Data Backup Digest

NFTs, or non-fungible tokens, are a popular form of storing digital art and other collectibles. Although they first hit the scene in 2014, they've only recently started to make headlines on account of the astronomical prices that some are paying to own NFTs of digital artwork and other online mementos.

Since NFTs are completely digital, and they are commonly traded via digital marketplaces that utilize blockchain technology, much like modern cryptocurrencies, the data that comprises these tokens must be stored in some sort of online location. To understand where this is, and to comprehend what happens when ownership of an NFT is transferred, one must first understand what an NFT is in the first place.

What is an NFT

As mentioned, NFT stands for non-fungible token. These exist as digital assets, many of which are completely unique. In some cases, however, a very limited run of identical NFTs is created. But this begs the question: how are these digital assets unique or limited in nature? After all, digital content can generally be copied and distributed in infinite numbers.

To prove ownership, each NFT contains built-in authentication that links that specific piece of digital content to its current owner. However, the actual asset – the piece of digital art of or content – isn't stored within the NFT. Instead, most NFTs store their data off-chain – separate from the blockchain – with an URL that points to the online location of the data.

However, this form of data storage has an inherent flaw; what happens to the NFT if the online location is deleted or moved, thus rendering the URL invalid? In short, it means that the NFT is lost forever. There are certain mechanisms in place to try and mitigate such issues, but their long-term effectiveness remains to be seen.

Enter IPFS

The Interplanetary File System, or IPFS, makes it possible for NFT to be retrievable and verifiable. It achieves this via content-identifiers, or CIDs, which utilize content-addressable data hashes. However, the NFT has to remain hosted on the IPFS network at all times, which begs the question: who is responsible for maintaining this data?

Third-Party NFT Marketplaces

At the time of this writing, NFTs rely on third-party marketplaces for long-term data storage. Ultimately based on the cryptocurrency Ethereum, these online storefronts charge various fees for maintaining and transferring NFTs. One of the biggest risks associated with NFTs in the their current state, and one of the issues why most serious investors have yet to take NFTs seriously, is the fact that the industry has yet to agree on any sort of best practices or standards regarding NFT data storage.

Until then, those who decide to create or trade NFTs will continue to use these third-party marketplaces – and they will continue to face considerable risks. Some buyers have already been duped by impersonators, and fake digital art is already a problem. While many of the marketplaces in existence are legitimate, and they do their best to curb such issues, there's only so much they can do.