If you’ve heard about Cryptopunks, Hashmasks, NBA Top Shots, or even celebrity tweets being sold for millions, then you’re likely already aware of the craze around NFTs – Non-Fungible Tokens.
What is NFT?
NFTs are not cryptocurrencies. Cryptocurrencies, such as Bitcoin or Ether are the native payment currencies of a blockchain, a chain of blocks produced by miners that represents an incorruptible ledger of transactions. Platforms such as Wirex allow you to buy, hold and exchange different cryptocurrencies, meaning you can use them to purchase just about anything.
However, unlike NFTs, cryptocurrencies are deemed fungible, interchangeable, and indistinguishable, like any commodity or traditional currency. You can trade one Bitcoin for another, and both Bitcoins will always be worth exactly the same as each other.
On the other hand, an NFT is a unique token that is conceived, for the large majority, on the Ethereum blockchain. As such, NFTs are governed by Ethereum smart contracts, and transfers of ownership are written into the blockchain. These smart contracts are made up of a specific code which contains all the essential information and handles all the important actions relating to an NFT such as its transfer and verification. These actions constitute the foundation of Ethereum’s ERC-721 protocol, wherein the uniqueness of an NFT is defined by the information stored within the NFT’s metadata, among which is a ‘token ID’ that points to an image, web domain, artwork or any valuable digital resource.
In short, an NFT is an untampered and tamperproof certificate of authenticity and ownership. It is used for instance by WISeKey or Arianee to track the provenance of luxury goods, by yInsure to create tradable insurance policies, or by Ethereum Name Service to track domain ownership.
The monthly volume of NFTs traded has exploded since September 2020 and has grown from a few million to $241 million, as recorded by NonFungible. The NFT craze is a phenomenon that is shaking the traditional art, game, sports, and insurance sectors with the markets being accessible to anyone ready to open an Ethereum wallet and connect to the blockchain.
Art collections are launched and often sold in batches and distributed randomly to investors. The game addicts or the lockdown-wary can escape to Decentraland, a virtual world where you can buy parcels, estates, or interact with other players.
Recently, a LeBron James dunk sold for $208,000 on NBA Top Shots and Jack Dorsey sold his first tweet for $2.9m.
The first NFT project that met an outstanding success was the Cryptokitties game launched in October 2017. The game lets Cryptokitty owners collect, buy, and sell unique creatures that ‘live’ forever on the Ethereum blockchain. Cryptokitties went viral soon after the launch, sending the price of some Cryptokitties into the hundred thousand dollars. The volume of exchanges clogged the Ethereum blockchain at the time, sending the transaction fees to a record high.
For young risk takers..
The NFT market is more efficient and more liquid than the traditional one. It is structured around digital art marketplaces and in terms of fees it’s far below the 5% or even 10% fee that is paid to traditional art brokers. Specialists such as Rarible, or aggregators like Opensea have counted tens of thousand unique wallet connections per week.
The first cryptocurrency HODLers have turned into millionaires over the past five years of impressive sector growth. This crypto-wealthy generation is mostly made of young risk-takers who like to experiment, and can afford to do so. In fact, despite an extreme price volatility, studies have shown that the public is growing increasingly favourable to widespread adoption of cryptocurrencies. Their risk appetite is widening the possibilities within the crypto-economy.
Although there are already a few extremely promising applications for the technology in the luxury and gaming industries that should gradually reach maturity over the next three years, some would argue that the craze around NFTs will be short lived, especially in the art sector.
The audience there is certainly quite different from the one involved in traditional markets; it’s the generation of WallStreetBets betting against the giant hedge funds, the heirs of Banksy who destroyed his artwork. So perhaps the NFT craze itself will be short lived, but more importantly it could represent a larger shift in where the digital economy is headed. It is first and foremost disruptive, for better or worse.