What's the hype about NFTs?
Understanding the craze surrounding Non-Fungible Tokens, touted to become the future of gaming, art, and how to get started!
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Introduction
If you’ve come across several news articles mentioning NFTs, digital art and auctions in the past few weeks and wondered what’s the buzz around NFT is all about, I’ve got you covered in this issue of my newsletter.
I’m sure when you hear cryptocurrency, the first word that enters your mind is Bitcoin, but currently, the global cryptocurrency world is buzzing with digital collectibles and arts which are being sold for millions.
These NFTs or Non Fungible Tokens are currently under the spotlight, with notable investors like Mark Cuban quite confident about their growth. The whole thing became an attention magnet when Christie’s, a major auction house announced the auction of a fully digital NFT based artwork.
In the past couple of weeks, CryptoKitties (one of the first uses of NFT), a blockchain-based game that allows you to purchase, collect and breed digital cats generated $433,454 in sales. The game was launched in 2017 and people went crazy over it then spending over a million dollars on virtual cats! Similarly, NBA Top Shot, a service that lets users buy and sell highlights of basketball matches as collectibles has 230 million dollars in sales.
Here, the virtual cats and the collectible highlights are NFTs. Basically, these NFTs are products that operate as digital assets and are unique and authentic, so they could be a drawing, a photo, an article, an audio or a video, and even virtual estates. In short, anything digital can be sold as an NFT.
As NYT reports, there is a fast-growing market for ownership rights to digital art, ephemera and media called NFTs. Here, the buyers won’t be acquiring copyrights/trademark or sole ownership of what they purchase but instead, they’ll get bragging rights and know that they have an authentic copy.
It’s like when we were in school and there was this craze of collecting Pokemon tazo cards, we’d often brag about the cards that we had collected (especially if you got a rare pokemon).
I’m quite sure that some of us have them preserved in some box at home, which highlights a fundamental human tendency to develop attachments to physical goods and that’s why we are willing to pay for them.
Now, with everything going digital, this craze has also gone digital. But the problem with digital art or collectibles is that they can be easily shared or copied, so how do we check for their authenticity?
This is where NFTs come into the picture! This new tech has made selling digital art an exciting prospect and we might just be witnessing the evolution of digital art collecting. In this issue, we’ll go through what NFTs are exactly and how they work, their exciting use cases from gaming to art to real estate, and what to expect in the future.
What are NFTs exactly?
To understand NFTs, we first need to define ‘Fungibility’. It’s an economic term that refers to the property of any good/commodity to be interchangeable with another without sacrificing its value. For example, if I have a $100 bill that I give to you and take a $100 bill from you, though the serial numbers on those notes might be different, they carry the same value. All bills and notes are examples of fungible items.
Now coming back to my Pokemon trading card analogy, a Pikachu card with 60HP cannot be interchanged with another card, let’s say Charizard with 120 HP. You will certainly not trade Charizard for Pikachu, because they aren't the same. They are distinct and essentially non-fungible. Concert tickets, art works, etc are examples of non-fungible items.
In the crypto world, Bitcoins are fungible tokens: one BTC can be interchanged with another BTC because they carry the same value. The same is not true for an NFT, a crypto token that has a distinct value than any other similar token, and hence cannot be replicated.
Just like Bitcoins correspond to owning digital currency, NFT’s correspond to owning digital media. They can be bought, sold, and traded just like bitcoins, let’s see how they work.
How do they work?
NFTs are based on blockchain technology that links a unique value to a digital asset. For the uninitiated, blockchain is a digital ledger that records all crypto transactions and its entries cannot be manipulated.
As I said earlier, any type of digital content can be minted into an NFT. When you mint an NFT, blockchain assigns a unique digital ID to the NFT. Linked to that ID is that NFT’s metadata, which includes its description, who created it, and also its whole transaction history. And all of this is immutable because of blockchain!
We know that digital media propagates all over the internet, from one platform to another. Since these NFTs have a unique ID, each platform can verify its authenticity and also track its entire history, not only making it easier to track back to the original issuer/creator but also adding to its cultural/financial value.
Coming to the technical part, NFTs are part of the Ethereum blockchain, which is another cryptocurrency like bitcoin. Unlike Bitcoin’s blockchain, Ethereum’s blockchain supports NFTs, so to buy an NFT, you need to first get Ether coins (ETH). Using these Ether coins, you can browse all sorts of NFT platforms currently and get that digital cat that you’ve been waiting for!
What differentiates them from other cryptos?
Here, I’ll list some of the characteristics that set NFTs apart from other cryptocurrencies:
Unique: I’ve already talked about this, each NFT contains the metadata that makes it distinct from others. Since this data is immutable and once can track the history of ownership, it serves as a certificate of authenticity.
Indivisible: Fungible items are usually divisible, a rupee can be divided into 100 paise. Similarly, bitcoin can be broken into smaller units called Satoshis. Non-fungible items are essentially indivisible, for example: you can’t buy half a piece of art or 20% of a concert ticket. NFTs need to be purchased in their entirety.
Rare: NFT’s carry so much value because they are rare and unique, in other words, they are scarce. Any NFT creator could create multiple NFTs, but he/she could choose to only make a limited number of items, making them a lot more attractive.
How tokenization of non-fungible assets helps?
As wonderfully explained in this Cointelegraph article, nonfungible digital assets have been there for a long time. For instance, website domain names, all sorts of digital IDs like your email address, Twitter and Instagram handles, which are all unique.
Often there’s a fight for the common and simple domain names, their rarity increases their value and thus they are more expensive. The same goes with a social media handle, if you have a name that’s shared by a lot of others, you’ll probably compromise with a ‘.’ or an ‘_’ or just make a cheeky pun on your name.
However, even if you get that desired domain or handle, it doesn’t exactly belong to you. You purchase a domain for a period and you have to keep paying to keep it running. Similarly, if you are inactive on Twitter/Instagram, your handle can be taken away from you.
Secondly, if you know how valuable your domain name or handle is i.e. you know the demand for it, and think of selling it to someone else, you can’t! Simply, because you aren’t allowed to, it’s not yours in the first place.
Tokenization takes care of all of this, blockchain helps you establish your ownership right. Because this ownership data cannot be altered, no matter wherever your digital asset moves, it’ll always contain that record that you own it.
What makes them so valuable?
As mentioned earlier, one of the characteristics of NFTs is that they are rare. And, Eco tells us that prices of all assets are governed by the demand-supply curve. Since NFTs are scarce and the demands from gamers, collectors and investors are increasing day by day as everyone is hopping on the digital collectibles bandwagon, NFTs continue accruing more value over time.
Well that was simple economics, the second aspect is the psychology behind collecting stuff. You could be collecting stuff because you love it, or you are trying to complete a set. Back in school, we’d buy more chips packets to complete the Pokemon cards collection. There are certain assets that are also passed on in families from one generation to another, even though they themselves might not be very expensive, passing down the generations adds greatly to their value.
All of this was limited to real-world items because digital items could be easily copied and shared. As we’re witnessing on the internet stage, anything can shoot up to fame instantly and go viral. Memes have entered pop-culture and end up getting used almost anywhere and in most cases, we don't know how or where they originated. However, the more a particular file be it a meme, video or song is seen across platforms, its cultural value increases.
Let’s say you own a digital asset that has gone viral. Knowing that you are the true owner of that digital (that’s what NFTs do!) asset makes it more exciting for you and also becomes a marker of your social status. You take pride in the fact that you own something that is being shared all over the internet. All of this is driving up the value of your asset.
Let me give another real-world analogy, Da Vinci’s Mona Lisa is one of the most famous art pieces to exist, almost everyone knows about it. It has a great cultural significance, many people have copies of it hanging in their home but there is only one original piece that is currently in the Louvre museum. Today, Mona Lisa is worth more than $ 800 million!
Think of something similar in the digital world now, the wider the distribution (which is guaranteed owing to the digital nature of the asset), the more value it accrues while keeping the ownership tied to a single person.
Where are they being used?
Though by now, you have an idea that NFTs are revolutionizing the collectibles industry, let’s take a look at their use cases.
Digital Art
First and foremost is of course digital artworks. Crypto art has been gaining popularity since the last couple of years. As digital artists struggle with protecting their copyright and their works being shared without any credit given to them, minting their artworks as NFTs can help them make a better living.
These digital artists could mint multiple NFTs of the same artwork or keep an artwork unique. Anyone who buys these NFTs would be sure that the art they are buying is not fake and blockchain would ensure that they get its ownership rights.
Artists can also set up getting profits from future sales of the artwork so that they’ll have a revenue stream. For example, Buyer A purchases an NFT for $100,000 from an artist and then sells it to Buyer B at some point later for $150,000, the artist could get some percent, let’s say 5% of this second sale.
Moreover, given how much NFT arts are fetching in the market currently, more and more digital artists will switch to creating NFT artworks. Digital marketplaces are popping up where artists can mint NFTs and directly connect with collectors without any middlemen. This presents a new set of opportunities for developers as well.
Some of these digital marketplace include Nifty Gateway, SuperRare and Foundation. Foundation launched only a few weeks ago and has collected a few millions in sales already. It also allows artists to get a cut of future sales if their artworks are resold.
Another exciting project in the same space is Showtime, a social network to showcase your digital art by Alex. (Who created $ALEX coin)
There’s an explosion of sorts happening in the crypto art space, As per CryptoArt, an analytics platform, the total volume of NFT artworks was $8.2 million in December 2020 and shot up to almost $90 million in February 2021.
Gaming & Virtual Real Estate
Much of the craze surrounding NFTs started from CryptoKitties back in 2017, a game that allows you to breed virtual cats. Since then NFTs have become popular in the gaming industry. Because of blockchain, gamers can become collectors and immutable owners of in-game assets.
Almost every game today has in-store purchases, be it skins, a legendary sword, or a high grade rifle. Right from the attire to your house and pets, everything can be customized. However, even after you spend money on these items, most of these games don’t give you the complete ownership i.e. you can’t use it on a different platform or sell these items to someone else.
With NFTs, these assets become tradable, you can sell a rare weapon that you’ve purchased and make money out of it. NFTs thus become drivers of the in-game economy. Additionally, games enabled with NFTs allow you to make money while playing by getting involved in the virtual trade of assets. Read more about the ‘leisure economy’, a utopia where people can make a living by getting paid for playing games here.
For example, games such as Decentraland allow you to create structures and make money from virtual land plots. You could create a casino, a museum or a movie theater and charge money for tickets, all in that virtual world! This I believe, is a great incentive given how everything is moving towards virtual reality, a move that has been further accelerated by COVID-19 as millions continue to stay in their homes.
One gamer in Decentraland purchased 64 lots and combined them into a single estate which got sold for $80,000 because of its desirable location and traffic footfall in a manner similar to properties in the real world.
Collectibles
Lastly, I’ll talk about collectibles, which I have mentioned a few times before already. Just like CrytptoKitties, where you collect digital cats, NFTs are enabling creation of new types of collectibles. Celebrities and brands have already started cashing on this.
Tokenization would enable you to purchase almost anything from a song from your favorite band to pictures and video clips of your favorite celebrities. Linkin Park’s Mike Shinoda sold a bunch of NFTs including a song a few weeks ago, becoming the first major label to do so. Lindsay Lohan sold her picture as an NFT currently valued at $30,000. And, Logan Paul sold a bunch of his video clips from YouTube for $20,000. It’s crazy out there!
Nike patented shoes as NFTs called CryptoKicks back in 2019 that offer customized sneakers.Here, blockchain is used to assign a digital asset to a sneaker, how cool is that? This was indeed the beginning of brands leveraging the power of NFTs, and we should expect a new class of digital goods from other brands in future.
As Mark Stenberg of Adweek notes, NFTs will become a natural extension of the creator economy and contribute to a new world of fan economics powering platforms such as Patreon. Fan culture is a real thing, that we are all aware of. I’m a big fan of CR7 and I’d definitely go for an NFT minted by him.
Artists mining NFTs would allow fans to connect with them on a greater level when they know that they own a one-of-a-kind artifact from their real-world hero/role model and are supporting them directly.
The tokenization is expected to soon spread to traditional real-world collectible items such as coins and stamps. To sum it up, NFTs are the disruptor of the collectible industry.
So why should I invest in/collect NFTs?
By now, you know what NFTs are and what they are being used for, which brings us to the next question: Why should you buy NFTs? Getting ownership rights and all is cool but that digital asset could still propagate freely over the internet, everyone can see it and use it (like I’ve used some artworks in this article). So, why should you spend hundreds of thousands of dollars on something like that?
Well, this free propagation over the internet actually becomes a plus point for NFTs contrary to what you think. As I talked about earlier, the more a file will be seen online, the more value it accrues. Let’s take the Nyan Cat for example, an animated flying cat with a pop tart body with a rainbow trail, which was created almost 10 years ago. It got sold for nearly $600,000, because it has been in existence for long and became a part of our pop culture.
Now, the person that bought it knows that he is in possession of a one-of-a-kind crypto art that everyone else is talking about. He’s enjoying the social status of owning something unique and no one can take that away from him. At some point later in time, he could decide to sell it to a different buyer and make much more than what he paid for because of the value that cat will accrue in this time period.
A lot of people are collecting NFTs for this very reason - its speculative value. Just like the share market and other cryptos, NFT markets are also reflexive, a social theory where rising prices will attract more buyers, which in turn will drive the prices even higher. To put it simply, if a lot of people think that an asset is valuable, it will fetch more value in the market.
This is what happened with Bitcoin, as its prices continue to soar, people are willing to invest in it only because they know they’ll get more out of it at some point later. So even if at this point, it feels like crazy that people are spending so much on virtual cats and gifs and whatnot, it’s going to create a positive feedback loop that will attract more creators, buyers/investors, and help in driving the market.
The other aspect is that of ethics, if you really like something that you want to get, you must make sure that the person who created it gets due credit for it. We must support digital creators, who’ve struggled to make their living in the internet age. With NFTs, artists will get revenue every time their artwork changes hands. Thus creating an exciting dynamic between creators and collectors.
Finally, where are we headed?
Most tech moguls view NFTs to be the future of fine art collecting, a hobby of the elite but also that of other collectible items that normal people could afford. On the other hand, some believe all of this to be a fad, reminiscent of the ICO (initial coin offering) bubble of 2017, when multiple start-ups started issuing digital coins and some ended up in defrauding millions out of investors.
As per this CNBC piece, the hype around NFTs started around 2017 and every galley, every blue-chip artist was considering NFTs. But then the market dropped just like the bear trap in the awareness phase of the reflexivity curve and then people didn’t want to take the risk anymore.
Hence, drawing from the past, we could go through the bull and bear market again. However, there’s a shift in perspective now and I expect that NFTs are going to stay, simply because they are a use case of blockchain to formal ownership of assets, which goes beyond just games and art pieces.
Walden of Variant considers 2021 to be the backdrop of the crypto bull market, and the whole r/WallStreetBets drama that unfolded earlier has woken the internet up to investing as a team sport creating the right conditions for the NFT market.
All in all, NFTs are an exciting case of blockchain beyond just currency trading. There are of course areas of improvement when it comes to blockchain being user-friendly, something that developers are currently working on. Another major drawback of wider crypto adoption is the environmental concern that it poses. The process of minting an NFTs is quite an energy-intensive, something that we’ll have to work towards in the future.
It’s extremely important to be careful while investing in NFTs though since it can potentially be very tricky to understand as the NFT market gets blown with more artists & digital.
Note: None of the content of this article is financial advice, please do your own research before investing. I’m writing out of my own curiosity & to spread awareness. :)
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