NFTs Explained
Yimin Huang | July 1st, 2022
Source: Cairo West Magazine
NFTs are all the rage today, but what exactly is it, and how does it work?
Source: BeInCrypto
What is an NFT?
An NFT, short for non-fungible token, is a certificate of ownership for a digital asset that represents a piece of media like art, music and videos. It creates a unique digital signature that defines ownership of that asset which can be bought and sold.
Fungibility means that a good or asset can be traded and interchanged with other units of goods or assets of the same type. Tokens that are fungible are interchangeable and can be divided into smaller units to form the same value, such as legal tenders. Conversely, non-fungible tokens are not exchangeable and each represents unique assets owned by a specific person.
Source: VentureBeat
How do NFTs work?
NFTs create a blockchain-based digital certificate with the same underlying technology as those used by cryptocurrencies. Blockchain is a digital public ledger decentralized across a network of several computers that records all the transactions. This means that each NFT contains distinguishable information including whom the buyer and seller are, making it easily verifiable and impossible to forge, securing the originality of the asset.
However, NFTs differ from cryptocurrencies in their fungibility. For example, cryptocurrencies like Bitcoin and Ethereum are fungible and can be exchanged to get the same value in a different currency, but this is not the case for NFTs.
Source: The New York Times
How did NFTs become so popular?
In music, the American rock band Kings of Leon released the first NFT-only album. In social media, Twitter’s co-founder and former CEO Jack Dorsey’s first tweet sold for nearly $3 million. In art, a digital collage entitled EVERYDAYS: The First 5000 Days, which took 13 years to create, sold for $69.3 million. In sport, a highlight clip of LeBron James’ two-handed reverse windmill slam sold for more than $200,000.
In fact, NFTs have actually been around since 2014 but took seven years to hit the mainstream. In 2020, around 150,000 NFTs were sold on OpenSea.io, one of the biggest NFT trading platforms. In 2021, more than four times that amount were sold monthly. That same year, the market for NFTs was worth a massive $41 billion, an amount that is approaching the total value of the global fine art market.
There were a few factors driving that boom.
First, COVID-19. Lockdown boredom contributed to young people dabbling in financial markets, as Bitcoin and Ethereum reached all-time highs. As crypto wealth grew, the supply of NFTs grew as well as many artists started minting NFTs. Even traditional auction houses Sotheby’s and Christie’s bought in on the action, partnering with NFT marketplaces to curate NFT auctions, like the Christie’s X OpenSea auction in December 2021. Not only do they promote copyright and originality of digital assets, but NFTs also have enhanced exposure on social media, which creates new opportunities for artists. In a way, NFTs became a way for artists to continue sustaining their income flows as their earnings take a hard hit amid canceled exhibitions during the pandemic.
Second, the idea of purchasing collectibles is not unfamiliar to the public. People have been collecting antiques and vintage items since time immemorial, spending on physical collectibles like postage stamps, baseball cards, comic books, and Beanie Beans. The only difference is that NFTs are a digital way of doing this, using a technology that is still maturing. Given its non-fungibility and unique certificate of ownership, NFTs create artificial scarcity, playing into human psychology in the way we value things – the more scarce an item, the more valuable the item. This further pushes up the hype for such tokens.
Source: Marca
Are NFTs worth the money?
Some experts think it is a bubble ready to pop, like the dot-com craze. Its volatility means that NFTs may come to worth nothing in the secondary market. The NFT of Jack Dorsey’s first tweet that was first auctioned for $2.9 million to Sina Estavi, CEO of Malaysia-based blockchain company Bridge Oracle, did not receive any bid above $14,000 when Estavi put it up for auction again earlier this year. Given the record-high prices, newly minted NFTs were sold for, it is harder to make a profit from reselling them. It is those who got in way earlier who would have enjoyed the gains today. Furthermore, while the record of ownership of an NFT is stable, the location of the actual item is not. Since you are only buying access to a code that goes through a gateway if the gateway or the server goes down or gets moved. In addition, making NFTs requires massive amounts of energy, which contributes to climate change.
On the other hand, some believe NFTs are here to stay and move beyond the art world to drive new frontiers in investing. NFTs have investment, trading, and practical potential – the ability to track ownership opens up new possibilities. For example, a university degree can be issued as an NFT, verified by the university and impossible to fake, and linked up with existing online sites like LinkedIn. In real estate, NFTs can streamline the process of buying a home.
Conclusion
Despite the rapid surge in popularity of NFTs in recent months, it is still too early to tell whether NFTs are sustainable in the long run. However, alongside other developments in technology, NFTs present new paradigms in which we interact with digital finance and other industries.