What are NFT (Non-Fungible) token ?
Non-Fungible Tokens (NFTs) became hugely popular after digital artist Beeple sold his artwork "Everydays: The First 5000 Days" for $69 Million. This piece is a collage of all the images Beeple posted online over the last 13 years. He auctioned it at Christie's. The sale made Beeple one of the top three most valuable living artists.
.@beeple 's 'The First 5000 Days', the 1st purely digital NFT based artwork offered by a major auction house has sold for $69,346,250, positioning him among the top three most valuable living artists. Major Thanks to @beeple + @makersplaceco. More details to be released shortly
— Christie's (@ChristiesInc) March 11, 2021
Before we dive into the details of NFTs, here are some other notable NFT deals making headlines at the time of writing.
Artist Claire Boucher, known as Grimes, sold $6M worth of NFTs. Electronic musician 3lau made $11.7M selling NFTs of his songs and albums. Artist Chris Torres sold his famous YouTube meme "Nyan Cat" from 2011 for $580,000. A single tweet by Dallas Mavericks owner Mark Cuban sold for $952. Twitter founder Jack Dorsey's first tweet was set to sell for $2.5M. A video clip of basketball superstar LeBron James's block shot went for $100K.
The table below shows the top 10 NFT products by total value sold in the last 30 days as of March 13, 2021.
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| | Product | Value |
|----|-----------------|-----------------|
| 1 | NBA Top Shots | $295,804,923.00 |
| 2 | CryptoPunks | $122,201,352.81 |
| 3 | Hashmasks | $22,482,508.74 |
| 4 | Sorare | $14,864,513.52 |
| 5 | Art Blocks | $9,514,244.39 |
| 6 | Axie Infinity | $3,157,517.38 |
| 7 | CryptoKitties | $2,802,551.82 |
| 8 | Street Fighter | $1,633,690.68 |
| 9 | Bitcoin Origins | $478,024.83 |
| 10 | Alien Worlds | $367,812.93 |
----------------------------------------NFT and What are they?
Before we learn what "Non-Fungible" assets are, let's first understand "fungible" assets.
"being something (such as money or a commodity) of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account" - Definition from Webster Dictionary
In the physical world, cash and commodities like wheat, corn, iron, and gold are fungible assets. They exist in physical form, and one unit can be swapped for another of equal value.
As we move into the digital world, what counts as a fungible digital asset? Cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) are classic examples. One Bitcoin is worth the same as any other Bitcoin.
Now let's look at non-fungible goods.
not easy to exchange or mix with other similar goods or assets - Definition from Cambridge dictionary.
In the physical world, non-fungible assets include artwork by famous artists, sports memorabilia, pop culture collectibles, and limited-edition items. For example, one of the 25 Leica 35mm cameras made in 1923 sold for $2.8 Million at a 2012 auction.
In the digital world, non-fungible assets can be any digital content. This includes tweets, photos, video clips, memes, and digital clip art. People are getting creative and inventing new forms of digital NFTs. Digital NFTs are also creating a new class of "asset-backed securities." In some cases, the physical asset does not even need to exist after it has been turned into a token.
NFT is based on "ERC(Ethereum Request for Comments)-721 Non-Fungible Token Standard".
NFT vs Cryptocurrency
Similarities
- Both use blockchain technology
- Both can trace every transaction
- Decentralized transaction.
- Secure - All transactions are encrypted.
- Transparency - Transaction ledger is public.
Differences
The main difference is that every unit of a cryptocurrency has the same value, while every NFT has a unique value.
For example, one Bitcoin in Person A's wallet has the same value as one Bitcoin in Person B's wallet. They can be exchanged freely, just like two $1 bills. However, each NFT is different. If Person A owns "CryptoPunk 4640" and Person B owns "CryptoPunk 4741," those two NFTs have different values in the marketplace.
NFT transaction
Let's look at a recent example. Banksy is a popular street artist from England. He made five hundred physical prints of his painting called "Morons."
One of these prints (print #325) was authenticated by "Pest Control," the only official body that can verify Banksy artwork. A blockchain company called Injective Protocol bought this print for $95,000. The company then burned the painting on a Twitter live stream. They announced the painting would be sold as an NFT on OpenSea, an NFT marketplace.
"We entirely recreate the physical piece and input specifications, such as the art version number into the smart contract code, [so] no one can ever alter the digital art in any way," "The physical piece will forever be memorialized in this NFT." - Injective Protocol executive
The NFT sold earlier that week for around $395,000. Below are the "smart contract" details that capture the transaction. As we can see, token holder 0x6c40fc.... paid token holder 0x47ac80... a total of 228.69 WETH (wrapped Ethereum), which was about $395K on the day of the transaction.
What drives the price of Non-Fungible physical assets, and will the same apply to Non-Fungible Tokens?
Let's look at what drives the prices of non-fungible physical assets.
(a) Supply and Demand: Economic theory says that for "Normal Goods," as the price goes up, fewer people want to buy. As the price goes down, more people want to buy. This is the downward-sloping demand curve.
However, "Veblen Goods" (luxury or collector items) work differently. For these goods, as the price goes up, demand also goes up. American Economist Thorstein Veblen called this "conspicuous consumption." It means some people spend money on luxury items to show or maintain their social status.
(b) Exclusivity - A more exclusive or rare asset will attract more bidders.
(c) Proof of Authenticity - An art piece that has been verified and authenticated will command a higher price.
(d) Original Artwork - If artwork has undergone any restoration or has been damaged, its price decreases.
(e) Trail of Acquisition - A clear record of the original purchase and all ownership changes along the way will lead to a higher asset price.
NFT does a good job with digital record-keeping and provides transparency. This makes it a great tool for art auctions and rare physical assets.
The biggest change of the 21st century is the democratization and decentralization of media. Both content creation and consumption have gone digital. Now anyone can have their own "print media" (like the blog you are reading) and "broadcast media" (video, music, news, and educational content on platforms like YouTube, plus audio content through podcasts).
NFT is built for this new digital world. One of its biggest benefits is that it lets people invest in up-and-coming artists. It's like investing in Da Vinci's paintings during his early years, before he became famous. This is good for both investors and the art community.
Another advantage of NFT is that the underlying physical asset can be destroyed, yet the tokenized version can live in the digital world forever. We saw this with the Banksy painting example above.
What goods can be sold as NFT, and where to trade?
Goods
Any physical or virtual good can be turned into an NFT. Virtual goods include video games, avatars, memes, tokens, and images. You just have to be creative. Real-world physical goods like artwork, cars, houses, and shoes can also be tokenized (turned into NFTs).
Trade
Some of the most popular NFT marketplaces as of 2021 include OpenSea, Rarible, SuperRare, Nifty Gateway, Foundation, Axie Marketplace, BakerySwap, NFT Showroom, and VIVE.
Different marketplaces use different blockchains. Before getting into NFTs, you should research which blockchain your trading platform supports. Ethereum is the most popular blockchain for NFTs. Other popular blockchains include Binance Smart Chain, Flow, Tron, EOS, Polkadot, Tezos, Cosmos, and WAX.
What caused the rise of NFT?
The COVID pandemic and lockdowns pushed consumers to find creative ways to earn extra income. We saw this with retail investors trading GameStop stock, and now with NFTs.
For example, NBA Top Shot is an NFT-based online marketplace where members trade "NBA Moments" -- short basketball game clips. It saw a huge spike in usage and traded nearly $250M of assets in just 30 days.
The pandemic also hit many industries hard. The music industry suffered especially, since artists could not earn income through concerts. So artists like 3lau got creative and started using NFTs to sell their "digital goods."
Where is NFT headed?
Skeptics call the NFT trend a bubble and expect it to burst soon. Their main argument is that copyright laws already protect digital assets, and NFTs don't provide exclusivity in terms of payments. For example, all "NBA Moments" purchased on NBA Top Shot can be viewed by anyone. The NFT owner does not receive royalty payments for the video.
However, Tidal's recent purchase by fintech company Square hints at future possibilities. There could be synergies between digital music, artist content, and NFT trading.
NFT as a cryptocurrency asset is here to stay. We will have to wait and see which markets benefit most from this trend.