What is an NFT, and what’s happening in the NFT ecosystem?
NFT stands for Non-Fungible Token, and they’re taking the world by storm, with the market already being worth ten times more in 2021 than in 2018.
Beeple, a digital art creator, recently sold an NFT-backed artwork for almost 70 million dollars at a Christie’s auction. This makes him the world’s third most valuable living artist.
But what are NFTs, why should we care about them, and will NFTs become the digital art of the future?
What is an NFT?
NFTs are identifiably unique crypto tokens.
Imagine a specific key that opens only one door, and because of the unalterable nature of the blockchain, the key cannot be forged, swapped for a similar key, or broken down into multiple pieces.
With NFTs, those who buy or inherit digital goods have concrete evidence to show that they are the legal owners of their assets.
NFTs both protect and create digital scarcity, and they first became popular in 2017, when virtual cats famously clogged up the Ethereum blockchain.
Every Crypto Kitty created is backed and represented by one non-fungible token which lives on the Ethereum blockchain. The more distinguishing features they have, the higher their potential sale value, as demonstrated when the whole craze topped off with one digital kitty being sold for 600 ETH (approx $170,000 at the time of purchase).
But the NFT ecosystem contains more than just digital artworks and collectibles, it can also incorporate music, items that can be used in video games, and even tweets.
The creator of Twitter, Jack Dorsey, is selling his first-ever tweet as an NFT, with the winner of the auction (currently priced above 2.5 million) receiving a digital certificate to confirm ownership of the Tweet.
Following this news, TESLA CEO Elon Musk then tried to break the internet by auctioning a tweet of a video of a song about NFTs, as an NFT.
Musicians that have joined the NFT train include dance music producer 3LAU, who raised over $11 million for his latest album, and rock band The Kings of Leon, who pulled in $1.4 million.
Electronic music pioneer Aphex Twin then made $127,000 in ETH by creating an audiovisual piece as an NFT. Due to the environmental impact of the Proof-of-Work consensus, the artist decided to donate a percentage of the proceeds towards tree planting initiatives.
Aside from already famous artists jumping on the NFT bandwagon, an obvious potential use case for NFTs in the music industry is to allow smaller, up and coming musicians to both copyright and control the transfer of ownership for their work, thus taking away the 'kingmaker' power of intermediaries such as record labels or streaming platforms.
With all this manic activity and innovation happening in the world of NFTs, commentators are divided. Some think that this is only the tip of the iceberg, whereas others see the NFT space as a bubble that will soon pop.
Are Non-Fungible Tokens overhyped?
Before selling his composite artwork Everydays: The First 5000 Days, Beeple also sold Punk 2890, a single edition of his Crypto Punks series, for 605 Eth - more than $700,000 dollars at the time.
Nobody could honestly say that a single square of pixel art is worth that amount of money, but then again, nobody can say that an abstract artwork by Jackson Pollock is truly worth 200 million dollars.
The value of digital art is relative to the tastes and requirements of the buyer, and, as with physical art, it is often used as a financial instrument.
As Bitcoin creates more and more crypto millionaires, NFTs offer crypto whales another refuge for funds that they don’t wish to send back to the legacy financial system. They also offer a fun, illiquid hedge against volatility in liquid crypto assets.
One potential criticism of NFTs is that to be truly non-fungible, they should be hosted on decentralized cloud storage platforms that cannot be shut down by third parties.
At the moment, NFT marketplaces like Nifty Gateway host the purchased files on their servers, meaning that if the company behind the site goes bankrupt, or is sold to a third party, legal battles between the owners of the NFTs and the new owners of the site could ensue.
Following the headlines around Beeple’s $70 million sale however, it’s unlikely that the NFT market is going to slow down anytime soon. Other auction houses are likely to follow the lead of Christie’s, and want to host their first NFT sales.
Another famous sale at Christie’s shows us an alternative use case for NFTs.
Robert Alice created Block 21, a hand-crafted artwork that was engraved with Bitcoin’s genesis code, and backed by an NFT. This shows that non-fungible token technology can also be applied to physical artworks, in order to have concrete digital proof that the works are genuine and have been legitimately purchased.
Where can I buy digital art?
Enjin CTO Witek Radomski created the Ethereum ERC-721 coding standard for the creation and distribution of NFTs, and there are now over 2 billion innovative in-game items and collectibles for sale on the Enjin marketplace.
Enjin also has a native cryptocurrency, ENJ, which can be stored and exchanged on the Exodus crypto wallet.
The Rarible marketplace provides a platform where users can not only buy NFTs, but earn Rari tokens in exchange for facilitating the purchase and sale of digital items. The Rari token can be sold, or retained for voting rights on the platform. Many of the Rarible team are artists, which gives the marketplace a creator-centric feel.
Bounce Finance is another NFT marketplace, but one that runs on the Binance Smart Chain as well as the Ethereum blockchain. The objective of this is to improve the current auction problems of missed bids and wasted gas fees due to Ethereum network congestion.
For crypto enthusiasts who are interested in getting into non-fungible tokens but are afraid to get burnt by a new technology they don’t understand, there are new projects like NFTX, which compiles NFT index funds that follow the growth of well-known projects such as Crypto Punks and Crypto Kitties. These funds trade on decentralized exchanges such as Sushiswap, and NFTX is also building a protocol from which NFT owners can source liquidity from their NFTs in the form of crypto loans. This helps combat the problems of illiquidity and wash trading in the growing world of NFTs.
And for the artistically-minded who are asking ‘how much does it cost to make NFTs’, the good news is that it costs only your time, although some marketplaces might charge a small seller’s fee.
What is the future of NFTs?
Millennials are already the age group most comfortable with digital currency, and seeing as they are in the process of becoming tomorrow’s breadwinners and inheritors, will be the ones who propel the NFT market forwards.
It’s inevitable that the NFT market will grow along with the video gaming market, which is already huge. Steam (the video game download store) has their own community marketplace for buying and trading in-game items, and the popularity of watching physical sports is gradually being caught up by the popularity of watching competitive gaming tournaments.
The same principle applies to the world of card and sticker collections, where websites like Sorare are onboarding football clubs to create officially-licensed digital trading cards of football players, backed up as NFTs.
A ‘unique’ (edition of one) Cristiano Ronaldo card recently sold for $290,000 on the site. Similarly, blockchain eSports project Chiliz has been busy creating fan tokens for football clubs, taking advantage of the current disconnect between fans and football stadiums due to Covid-19. European football giants Juventus were the first team to sign up, with their JUV fan token being launched on Binance Launchpool.
Despite all of this development, there is still room for improvement in the NFT space, which has to convert this surge of interest into ever more user-friendly applications and products. Popular NFT marketplaces such as Open Sea still require users to have knowledge of how to win auctions by maximizing their Eth gas fees on Metamask, although Open Sea are seeking to address this by expanding onto the Tezos blockchain.
But despite all of the commentators rushing to declare NFTs the latest crypto bubble, it’s hard to see all of this growing infrastructure and activity just packing up and going away. Entire virtual worlds such as that on Decentraland are being built out and becoming ever more complex, to the point that users can sell their virtual land as advertising space for real world companies.
As every aspect of our lives moves ever more gradually online, so do our commercial activities, and those activities need to be regulated in a trustless, decentralized way.
NFTs and decentralized cloud storage could be the key to this. And after that becomes a reality, how far away will we be from the first 100 million dollar meme?
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.