- A non-fungible token (NFT) is a digital certificate or contract attached to a unique asset to be bought, sold, traded and owned through marketplaces.
- Non-fungible means something is unique and cannot be replicated, unlike bitcoin, which is fungible.
- Some popular NFTs are CryptoPunks, CryptoKitties and NBA Top Shot.
- You can buy and sell NFTs on online marketplaces.
It’s no surprise technology continues to influence how industries evolve. And as the technological world expands, so too does the crypto space. A crypto product borne from blockchain technology is non-fungible tokens (‘NFTs’), endorsed by musicians such as Grimes and business moguls like Jack Dorsey. Even Saturday Night Live has attempted to educate their audience of their purpose!
Defining Non-Fungible Tokens, or NFTs
Things that are fungible are interchangeable or equivalent. Fiat currencies and bitcoin are fungible, for example.
When something is non-fungible, it’s unique. This means it cannot be interchanged—there is nothing exactly like it. For example, an original piece of artwork. Despite reproducing copies, those copies are not the original.
Why NFTs Matter
If I create digital art and publish it online, anyone can save or copy it. Whilst it is required by law to source the original creator, anybody could use or duplicate my work quite easily.
Now, say I mint it instead, meaning I upload it to a blockchain like Ethereum as an NFT. Now my art can start to build value because I own the original artwork. Whilst it can still be redistributed, copied, shared, etc., it is the original piece that becomes valuable the more it is copied, similar to any physical artwork or collectible.
NFTs are financialising the world of viral content, from memes to tweets. The more they’re copied or redistributed, the more valuable the original NFT becomes. Both their scarcity and abundance contributed to their exponential growth in early 2021.
Where Did NFTs Come From?
Whilst NFTs have been around since the early 2010s, the first to gain significant traction were CryptoPunks. Built on Ethereum, the CryptoPunks collection consists of 10,000 unique pixelated “punks”. Demand for punks has exploded over the years, primarily due to their status as one of the earliest NFTs. (When they launched, a punk cost next to nothing. Nowadays, some are selling for as much as US$2 million!)
Another relatively early project to showcase the power of NFTs was CryptoKitties, which launched on Ethereum in 2017. CryptoKitties is a game where you can collect and breed digital cats. Each ‘CryptoKitty’ is an NFT, a powerful idea because every owner can know with 100% certainty that their CryptoKitty is one-of-a-kind. Some CryptoKitties have sold for more than $300,000.
For a more comprehensive look into the history of NFTs, consider heading to NFT Timeline.
In many ways, CryptoPunks and CryptoKitties showed the world how powerful NFTs are. They inspired a wave of innovation and the disruption of many industries.
Just How Big Have NFTs Gotten?
It’s difficult to put into perspective just how rapidly the NFT industry has grown, especially the surge in early 2021. Some figures:
- Roughly $375 million has ever been spent on NFTs. Nearly half of this came in February 2021 alone!
- NFT trading volume was just $12 million in December 2020.
- Cointelegraph predicted the 2020 NFT market cap would increase by $210,558,198 in 2019 to $315,712,346. It surpassed this 2020 forecast, totalling US$550 million (as featured in the chart above) and is expected to reach US$1.3 billion by the end of 2021.
- The average NFT purchase price significantly increased over the past quarter, reaching an average of $161, the highest since the launch of CryptoPunks and CryptoKitties in 2017
Public companies, leading figures in finance, and even celebrities have publicly endorsed and participated in the NFT boom:
- Kings of Leon are releasing their new album, “When You See Yourself”, as an NFT.
- Paris Hilton sold a digital painting of her cat for $17,000 worth of ETH.
- Twitter CEO Jack Dorsey minted his first tweet as an NFT, bidding for approximately US$2.5 million.
- Tesla CEO Elon Musk put a song about NFTs up for sale as an NFT, showing the potential for any type of digital asset attached to an NFT to find value.
Even some of the world’s top sporting leagues have gotten involved with NFTs, including:
- NBA team, The Golden State Warriors, was the first professional sports team to launch an NFT collection commemorating the team’s 6 NBA championships.
- Formula 1’s F1 Delta Time is an Ethereum-based game that is part collectibles, part racing.
- UFC on Flow is a digital collectibles marketplace and gaming platform.
Companies are also rapidly entering the NFT market. Consider these:
- The New York Times has created a column about NFTs and to sell as an NFT.
- TIME Magazine is selling 3 magazine covers in the NFT marketplace.
- Pringles has created an NFT flavour of Pringles, “CryptoCrisp”, produced by artist Vasya Kolotusha.
- Taco Bell released 5 taco-related digital collectibles.
Why Have NFTs Grown So Much?
The unique properties offered by NFTs have innovated and bolstered the growth of already successful industries, such as digital collectibles and art.
Before the NFT boom in early 2021, demand for fine art had been soaring. In 2018 alone, global art sales increased to US$67.4 billion, or 6% from 2017, according to Art Collector.
As a result of the COVID-19 pandemic, artists and creators have had to find alternative methods for producing their work. Many moved their art on to a blockchain network, finding utility in the growing NFT market and the ability to increase their reach.
Artists and creators are not just using NFTs to increase the value of their creations but create in ways that weren’t possible before. They can simultaneously sell their work on traditional platforms (e.g. website, Instagram, etc.) as well as use NFT marketplaces to optimise their creations further.
Similarly, the sports card industry was also surging well before NFTs, especially at the beginning of the pandemic in 2020. Back in 2015, some sports cards were already worth six figures in value. As of June 2020, the sports card and memorabilia market value was approximately $5.4 billion.
Professional athletes and sports leagues have jumped on board, selling the ownership rights to famous sporting moments and turning digital sports cards into NFTs. For example, NFL player Rob Gronkowski launched his own set of digital trading cards as NFTs — one of the first NFL players to join the market.
Similarly, the NBA partnered with Dapper Labs to create NBA Top Shot — a platform to buy, sell and trade videos of iconic NBA moments. In February, NBA Top Shot’s total sales were $232 million, earning $47.5 million worth of sales in just a single day.
While the economic effects of COVID-19 have influenced the crypto markets, the utility, scarcity, and provenance of NFTs provide new avenues for companies to create wealth.
Are NFTs a Bubble?
Market cycles are natural. It’s impossible to know where NFTs currently are in this market cycle. However, let’s look at both arguments.
Some argue that the NFT boom has similar characteristics to the cryptocurrency surge. The continuous increase in NFT value has primarily been driven by speculation instead of use-case, not dissimilar to bitcoin. Also, the breadth of innovation possible is infinite. The very utility of NFTs enables anything digital to become an NFT, which strongly suggests we are only scratching the surface of the NFT evolution.
On the other hand, the more an NFT increases in value, the more constricted bargaining power becomes as the pool of potential investors decreases. Looking at this idea cumulatively, the current sales volume surge may begin to taper off from where it is now.
How Do I Buy an NFT?
There are a few things you need to consider before buying an NFT.
Firstly, have you set up a wallet to store your NFTs? Connecting a wallet to the platform where you choose to buy an NFT is crucial as this is where the NFTs ownership rights will be transferred.
Secondly, what are you planning to buy an NFT with? Most marketplaces accept ETH and some ERC-20 tokens.
Lastly, which marketplace are you planning to buy an NFT from? Most marketplaces are set up like auction houses where you bid for NFTs. Some NFT marketplaces are more general. That is, they offer all sorts of NFTs. Examples here include OpenSea and Rarible.
There are also dozens of niche NFT marketplaces. For example, Async and KnownOrigin are marketplaces for NFT art, Catalog is for NFT music, and Decentraland Marketplace is for NFTs specific to a blockchain-based game called Decentraland.
NFTs are native to the blockchain, but a specific digital asset’s ownership rights can be bought, sold and traded in marketplaces.
The best way to understand NFTs is to check out some NFT platforms and apps. Consider these:
- NBA Top Shots is an NFT platform backed and officially licensed by the NBA, allowing users to buy some of the greatest basketball highlights digitally.
- Hashmasks are digital art collectibles created by over 70 global artists, and there are only 16,384 unique portraits a part of the collection.
- Sorare is a fantasy soccer game where you can manage, buy, sell, and trade a virtual team with NFT player cards.
Risks & Challenges With NFTs
Copyright issues and illegal minting
A growing issue within the NFT digital art industry is the permissionless tokenising and copyright issues many artists have with their creations.
The question remains about who is enacting anti-money laundering procedures and relaying what rights artists have when they mint their creations. For example, there are no barriers to stopping anyone from minting another artist’s work. The only reason why another person may not benefit from stealing is if the artist doesn’t verify the work on the marketplace.
There are currently many NFT auction sites inciting the tokenisation of content they don’t own. However, Marketplaces are starting to emerge that require all works to be registered for copyright. Whilst DMCA processes are beginning to be put in place for many marketplaces—the criminalising of technology that evades measures that control access to copyrighted works—it is unsure whether this will be effective enough to remove unauthorised NFTs.
It’s important to note, minting NFTs will not protect your work. Copyright registration is the only way to have legally enforceable rights.
The amount of raw energy that goes into powering blockchain technology is significant, which powers NFTs. Ethereum mining requires 26.5 terawatt-hours of electricity a year—roughly the same amount of energy needed annually to power Ireland. Ethereum’s Proof of Work (‘PoW’) protocol requires an immense amount of energy to confirm computational effort expended by every system undergoing a task on the network.
However, Ethereum’s iteration, Eth2 (which is still in the works), aims to replace the energy-consuming PoW system with proof of stake (PoS) which significantly reduces the number of nodes needed to process transactions. By switching to PoS, this will cut energy consumption per Ethereum transaction by more than a hundredfold.
NFT artists such as Beeple—otherwise known as Mike Winklemann—plans to ensure his artwork will be carbon neutral or negative by investing in renewable energy, conservation projects or technology that removes CO2 from the atmosphere as a way to offset the emissions from his NFTs. He believes many other NFT artists will follow suit.
Whilst the environmental impact blockchain technology poses is considerable, the question remains whether the value NFTs provide is worthy of its energy consumption.
As the NFT space continues to explode, so does their growing purpose and ability to disrupt various industries. Only time will tell if their current popularity is merely a bubble or if their provenance and innovation will continue to gain traction. If NFTs follow the same timeline as cryptocurrencies, such as Bitcoin, and attract institutional money and widespread acceptance, their legitimacy as a crypto asset may become more concrete.