ONE CANDIDATE for the Oxford English Dictionary’s “Word of the Year” for 2021 will surely be “NFT”. Non-fungible tokens—cryptocurrency chits which represent digital images or videos—have been around since 2014, but they took off in popularity in March this year when Christie’s, a British auction house, sold an NFT of “Everydays—The First 5,000 Days”, a work of art by Mike Winkelmann, for a cool $69m. Now The Economist is getting in on the act. On October 25th we will auction off the cover of our issue from September 18th, which depicts Alice in Wonderland embarking on a journey into the world of decentralised finance (DeFi)—a world in which NFTs form part of the foundation of the digital economy.
An NFT proves the ownership and authenticity of a digital asset that is recorded on a blockchain. The auction will be held on Foundation, a platform for digital art, and will last for 24 hours. It is open to all. Proceeds from the sale, after auction fees, transaction costs and tax liabilities*, will go to The Economist Educational Foundation, an independent charity that helps students learn about current affairs. As well as raising money for a good cause, we hope that the auction will be educational, both for us and our readers. The world of DeFi has the potential to make economic activity more efficient, transparent and fair. But it also comes with risks.
The Economist’s auction is a leap into a frothy market. The total value of NFTs issued on the Ethereum blockchain is $14.3bn, according to DappRadar, a blockchain research company. CryptoKitties, unique digital animals that can be bred and sold, were one of the first tokens to generate large volumes of activity. Dapper Labs, a gaming company that created CryptoKitties in 2017 along with several other NFTs, is now valued at $7.6bn, roughly the same as Lufthansa, an airline.
After the sale of “Everydays”, the use of NFTs for digital art was particularly frenzied. Blockchain-based art can help artists keep a larger share of their work’s value. In the physical world, it is difficult for creators to maintain a stake in re-sold versions of their work. But NFT creators can collect royalties on future transactions by baking it into the blockchain’s code.
Some doubt the true value of a NFT. To “own” one means having your ownership recorded on a digital ledger—nothing more. The image can still be copied and downloaded by other internet users. There are signs that the market is cooling off. Trading volumes for art NFTs have fallen from their peak of about $200m in March to less than $25m in July (see chart).
Still, the world of DeFi is beguiling and evolving. People are coming up with more and more uses for the tokens. San Marino, a small country in southern Europe, has approved the use of NFTs to issue digital covid vaccine passports. Some people are using virtual land NFTs which confer the right to build properties in different virtual worlds known as “metaverses”. Trading volumes of NFTs overall have remained steady, even as art trading has slumped. Come and join us down the rabbit hole. ■
Correction (October 24th 2021): An earlier version of this article calculated the market capitalisation of NFTs including some tokens that are used in NFT applications, but are not themselves NFTs. This was incorrect. Sorry.
*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 TEEF. 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 funds donated to TEEF.
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.