What Are Non-Fungible Tokens (NFT) & Why Are They Worth Millions?
Wait… what sold for how much?
Remember when cryptocurrency purchases were the peak of the strangest online trends? Well, those days are gone. The reins have been handed to NFTs, or non-fungible tokens.
How strange does it get? Jack Dorsey, co-founder and CEO of Twitter, sold his first-ever tweet for 2.9 million USD. Alexander M. Ramirez-Mallis, a Brooklyn-based filmmaker, sold 52 minutes worth of recorded farts for around 420 USD. Granted, that might not be as much as Jack Dorsey’s tweet, but it’s a very ridiculous thing to spend money on.
So, what is an NFT or a non-fungible token, and why are people paying bizarre amounts of money for them?
What is NFT? Explaining non-fungible tokens
The easiest way to define what a non-fungible token is is to determine what fungibility means. Basically, fungibility is a characteristic of an asset that allows it to be interchangeable: my $100 bill has the same value as yours. Even if we trade bills for whatever reason, we’ll still have the same amount of money in the end. It’s the same for cryptocurrencies: my 1 BTC is worth the same amount as your 1 BTC. This means that both fiat and cryptocurrencies are fungible—one BTC will always equal 1 BTC, 1 Ethereum will always equal 1 Ethereum, and so on. This is what makes them so great as exchangeable tokens.
NFTs, on the other hand, change the landscape by making each token unique and irreplaceable. They’re 1-of-1 cryptographic assets on a blockchain with special identification codes and metadata that distinguish them from one another. This means that my non-fungible tokens may never be worth the same amount as yours, no matter how similar they look. They’re digital representations of assets and, in a way, are like digital passports since they each contain a unique code that’s non-transferable and distinguishable from others. These tokens are also extensible. This means that, in some cases, you can combine two NFTs to “breed” a third, unique non-fungible token.
Just like BTC and Ethereum, non-fungible tokens also contain ownership details within them. This makes for easy identification and transfer between token holders. An NFT’s metadata and digital attributes are the reason why one may prefer them to owning physical collectibles like NBA or Pokemon trading cards. Physical collectibles may have countless fakes which vary in accuracy. In contrast, their digital counterparts have data that would render fakes useless since people can use it to trace the item back to the original issuer.
These types of tokens are developed from the ERC-721 standard which defines the minimum interface—ownership details, security, and metadata—required for the exchange and distribution of gaming tokens. The ERC-1155 standard takes it a step further by reducing transaction and storage costs for NFTs and batch multiple types of non-fungible tokens into a single contract.
The key characteristics of non-fungible tokens
Aside from the fact that they are, in nature, one of a kind, there are a couple of other characteristics that make NFTs unique:
- Indestructible – All data is stored on a blockchain via smart contracts, which means each token cannot be removed, replicated, or destroyed.
- Indivisible – Unlike Bitcoin or Ethereum where you can divide it and own fractions, NFTs cannot be split into smaller denominations. They exist and are traded exclusively as whole items.
- Non-interoperable – These tokens exist wholly in the realm they’re created for. For example, Blockchain Heroes and Gods Unchained are blockchain digital trading card games where you can get NFTs from digital packs. Because they are non-interoperable, you cannot play a card on Gods Unchained that is made for Blockchain Heroes.
- Immutable ownership – Once you buy a token, you actually own it—not the person or company that created it. The opposite of this, for example, is if you purchase music from the iTunes store, you don’t actually buy the song—you only buy the license to listen to it. Non-fungible tokens, on the other hand, are 100% yours to trade or collect.
- Verifiable – Tokens like digital artworks can be traced back to the original creator, meaning that pieces can be authenticated without a third party.
The past and current NFT marketplace
The most famous example of leading non-fungible tokens (before its renaissance today) is Cryptokitties, a game wherein you could collect and breed digital “kitties.” Each kitty is unique and has its own price in Ethereum. They could reproduce amongst themselves and produce new offspring, which would have different attributes and valuations than their parents. Starting off small when it launched in November 2017, the game racked up a fan base that spent around 20 million USD worth of either purchasing, feeding, or nurturing their kitties.
Right now, the marketplace for these tokens is centered around collectibles: memes, digital art, sports cards, and rarities. One of the best examples of this is NBA Top Shot, a website that allows you to buy “moments” from NBA games. Line up for digital packs, open them, and then collect or sell the moments you get. In fact, the market has evolved to the extent that some of these moments have sold for millions of dollars.
Although these uses for NFTs may seem solely focused on entertainment, they can also have serious business applications.
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NFT use-cases beyond digital art
Although the ideas of digital representations of assets and unique identification aren’t synonymous with NFTs, the addition of blockchain technology and smart contracts are—and when all are combined together, they become a potent force for change.
One of the most apparent benefits of non-fungible tokens is market efficiency. By converting physical assets into digital ones, processes are streamlined and intermediaries are removed. For example, an artist won’t need to hire an agent anymore to sell their artwork—they can connect directly with their audience through the blockchain. The same applies to more mass-produced items.
Let’s say that there’s an NFT for a water bottle. The digital representation of that physical item will allow the different actors on the supply chain to interact with it and help track its provenance, production, and sale throughout the entire process.
Another benefit of these tokens is identity management. When you go to the airport, how many times do you have to show your passport? Suppose we created a token for each of our individual passports, each with its own identifying characteristics. In that case, the entry and exit processes can be streamlined.
Non-fungible tokens also have the potential to democratize investing by allowing assets like real estate to be split up. It’s much easier to divide a digital real estate asset among multiple owners than a physical one. This benefit can also expand beyond the realm of real estate. For example, numerous people can own paintings too, right? Split the painting up into NFTs and distribute the parts between you and your co-owners.
Now, let’s talk about, possibly, the most exciting application for NFTs: the creation of new markets and forms of investment. We’re seeing many people invest in different things nowadays—cards, memes, digital art, and more. Investors are no longer confined within the realm of stocks and cryptocurrency. Since the term “investor” is becoming more loosely defined, unorthodox investors are popping out everywhere, and it’s a beautiful thing to see.
The actual implementation of the described possible uses of non-fungible tokens would obviously require changes in applicable regulations. However, the above demonstrates that the concept of NFTs has potential.
How do non-fungible tokens get their value?
Like most assets on any marketplace, supply and demand are the critical drivers for price. These tokens are, in nature, scarce, and the demand from gamers, collectors, and investors is why people are paying money.
Non-fungible tokens also have the potential to make their owners money. Take the example of a gamer on Decentraland, the virtual land platform that could be explored by its users. A user decided to purchase 64 lots of land and combine them into a single estate. Named “The Secret of Satoshi’s Tea Garden,” the lot sold for 80,000 USD because of its desirable location and road access—crazy, right?
The next step
Non-fungible tokens are an exciting step up from the concept of cryptocurrencies. The current finance systems we have in place use complicated loan and trading systems for different asset types. NFTs could be a massive step forward in the reinvention of this infrastructure.
Right now, we’re living in a renaissance of collectible items, and it’s beginning to showcase the true power of these tokens. The passion that these collectors and gamers have is possibly the reason that these prices are spiking. Although it may seem odd to some people at the moment, there’s no denying that the demand is there and that the beautiful world of non-fungible tokens has all the space it needs to grow.