NFTs — the word on every digital artist’s mind, the craze on the internet, a multi-million dollar market, seeking the interest of many from fields varying from digital art to sports.
But what exactly are NFTs?
NFT stands for Non-Fungible Token. Made it even worse? Let’s break down the term and try to understand the underlying concept in simpler terms.
The word ‘Fungible’ refers to a good or a commodity that is replaceable by another identical item; mutually interchangeable. For instance, you have two $100 bills in your pocket. Both of these bills have the same value and are interchangeable. This makes each of those $100 bills fungible. However, the famous artwork ‘The Mona Lisa’ by Leonardo da Vinci is a unique piece of art, one-of-a-kind. It simply can’t be interchanged with any other copy of the painting, making it ‘Non-Fungible’.
Cryptographic tokens are programmable assets that are governed by an underlying smart contract and blockchain. These tokens are accessible only by the person who has the private key to the digital wallet wherein the tokens are stored. The token is a combination of letters and numbers. The token itself does not contain any information but it relates to the data of relevance to the digital artifact and gets stored on the blockchain.
Here’s an example of a token:
So the digital artifact is crunched down and somehow stored in that token?
No. The original artifact never gets stored on the blockchain. However, the URL pointing to the storage location of the artifact does. The storage place can be a self-hosted server or a peer-to-peer distributed file system like IPFS.
What does it mean by owning an NFT?
When an individual buys an NFT, he or she acquires the rights to transfer the token of that NFT to their blockchain wallet. This token verifies that the digital version owned by the individual is genuine and other versions available or copied from the internet are merely duplicate.
The evidence of ownership of the original work is your private crypto key. The public crypto key of the content creator acts as the digital work’s certificate of authenticity.
Even if someone buys an NFT and gets the rights to brag about its ownership, the owner does not necessarily receive copyright privileges. This allows the NFT creator to generate further NFTs of the same artifact.
Why are people spending millions on NFTs? Why so much hype?
The very idea of converting a digital item into a rare entity is new to the industry.
NFTs devise a way to make digital artifacts rare by assigning ownership to them. We all know supply and demand are the primary drivers of price in any industry. Since NFTs are one-of-a-kind their supply is limited, so by applying the scarcity principle here, we tend to place a higher value on objects that are limited, unique and scarce, resulting in a high price.
Another factor responsible for the NFT buzz is that these digital collectables don’t degrade at all. In the case of collectable cards, painting and other physical collectables, the quality will deteriorate over time and so will their significance and value, but not in the case of NFTs.
In addition to this, the programmability of NFTs enables one to add certain behaviors and attributes to each NFT. The capability to program royalties into the collectable itself allows the original artist to obtain a certain percentage of the money every time the collectable is sold further.
- Beeple’s Everydays: The First 5000 Days
Mike Winkelmann, the digital artist known as Beeple had one of his artwork, namely “Everydays: The First 5000 Days” sold for a staggering $69 million at Christie’s auction on 11th March 2021.
2. CryptoPunk #3100
CryptoPunk #3100, one of the original 10,000 CryptoPunks. These are 24x24 pixel portraits generated using an algorithm by Larva Labs. This crypto punk was sold for $7.58 million on 11th March 2021.
3. NBA Top Shot
NBA Top Shots is a platform that was created by a company named Dapper Labs in collaboration with the NBA. The marketplace has put on NBA’s historical moments for sale in the form of NFTs. As of now, it is estimated that NBA fans have spent more than $230 million on buying and trading these NBA digital collectables.
CryptoKitties is a blockchain-based game, where players can own, breed and trade various crypto kitties. Each of these crypto kitties is unique in one way or another, thanks to a billion possible values of their “cattributes”.
A CryptoKitty named Dragon was sold for a whopping $172,000 in 2018, making it the most expensive crypto kitty sale.
5. The First Tweet
Twitter’s founder and CEO, Jack Dorsey, sold an NFT of the first-ever tweet. The tweet was uploaded on 21st March 2006 and was sold for a final bid of $2.9 million on 6th March 2021.
- Music Industry
Kings of Leon became the first band to release an album named “When You See Yourself” as an NFT in March 2021. The band launched 3 different types of tokens as a part of a series called “NFT Yourself”. The first type of token is a special album package. The second type offers the perk of guaranteeing the owner four front-row seats to one show of every Kings Of Leon headline tour for life. The third one offers exclusive audiovisual art. The band have generated over $2 million as of March 2021 from their album sale.
Gamers have been spending loads of money and valuing virtual in-game items such as skins. NFTs can now allow items like weapon skins, character outfits to be tokenized and owned by a player and trade them amongst the gamers community.
Nike in December 2019, issued a patent for blockchain-based sneakers termed “CryptoKicks”. The patent outlines a blockchain-based system that states whenever a customer buys a CryptoKick, it will receive a cryptography token associated with it. This token will allow Nike to track the ownership of the sneaker and verify its authenticity.
“Metaverse” was coined by Neal Stephenson, a sci-fi writer in his novel “Snow Crash” in 1992. It can be explained as a virtual 3D environment coupling physical and augmented reality. It is often described as a future version of the internet. Some metaverses are powered by blockchain namely, Decentraland, Somnium Space. These metaverses not only allow you to explore them but also enable buying a piece of virtual land, estates, clothing for your avatar and much more within the metaverse. All of these are implemented as NFTs and are controlled by smart contracts. Another exciting feature is that the NFTs that you own in the real world can be showcased in these metaverses too.
Documents like birth certificates, degrees, licenses, etc. can be tokenized and stored on the blockchain to prove the authenticity and ownership of these documents.
While most of the NFTs are built on top of the Ethereum blockchain, other blockchains have their standards of implementation of NFTs like Flow and Tezos. We’ll focus on the standard presented by Ethereum. Ethereum introduced the ERC-721 standard for developing NFTs. They came up with a concept to tag every token with an identifier that will be unique globally on the blockchain, unlike ERC-20 tokens (Ethereum cryptocurrency).
The ERC-721 standard proposed some functions and has defined their structure. If a smart contract implements these functions, it can be used to track the creation and circulation of tokens.
NFTs presented mankind with a way to formulate digital scarcity, link ownership with digital goods and present proof of authenticity. With prices of NFTs being exorbitant, some do acquire them as collectables while others feel it to be a stupid move. Some believe NFTs to be a groundbreaking innovation, some feel it’s just a bubble. NFT has grabbed the masses’ attention since the beginning of 2021 but has started to see a downfall in the market lately. With the value of cryptocurrencies fluctuating every day and the hazardous impact of blockchain mining on the environment, are NFTs here to stay?. Well, time shall tell.