What are NFTs? Art? Crypto? A scam?
Is the NFT space all set to become a billion dollar market or is it just another passing fad?
Over the last couple of days, the Internet has been swamped with stories of how Twitter CEO Jack Dorsey has been on the receiving end of a US$2.5 million bid for his first-ever tweet which he is selling in the form of a non-fungible token (NFT). However, this then begs the question: What exactly is an NFT, and why are they garnering so much mainstream traction in recent times?
NFTs are one of the many unique offerings to emerge from the crypto ecosystem in recent years and in their most basic sense, can be thought of as being cryptographic entities that have their value directly associated with a real-world asset. As a result, they are perfect for a wide array of ownership purposes, especially those relating to art, music, collectibles, etc.
Dorsey's famous first tweet sold for a cool US$2.5 million. Source: Twitter
Another way of understanding the concept of an NFT is by looking at what exactly the term fungibility means. Simply put, fungibility refers to an attribute of a particular asset that makes it easily exchangeable. For example, a single US dollar bill is extremely fungible such that it can be exchanged in place for other goods repeatedly. This is much like Bitcoin, a cryptocurrency that can also be traded for other tokens quite seamlessly.
On the other hand, if an asset is non-fungible in nature, it basically implies that it cannot be easily traded for something else.
For example, if an NFT for a painting is made, it cannot be substituted or traded for another NFT token, as each NFT represents an entirely unique and individual piece of content. Contrast this against something like Bitcoin, where every BTC is the same as the next.
Straight off the bat, the most distinguishing aspect of an NFT when compared to a physical collectible – such as a Pokémon card or rare Monet artwork – is that each NFT features a number of digital markers that make them not only verifiable but also easily distinguishable from other similar tokens.
Not only that, the data associated with each NFT is duly recorded on a publicly verifiable blockchain which means that there can never be any confusion regarding its ownership. In the rare case that a dispute does come up, items can easily be traced back to their owner with the touch of a button.
As pointed out earlier, contrary to how traditional crypto assets can be exchanged for one another, two NFTs cannot be mutually interchanged because even though they may co-exist within the same digital ecosystem they are not identical in nature.
Last but not least, from a purely technical standpoint, it should be mentioned that a vast majority of all NFTs are devised using two primary Ether token standards: ERC-721 and ERC-1155. What this basically means is that they are compatible with the Ethereum ecosystem as well as other exchange platforms and wallet service providers (such as MetaMask) that offer Ether integration.
Are NFTs all hype or are they here to stay?
To make sense of ongoing NFT hype, Finder reached out to Bryana Kortendick, VP of operations and communications at Enjin, a blockchain gaming platform focused on the creation of digital collectible items. In her view, even though the current hype surrounding this space is bound to subside, the NFT market is here to stay:
"We've seen collectible NFTs garner mind-blowing sales numbers over the last months, but relying on a market consistently to invest hundreds of thousands or millions into pieces that offer nothing beyond collectability isn't sustainable. NFT collectors are investors; they expect their purchases to grow in value over time, which is where high-functioning NFTs come into the picture. Beyond the hype, as more creators and businesses begin to understand the potential for NFTs to create sustainable business models, the NFT market will only continue to grow."
Elucidating her thoughts on high-functioning NFTs, she added that these are the offerings that will continue to garner more and more mainstream adoption since they offer deeper functionality and usefulness in our real lives – providing exclusive access and benefits to various digital ecosystems, unlocking content, certifying ownership of physical assets, etc. "These types of use cases are what will ultimately lead to sustainable, NFT-based business models," Kortendick said.
A similar sentiment is shared by Luuk Strijers, chief commercial officer for cryptocurrency futures and options trading platform Deribit. He told Finder that he sees NFTs as having enormous potential, especially as they pave the way for a blockchain-based tokenised world:
"Whether the current art and collectibles NFTs are a hype or priced accurately is less relevant as this is merely the start of an ongoing process that will eventually include a wide variety of assets like your house, car, gaming, contracts, essentially anything that has value and is a unique entitlement."
On a more technical note, he emphasised that crypto users need to understand that NFTs enable fractional ownership or from a derivatives trading perspective could at some point be used as collateral for open positions. "NFTs will allow for a variety of new business models and apps and have already been instrumental for millions of new users to start using crypto-wallets", he said.
Antonio Vazquez, head of communications at Hermez Network, told Finder that for those individuals looking to wrap their heads around what's coming, a good starting point could be open marketplaces such as OpenSea or Rarible. He emphasised that NFTs are not just about digital art, but digital ownership and that watching the movie Ready Player One could give users interested in this space a glimpse of what's to come in the future.
Here are some of the most expensive NFTs in existence today
There's no denying that the NFT market has been witnessing a lot of monetary inflow recently, with Dallas Mavericks owner Mark Cuban and billionaire investor Chamath Palihapitiya seemingly on board the NFT hype train. However, to gain a better understanding of how big this space has actually become, one only needs to look at the amount of money that has entered this space in recent times.
In this regard, as per data available online, since Q4 2017, a staggering US$410 million plus has made its way into the market. Some notable examples of NFT purchases include:
- Recently, an investor bought a digital rendition of the Monaco racing track – part of the F1 Delta Time game – for a sizeable US$222k. As a result of the purchase, the investor now receives 5% of all proceeds coming from the track's digital racing activities, including entry fees.
- Dragon, a CryptoKitty collectible, is currently priced at a whopping 600 ETH (which works out to more than US$1 million).
- Similar to the above-mentioned digital collectible, Alien #2089, which is part of the CryptoPunk world, was recently traded for 605 ETH.
- A digital collectible of NBA megastar LeBron James was recently sold for US$200,000.
- A character that is part of the NFT-based game Axie Infinity, called Angel, was recently sold for a cool 300 ETH.
A PNG image of the Crypto Kitty "Dragon" worth approximately 600 ETH. Source: CryptoKitties
Disclosure: The author owns a range of cryptocurrencies at the time of writing