Non-fungible token

• 1. Introduction

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  Non-fungible tokens were born in a live demonstration at New York City's New Museum. In May 2014, Kevin McCoy and Anil Dash sold a video clip for four dollars.

  The clip had been made by McCoy's wife, Jennifer. McCoy had registered it on the Namecoin blockchain just before the presentation began. Dash bought it. They called what they had done "monetized graphics." Their language was modest. Their idea was not.

  Within years, the concept they had sketched in that four-dollar transaction had grown into a multi-billion-dollar asset class. Then it collapsed. The questions this documentary explores are durable ones: what does it mean to own something that can be copied infinitely? Who profited from the frenzy, and who was left behind? By September 2023, one report claimed 95 percent of all NFT collections had zero monetary value.

• 2. Origins of the Standard

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  Curio Cards launched in May 2017 as Ethereum's first art NFT project. It featured card-shaped artwork, including images that satirized corporate logos. The generative art project CryptoPunks followed in June 2017, putting 10,000 pixelated characters on the Ethereum blockchain. In December of that year, a clipart collection of images of rocks called EtherRock also appeared.

  CryptoKitties launched on Ethereum in November 2017 and grew popular enough to overwhelm the network's processing capacity. The game's monetization raised a $12.5 million investment. Individual cats sold for over $100,000 each. It became recognized as the first mainstream NFT application on the Ethereum network. It also pioneered an early version of the non-fungible token standard known as ERC-721.

  A community-driven paper called ERC-721: Non-Fungible Token Standard was published in 2018 under the initiative of civic hacker William Entriken. Entriken served as lead author, writing under the moniker "Fulldecent." The standard established rules for smart contracts ensuring that no two tokens would share the same attributes or ownership details.

  Alternatives to "NFT" considered during the drafting process included "deed," "distinguishable asset," "title," "token," "asset," "equity," and "ticket." Entriken drove a stakeholder vote to settle the question. "NFT" was the term the group chose.

  OpenSea emerged in 2017 to capitalize on the emerging standard and grew to a $1.4 billion market cap by 2021. That year, ArtReview's Power 100 ranked ERC-721 at number one, calling it "the most powerful art entity in the world."

• 3. The Ownership Question

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  Legal scholar Rebecca Tushnet described the central problem in a single sentence. "In one sense," she said, "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."

  Bored Apes explicitly assigned intellectual property rights of individual images to their respective owners. CryptoPunks took the opposite approach initially, prohibiting owners from using the associated artwork for commercial purposes. That policy changed after the collection's parent company acquired it.

  Australian programmer Geoffrey Huntley challenged the ownership claim from a different angle. He built a site called "The NFT Bay," modeled after The Pirate Bay. It advertised a torrent file supposedly containing 19 terabytes of digital art images linked to NFTs. His message was simple: any of it could be right-clicked and saved. He hoped the project would help educate users on what NFTs are and are not.

  The 2022 amendments to the Uniform Commercial Code in the United States attempted to address these legal gaps. Article 12 created a new legal category called "controllable electronic records." It gave NFTs a clearer basis as personal property that could be owned and transferred. For digital art without additional contractual agreements, however, the disconnect between holding an NFT and controlling the underlying work persisted.

  In 2019, Nike patented a system called CryptoKicks that would use NFTs to verify the authenticity of its physical sneakers. Buyers would receive a corresponding virtual version of the shoe as well.

• 4. Boom to Bust

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  In 2020, total NFT trading reached $82 million. The following year, that figure grew to $17 billion.

  In the first three months of 2021 alone, buyers spent more than $200 million on NFTs. The pace of buying struck some as surreal. The early NFT project Etheria had launched at DEVCON 1, Ethereum's first developer conference, in London in October 2015. Its 457 purchasable hexagonal tiles sat mostly unsold for more than five years. On the 13th of March 2021, renewed interest triggered a buying frenzy. All tiles of the current and a prior version, each originally hardcoded to 1 ETH, sold within 24 hours. The combined total came to $1.4 million.

  By May 2022, daily NFT sales had collapsed 92 percent from their September 2021 peak. The number of active wallets in the NFT market had fallen 88 percent from November 2021. In March 2021, Mike Winkelmann, known professionally as Beeple, had called NFTs an "irrational exuberance bubble." He said so even as his own work was setting new price records.

  Financial theorist William J. Bernstein compared the trajectory to 17th-century tulip mania. Any speculative bubble, he argued, needs a new technology for people to "get excited about." Extreme predictions made about the product do the rest. In June 2022, Bill Gates stated his belief that NFTs were "100% based on greater fool theory."

  In December 2022, even as values crashed, programmer Casey Rodarmor introduced a new method for putting NFTs on the Bitcoin blockchain. He called the approach "ordinals." By February 2023, the popularity of ordinals had contributed to rising payment fees across the Bitcoin network.

• 5. The Art World's New Market

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  On the 11th of March 2021, Beeple's composite work "Everydays: the First 5000 Days" sold at Christie's for $69.3 million. It was the first time a major traditional auction house had sold an NFT.

  The work by artist Pak, titled "Merge," exceeded even that price: it sold for $91.8 million. "Merge" became the most expensive NFT ever sold.

  In March 2021, the blockchain company Injective Protocol paid $95,000 for an original screen print by Banksy. The work was called "Morons (White)." Someone then burned it with a cigarette lighter on camera. The resulting video was minted on the blockchain and sold as an NFT. The person who carried out the burning called themselves "Burnt Banksy." They described the act as transferring a physical artwork into the NFT space.

  American art historian Tina Rivers Ryan, who specializes in digital works, said art museums were widely unconvinced that NFTs had "lasting cultural relevance." She compared the phenomenon to the net art fad that preceded the dot-com bubble. In July 2022, Italy's Ministry of Culture temporarily barred its institutions from signing contracts involving NFTs. The move followed a controversial sale of digital reproductions of Michelangelo's Doni Tondo.

  Analysis conducted in March 2021, in the immediate aftermath of Beeple's Christie's sale, found that most NFT artworks were selling for less than $200. A third were selling for under $100. For artists in that range, platform fees averaged 100.5 percent of the sale price. Sotheby's and Christie's had both begun showcasing NFT artworks in virtual galleries and on physical screens.

• 6. Beyond the Gallery

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  On the 28th of February 2021, electronic dance musician 3lau sold a collection of 33 NFTs for a combined $11.7 million. The sale commemorated the three-year anniversary of his album Ultraviolet.

  In August 2022, the band Muse released "Will of the People" as 1,000 NFTs. It became the first album for which NFT sales would qualify for both the UK and Australian charts. In March 2021, Adam Benzine's 2015 documentary "Claude Lanzmann: Spectres of the Shoah" became the first motion picture auctioned as an NFT. In November 2021, film director Quentin Tarantino released seven NFTs based on uncut scenes from Pulp Fiction. Miramax filed suit, arguing their 1993 contract with Tarantino gave the studio the right to mint NFTs related to the film.

  In October 2021, Valve Corporation banned any Steam application that uses blockchain technology or NFTs to exchange value or game items. In December 2021, Ubisoft announced "Ubisoft Quartz," an initiative allowing players to buy scarce in-game items using cryptocurrency. The announcement video attracted a dislike ratio of 96 percent on YouTube, and Ubisoft subsequently unlisted it. The Game Developers Conference's 2022 annual survey polled developers on the question. Seventy percent said their studios had no interest in integrating NFTs into their games. In July 2022, Mojang Studios said NFTs would not be permitted in Minecraft. The company cited the game's "values of creative inclusion and playing together."

  In May 2021, the University of California, Berkeley announced plans to auction NFTs representing two Nobel Prize-linked patents. One covered CRISPR gene editing; the other covered cancer immunotherapy. The collection was named "The Fourth Pillar" and included handwritten notes and faxes by James Allison. It sold in June 2022 for 22 Ether, worth roughly $54,000 at the time. The university retained the patents and designated 85 percent of auction proceeds for research funding.

  In April 2023, a group visited the British Museum to photograph the Rosetta Stone extensively in three dimensions. Their aim was to recreate the artifact as an NFT.

• 7. Fraud and Dark Money

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  In January 2022, an NFT company called Voiceverse was found to have stolen voice lines from 15.ai, a non-commercial text-to-speech project. Log files revealed Voiceverse had generated the voices of Twilight Sparkle and Rainbow Dash using 15.ai. They had pitched the audio up to disguise the source and sold it as the product of their own technology. The developer of 15.ai responded with a tweet that went viral and drew widespread public support.

  After artist Qing Han died in 2020, a fraudster assumed her identity and sold her works as NFTs. A seller posing as Banksy sold a fake NFT for $336,000 in 2021, then refunded the money after the case drew public attention. A process called "sleepminting" allowed fraudsters to mint an NFT in a legitimate artist's wallet. They could then transfer it back to their own account without the artist's knowledge. A white hat hacker demonstrated the technique by minting a fraudulent NFT that appeared to originate from Beeple's wallet.

  A 2022 study by the United States Treasury found evidence of money laundering risk in the NFT market. The study noted that digital art transactions could simplify laundering by avoiding the physical complications of shipping and insuring traditional artworks. The platform Looksrare, created in early 2022, generated an estimated $400 million per day in its earliest period. Investigators attributed much of that volume to wash trading: the practice of creating multiple wallets to fabricate sales activity.

  In March 2022, two people were charged with executing a million-dollar NFT scheme through wire fraud. In February 2023, a New York court ordered Mason Rothschild to pay $133,000 in damages to Hermès. A jury had sided with the fashion house over his 2021 digital depictions of the Birkin handbag.

  The European Commission announced in July 2022 that it planned to draw up anti-money laundering regulations targeting the NFT space by 2024. Regulators, at least, appeared to regard the technology as a permanent feature of financial markets, whatever the state of its prices.