Non-Fungible Tokens (NFTs) are digital assets that establish provenance on a blockchain. The term “fungibility” refers to the ability of an asset to be traded with another identical asset. For example, money and cryptocurrencies are fungible because one dollar can be traded for one dollar, and one bitcoin can be traded for another bitcoin.
On the other hand, non-fungible assets are unique and hence cannot be interchanged with another similar asset. The Mona Lisa is non-fungible because it cannot be traded for another original Mona Lisa, as it’s a one-of-a-kind painting.
Therefore, NFTs contain unique pieces of data that’s stored on a blockchain, which establishes a public proof of ownership for them. These unique data can be represented by objects including art, music, collectibles, or pieces of virtual land, therefore creating assets that are non-fungible.
Instead of receiving physical assets (e.g. a real-life painting), buyers of NFTs gain access to a digital “token” that acts as a certificate of ownership of the asset (e.g. a piece of digital art). Think of it as buying a digitised Mona Lisa containing encrypted data that certifies its authenticity and ownership.
While most NFTs are stored on the Ethereum blockchain, other blockchains such as Solana also support them.
How Do NFTs Work?
Or rather, why should you purchase a piece of digital art when you can right-click and download the world’s most expensive NFT for free?
The buyers behind the world’s most expensive NFT (USD 69 million) recently spoke to Bread News about investing in NFTs. Read their story here.
Nothing can stop people from downloading NFTs for free. But it’s akin to taking a picture of the Mona Lisa and then claiming ownership. The value of a NFT comes from its ability to establish authenticity, with the unique data that it contains creating scarcity.
A meme can be downloaded and shared a million times, with no record of its ownership and the appropriate credits to its original creator. NFTs solve this issue by enabling digital creators to protect their creations with unique data, therefore making it more scarce and valuable. They guarantee the authenticity of the content while enabling creators to monetise their work instantly.
NFTs can also be programmed to contain smart contracts, which ensures that creators will automatically earn a cut of the fees if their works are resold in the future. This is a groundbreaking feature as the conventional art industry cannot usually guarantee resale royalties.
Because NFTs exist on blockchains, it essentially removes the need for intermediaries such as auction houses, because a piece of digital content can now be directly sent and received as unique data on the blockchain, similar to how a cryptocurrency transfer might work.
The History Of NFTs
CryptoPunks was released in June 2017 as the first NFT project on the Ethereum blockchain. The project was developed by Larva Labs, and anyone with an Ethereum wallet could claim a CryptoPunk for free. Only 10,000 uniquely generated CryptoPunks were created.
Today, CryptoPunks have a floor price of USD 420,000. CryptoPunk #3100 and CryptoPunk #7804 were sold for USD 7.58 million and USD 7.57 million respectively.
In October 2017, CryptoKitties was launched as a collectible series by software company AxiomZen. Each virtual cat had unique features and were breedable. CryptoKitties are said to be the first real test of Ethereum’s utility beyond financial use cases. The buying frenzy resulted in prolonged periods of congestion on the network, making up nearly 10% of all transactions at one point.
Prominent NFT marketplaces such as OpenSea were created to support the sale of CryptoKitties.
NFTs have since rapidly evolved into a booming market for artists, content creators, gamers, and celebrities. It’s estimated that NFT sales volume surged from USD 81 million in the second half of 2020 to USD 2.5 billion in the first half of 2021.
NFTs And The Metaverse
While NFTs are fuelling a boom in the art industry, the technology also has widespread applications in virtual reality environments.
Metaverses such as Decentraland and Sandbox exist on the Ethereum blockchain, therefore allowing players to own digitised assets like virtual land and real estate as NFTs. Every purchase and sale is executed with Ethereum-based currencies, and players are able to authenticate assets on the blockchain.
Prominent auction house Sotheby’s has also set up shop in Decentraland, with its virtual gallery showcasing digital art by prominent artists.
Are NFTs A Bubble?
Yes and no. NFTs are partly driven by FOMO (fear of missing out) and like cryptocurrencies, their prices are often determined by shared sentiments. Just look at this sale of the word “Test” for USD 270,000:
It can be difficult to comprehend the long-term value of a JPEG file. Sky-high prices have resulted in a saturated market filled with individuals that are desperately trying to seek profit.
However, the real potential and value of NFTs lies in its underlying technology, and not the asset that it might represent. NFTs provide an opportunity for talented artists and creators to secure the authenticity of their works, while allowing for more efficient transactions without bureaucracy.
The tokenisation of digital assets might also be a precursor to real-world assets being exchanged as NFTs in the future, therefore creating a more liquid market for previously illiquid assets like real estate
Interested in buying NFTs? Prominent marketplaces such as OpenSea, Rarible, MakersPlace, and SuperRare provide easy access to a wide range of NFTs. However, due diligence on the artist and/or seller should be conducted before purchasing any NFTs. Look out for upcoming creators with original concepts or stories that might make their work more unique and valuable.
Before the writer got into the blockchain space, he thought bitcoin was dug up from the ground and Non-Fungible Tokens were inedible fungi.
Take what he writes with a pinch of salt.