Whether the NFTs attract creators and collectors or grifters and spammers is a hot topic as far as the question of the long-term survival of such tokens is considered. The invention of non-fungible tokens can prove to be either a precarity or an amnesty contingent upon the target demographic and their motives for investment. If the theoretical uses can translate to praxis, and align with the multi-sphered ecosphere, NFTs will be immune to evanescence and the ‘chain’ reaction shall continue unabated.
Author(s) Name: Akshita Kothari (Himachal Pradesh National Law University, Shimla)