Attempting to correct the myriad misconceptions surrounding NFT’s would be an endless task; this article will focus not on what they are not, but for what they are: an immutable cryptographic deed formed by a trustless ledger of provenance. Like fungible cryptocurrency before it, they are an innovation built off trustless blockchain breakthrough which will be key to furthering the mechanisms of decentralized finance.
What is an NFT?
Defining an NFT itself is uncomplicated, but seeing what abstract financial mechanisms it solves requires an unintuitive conceptual shift. NFT, non-fungible token, is simply a token on the blockchain that’s immutable and uniquely identifiable, in contrast to normal blockchain tokens which are mutable and fungible. e.g. currency is fungible - a dollar is a dollar, there is no meaningful difference between one USD bill and another; property is non-fungible - a car title or house deed point to a specific, unique thing.
NFT solves the Deed
The NFT’s purest and simplest use-case is as a deed of ownership: a land deed, for example, is a paper contract representing ownership of a real estate property which can be transferred from the owner of the contract to another to represent transfer of the property.
The ideal deed is singular, immutable, unforgable, with a transparent ledger of ownership transfer . But in practice, traditional deeds can be copied, can be forged & the ledger can be incomplete. Due to this, reliance on centralized legal authority (courts) is required to enforce deed disputes, leaving it liable to human error and unfairness, as well as simply being inefficient.
The deed being tokenized on the blockchain is an obvious solution to all these needs through the benefits of a trustless P2P public ledger. The blockchain ledger is provably trustless, safe from centralized attacks and cannot be forged; NFT's thus achieve the basic ideal of a deed. There is no reason not to expect them to be ultimately adopted for all mundane forms of contract deeds, such as real estate deeds, car titles, etc.
The Problem of Authentication
However, a deed is not stand-alone. It is an abstraction of ownership that ideally points to a certain property. But if the deed is not recognized as genuinely demonstrating ownership, then it may as well be a forgery.
Authentication, the process of “recognition”, requires either a centralized authority (e.g. for land, it may be a state body; for art, it may be museum-supported assessors) or decentralized by community consensus (e.g. fiat money, as an abstraction of value, it only represents it as such if its agreed to by the market).
Certificates of Authenticity in the Art World
It makes sense that NFT’s have first found their use in Art, because the art world has struggled with ownership and authentication for its centuries of existence. Let’s use it as a case study.
In modern times, high art is bought and sold via the transfer of ownership deeds; often the work does not even physically change hands, being held in tax-efficient freeports.
This is why it was also possible and normal for the art world to have sold immaterial (digital, conceptual…) works even before the arrival of NFT’s. NFT’s just are just a perfect deed, so make the process much easier.
The difficulty arrives in authentication. The purchase of an artwork is rarely solely the artwork alone, but also with a certificate of authenticity. With many artists, their work is worthless without it, with it needing an appraisal by an expert often first-party to an artist’s representative gallery or own foundation.
The signature is not enough, as it can be forged, so a convergence of items are used to assess authenticity; an example is the use of chemical analysis on oil paints to identify if they’re of a similar origin and age as paints used by an artist in other works.
Rather than make close studies on the work themselves, certificate of authenticity are prepared as a convenient solution - they essentially act as a set of convergence data, densely packed to be easily tested for forgery on multiple angles - stamp, signature, holographic sticker, etc.
It’s designed this way in the same principles behind the dollar bill in your pocket: it may be easy to fake a couple elements of a bill to be plausible to the layman, but by embedding hundreds of anti-forgery aspects, an expert can take the time to authenticate any possible counterfeit.
But a dollar bill is fungible; the only thing one is interested in proving is that it is a real US Treasury minted $1.00 bill, not which bill it is.
This is the second aspect of the certificate of authenticity: pointing to the object referrent it intends to cover.
One may have a provably real certificate of authenticity for a Picasso, but if the details on which painting it refers to are rubbed off, it is useless. It would also be useless alone if it only referred to the title of a painting.
How is one to know which physical painting this abstract “title” tracks to? COA’s try to solve this by embedding information on the dimensions and materials of the painting, as well as often a description of the work, even a small photograph of it and cited references to the work in magazines or literature.
(1) Authentication, and (2) Object reference are the two functions NFT’s must achieve to act as not just a deed of ownership but as a complete certificate of authentication.
But unlike the deed of ownership, non-fungibility as a token on the blockchain is not alone enough to perfectly solve both functions.
NFT’s Authenticate by Solving Provenance
The problem of tracking provenance, the history of transfer of ownership of a property, is an issue that has long plagued art.
It is very relevant to auction houses and collectors because it can influence a work’s value - a painting owned by a notable historical figure, or one that had not changed hands often, etc.
But further, an unbroken chain of provenance from the artist’s studio down the current owner would also be a perfect method of authentication - when an expert must step in to authenticate a work of art it means a mistake has been made, the chain of ownership has found gaps or is otherwise suspicious.
Currently, however, provenance has to be managed by a messy network of third-party auction houses and appraisers, within inconsistent and opaque systems liable to human error, negligence and malice; there is little trustworthiness to provenance (which, by the way, is the driving incentive pushing international art to be centralized around major institutional galleries & auction houses).
The blockchain is trustworthy and robust public ledger by virtue of its cryptographic P2P decentralization; the introduction of non-fungible tokens to its public ledger perfectly solves the question of provenance, and an agreeably unbroken chain of provenance moots any need for third-party authentication.
Addendum: Physical Object Reference Remains Unsolved
Where NFT’s falter and require reliance on externalities is pointing the object being referenced (with the exception of embedded digital art, discussed below). It is here where most of the confusion around and criticism of NFT’s originates.
However, it would be a mistake to assume this voids the solved benefits of the hard solutions to ownership, provenance and authentication detailed above, because NFT’s current solution is to follow the same method as traditional COA: a series of metadata that helps converge on the object in question.
Dimensions, material, title, description, date and a small photograph duplicate - sound familiar?
Even in this aspect, it is a measurable improvement on the traditional COA system: the metadata is as immutable and authenticated as the certificate itself.
The issue arises not from the design of NFT’s themselves but in the crossover between decentralized infrastructure and the need for external, centralized coordination.
NFT’s are perfectly suited to be adopted by the non-digital art world and replace their current COA model, but would still rely on the centralized infrastructure to authenticate.