The “NFT” market has grown rapidly in recent years. TECHBOOK explains what it is and what it has to do with crypto.
NFTs have grown into a billion dollar business. While the transaction volume was just 16 million US dollars in 2020, forecast extra valued at more than $3.5 billion by 2023. That’s a whopping 21,775 percent increase in just three years. Despite the rising popularity, NFTs remain a mystery to many people. We explain how they work.
The term “NFT” explained
NFT stands for “Non-Fungible Token” and describes a non-exchangeable value. This contrasts an NFT with exchangeable values such as a currency. Fungibility, or interchangeability, is an economics and finance term. This is the ability to exchange an item for a similar item of comparable value. For example, four 5-euro bills can be exchanged for a 20-euro bill without the value changing. Non-fungible stocks, NFTs, are the complete opposite. Each NFT is unique and cannot be replaced with another item.
A good example of such items are famous paintings. You can’t just replace a van Gogh with a poster from the museum shop. The poster will not have the same value as the real painting.
Why should I buy an NFT when the image is freely available on the internet?
Almost anyone can view, copy and save an image online. However, an NFT gives the buyer something that cannot be copied. Namely the possession of a work. You can think of NFTs as collectibles. Like paintings, stamps, comics – just in digital form. At first glance, however, it looks as if you are buying something that is already available for free on the Internet. Like pictures and videos. A LeBron James slam dunk recently sold for $208,000 as a trading card. However, the video is freely available on the Internet.
The problem with it: a collector’s item in real life is tangible. A painting like the Mona Lisa may look different than poster-style copies. Digital NFTs, on the other hand, are visually indistinguishable from their copies. Only an underlying encryption guarantees that it is the original. An NFT is only valuable because others assign an imaginary value to it.
In the context of the LeBron dunk, this means: the trading card with the video is the official NBA clip. Having the official clip is the prestige that gives the card its value. Only those who have this card really own the clip. Everything else is imitations.
How is it ensured that an original is not simply copied?
NFTs are part of the Ethereum blockchain. This is the basic framework for the cryptocurrency “Ether”, the second most valuable in the world after Bitcoin. While there are now other blockchains that have introduced NFTs, the Ethereum network remains the largest NFT platform.
So, NFTs are a type of cryptocurrency. However, unlike Bitcoin, Ether and others, they are unique. They have a kind of digital signature – similar to the signature of a great painter. This means that the original can always be recognized as the original, even if there are masses of similar copies of it.
The blockchain is comparable to the bookkeeping of an account, but this takes place online and purely digitally. It is a surefire way to track sales of digital objects. Unlike an account book, however, NFTs are stored as a series of numbers and letters. This virtual certificate contains information about the owner of an NFT, the date of sale and to whom it was sold. With the purchase, one’s transaction of money spent on an NFT is added to the list of previous transactions. Saving this data in the blockchain guarantees the authenticity and uniqueness of the NFT.
Read more about blockchain: Cryptocurrency Bitcoin and the blockchain simply explained
Who Needs NFTs Anyway?
This solves a problem that creative people in particular often have on the Internet. In this way they can ensure that their works are not simply copied on the Internet. Creating a unique original increases its value. Of each NFT there can only ever be one original that is also authentic.
So the goal is to create an artificial scarcity. A good example is a streaming service like Spotify. Musicians only get small amounts for their songs on Spotify. However, if a song is only available once as an original on the Internet as an NFT, the value increases immensely. There may be copies of the song, but only one person can actually own the original. In addition, the originator of an NFT can stipulate that a certain amount is transferred to him or her every time the token is resold.
Thanks to NFTs, creative people can also offer things for which there was no sales platform before. For example GIFs or stickers to send via Messenger. In principle, NFTs can be anything that can be stored digitally. At the moment, however, the focus is on digital art.
NFTs driven by speculation
NFTs are also a money-making opportunity for savvy collectors. As in the art market, you can buy an NFT and speculate that the value will increase. For example, someone bought a Gucci Ghost for $3,600 on the Nifty Gateway site and is now charging $16,300 for it. The original price to create the image was $200.
What types of NFTs are there?
NFTs are used, digital art and sports collectibles, but also video games. One of the first applications that made use of the NFT principle is the digital collecting game “CryptoKitties” from 2017. Players could buy, swap and breed collecting cats. Each new cat was an NFT, ensuring authenticity and uniqueness.
The original copy of the part-cat, part-pop-tart (an American confectionery) popular meme of 2011, the “Nyan Cat” sold for 300 ether (about $600,000) in an online auction as recently as February. The US band Kings of Leon has released a digital-only album, earning 2 million US dollars. Twitter founder Jack Dosey’s first tweet sold for $2.5 million in March. Even the New York Times offers articles as NFT for a mere $560,000.
Also in March, auction house Christie’s auctioned off its first all-digital artwork in the form of an NFT for $69 million – a collage of images called “The First 5000 Days,” which has been in the works for 13 years.
How NFTs work as trading cards is shown, for example, by the US NBA with Top Shot. Users can use it to collect short videos with basketball highlights. As of October 2020, NBA Top Shot has earned more than $333 million.
Of course, the fact that an NFT is unique does not mean that each object only exists once. Like in real life, trading cards can exist more than once. Thanks to the blockchain, however, it is tracked when each individual card changed hands.
Problems with the NFT market
Who guarantees that a work will remain unique?
Incidentally, buying an NFT from an artist does not mean that they lose their copyright to it. That’s one of the potential problems with NFTs. Because what if someone decides to just sell the same piece of art that you’ve already bought a second time? The young NFT market has not yet offered a solution for this. That’s why it’s important to make sure the person selling is trustworthy. The first point of contact should therefore be well-known sales platforms such as Nifty Gateway, OpenSea and Rarible.
Enormously high energy demand
Like other cryptocurrencies, NFTs require increasing amounts of energy because blockchains are extremely hungry for computing power. Some creative people have therefore already announced that they no longer want to create NFTs in the future, so as not to further increase the energy requirement.
NFTs are not protected from deletion
Instead of buying a painting that you can then hang in your living room, when you buy an NFT you only acquire a kind of title deed – not the NFT itself. The deed in the blockchain contains all the information about the authorship, transactions and ownership of an NFT and cannot be deleted as such. However, the NFT must be stored somewhere on a server.
With the purchase of an NFT you practically only get the access code to the NFT. If the website is deleted or the server on which the NFT is stored is moved, this code will lead nowhere. In this case, owning an NFT is nothing more than a dead link on the internet.
The question of value
It is also questionable whether owning a unique NFT alone makes it valuable. A buyer keeps the original, genuine NFT. However, since this is digital art, that person cannot prevent others from copying the image and sharing it online.
So are NFTs an evolving digital bubble? Proponents believe NFTs will be the next digital revolution. But there are still many unanswered questions. If I buy an NFT, who guarantees that it’s worth the money? The value of an object is only given as long as there are people who spend money on it. Like other cryptocurrencies, NFTs have no real world value. For example, if everyone decided overnight to monetize all of their NFTs, who would buy them?