NFTs sit at the heart of many GameFi projects, from tradable in-game items to collectible artwork. A non-fungible token (NFT) is a unique digital identifier recorded on a blockchain and used to certify ownership and authenticity. NFTs typically contain references to digital files such as artworks, photos, videos and audio. Because each one is uniquely identifiable, NFTs differ from cryptocurrencies, which are fungible (interchangeable). In this guide we explain what an NFT actually is, where the idea came from, how NFTs are used in games, and the risks every player and buyer should understand.
What an NFT is – and what it is not
An NFT is a data file stored on a digital ledger called a blockchain, and it can be sold and traded. It can be associated with a particular asset, digital or physical, such as an image, music or the recording of a sports event, and it may confer licensing rights to use that asset for a specified purpose. Its ownership can be transferred by the owner, which is what allows NFTs to be bought and sold on digital markets.
What an NFT does not do is just as important. Ownership of an NFT as defined by the blockchain has no inherent legal meaning and does not necessarily grant copyright or other intellectual property rights over the associated file. An NFT does not stop anyone from sharing or copying that file, and it does not prevent the creation of other NFTs that reference identical files. Legal scholar Rebecca Tushnet put it this way: buyers “definitely do not own the copyright to the underlying work unless it is explicitly transferred.” Some projects, such as Bored Apes, explicitly assign intellectual property rights for individual images to their owners, so the terms of each project matter.
An NFT also usually contains data links pointing to where the associated art is stored, and those links can be affected by link rot.
A short history of NFTs
The first known NFT, Quantum, was created by Kevin McCoy and Anil Dash in May 2014. McCoy registered a video clip on the Namecoin blockchain and sold it to Dash for $4 during a live presentation at the New Museum in New York. In October 2015, Etheria was demonstrated at DEVCON 1 in London, three months after Ethereum launched; most of its 457 hexagonal tiles went unsold for more than five years until a buying frenzy in March 2021.
In 2017 several projects emerged on Ethereum, including Curio Cards and the generative-art collection CryptoPunks of 10,000 pixelated characters. In November 2017 the blockchain game CryptoKitties launched and pioneered what is considered the first true NFT standard, ERC-721. The community paper “ERC-721: Non-Fungible Token Standard”, led by William Entriken, was published in 2018 and formalised the term “NFT”. During drafting, alternatives such as “deed”, “title” and “ticket” were considered before stakeholders voted for “NFT”.
Boom and bust
Initially pitched in 2017 as a new class of investment asset, NFT trading grew from US$82 million in 2020 to US$17 billion in 2021. The marketplace OpenSea reached a $1.4 billion market cap during the boom, and the artist Beeple sold Everydays: the First 5000 Days at Christie’s for $69 million. Then, in 2022, the market collapsed. In May 2022 The Wall Street Journal reported that daily NFT sales had declined 92% from September 2021. A September 2023 report claimed that 95% of NFTs had fallen to zero monetary value and 79% of collections remained unsold.
NFTs in games
NFTs can represent in-game assets. Some commentators describe these as controlled “by the user” rather than the developer if they can be traded on third-party marketplaces. CryptoKitties, an early success where players adopt and trade virtual cats, raised a $12.5 million investment, and some kitties sold for over $100,000. Developer reception has been mixed, however. In October 2021 Valve banned applications on Steam that use blockchain technology or NFTs to exchange value or game artifacts. Ubisoft’s December 2021 Quartz announcement was heavily criticised, and in July 2022 Mojang announced that NFTs would not be permitted in Minecraft. The Game Developers Conference’s 2022 report said 70 percent of surveyed developers had no interest in integrating NFTs or cryptocurrency into their games.
Risks to understand before you buy
- Uncertain rights: buying an NFT does not automatically give you copyright to the work.
- Easy copying: the referenced image can usually be saved from a browser; critics call the value little more than a status symbol.
- Speculation: the market has been compared to a bubble or a Ponzi scheme, and most collections lost their value after 2022.
- Fraud: NFTs have drawn criticism for their use in art scams and “rug pull” exit scams.
- Environmental cost: some blockchains carry a significant energy cost and carbon footprint.
Risk note: This article is general information, not financial or investment advice. NFTs and other crypto-assets are highly speculative and volatile, and you can lose all of the money you put in. Do your own research and only risk what you can afford to lose.