As if cryptocurrencies weren't confusing enough, non-fungible tokens ( NFTs ) are another blockchain-native asset class that gets people spinning.
While only a fifth of American adults is actually familiar with NFTs, their staggering growth deserves worldwide fame. OpenSea, a popular NFT marketplace, had a trading volume of over $1 billion during the month of August. Additionally, the entire space was amassed $500 million in daily trading volume at the time.
Most notable are the prices that people pay for some of these digital items. A simple and insignificant rock NFT sold for 45 ETH this summer, worth around $134,240 at the time. Even more impressive, a rare “crypto punk” alien NFT sold for 605 ETH ($762,000) in January. This too was nothing more than an algorithmically generated work of art.
So what exactly are NFTs? More importantly, why are some people willing to pay astronomical prices to buy them?
What are non-fungible tokens (NFTs)?
To clarify, an object is "fungible" when it can be easily replaced by an identical one. This can also be called "mutual interchangeability".
Therefore, a non-fungible token is a completely unique digital token that cannot be replicated. Like cryptocurrencies, these tokens take advantage of distributed blockchain networks and consensus mechanisms to ensure fair play. Thousands of computers regularly and independently verify network transactions to ensure that no one is fraudulent or copied.
For a cryptocurrency like bitcoin, this means ensuring the currency's legitimacy by creating an artificial and guaranteed monetary scarcity. But what if the same technology could be used to generate rare digital items as well as money?
NFT development is one of the first alternative use cases for blockchains yet to be discovered. Using development-friendly blockchains like Ethereum and Cardano, people can mint tokens with various forms of data put into them. These can include music, videos, gifs, and most often digital artwork.
The aforementioned NFT rock is an example of this. To be exact, that NFT was simply ETHRock #21, part of a whole collection of other similar-looking jpeg files. These jpegs were minted on the Ethereum blockchain as an ERC20 token, creating a new NFT “art”.
What are NFTs used for?
In reality, there is often little interesting to say about even the most valuable NFTs to date. First, most people create NFT collections using AI software to generate thousands of images with only slight visual variations. Therefore, the personal and "artistic" element of this "art" is largely lost.
Second, they don't really have "real" use cases. The Ether Rock collection is also his website admits that his NFTs are really useless:
"These virtual rocks have NO PURPOSE other than being bought and sold and give you a strong sense of pride for owning 1 of only 100 rocks in the game :)" - EtherRock.com
In fact, there is only one difference between “NFT art” and a jpeg image found online: certified scarcity. Although each image itself is replicable, the blockchain metadata for the tokens these images are linked to is No. Therefore, by using the public Ethereum blockchain, people can verify officiality and authenticity. owners of these images.
With that, a new innovative concept was created, which has now transformed into a huge emerging industry: digital collectibles.
Sale of non-fungible tokens
Sometimes the scarcity of an item alone is reason enough to appreciate it. In fact, NFTs don't need real use cases to allow people to pay Millions of dollars to get them.
This is a well-established fact in the world of physical collectibles and fine art. A Saudi royal family bought Leonardo Da Vinci's painting Salvator Mundi for $450 million in May 2017. One of the jerseys of Babe Ruth, an American baseball icon, sold for $5.64 million at a 2019 American auction. Logan Paul also bought a first edition Pokemon card for $150k in July 2020.
What makes each of these items valuable is not their usefulness, but their combined irreplaceable and cultural importance. Throw in some speculation on crude oil prices (which is always common in cryptocurrencies) and NFTs have the ability to see unfathomable valuations.
This is not a simple theory: celebrities, brands, and athletes seem to be the first groups to exploit the NFT boom. Soccer legend Lionel Messi launched his NFT collection in August, featuring illustrations of himself. Additionally, the National Basketball Association has a dedicated NFT marketplace for exclusive and iconic NBA moments recorded as short videos. Other sports organizations, including track and soccer teams, also participated. As the sport has always been a space for collectibles and memorabilia, NFTs go well with the industry.
Recently, Madonna's talent manager also signed a preset NFT collection called "The Bored Ape Yacht Club." Bored Ape's NFTs sold for millions of dollars in 2021, but the manager wants to bring them to a broader sphere, likely using celebrity endorsements.
Art galleries are also taking advantage of this. The State Hermitage Museum began selling NFT versions of famous physical artworks they owned on Binance in August. His offerings started at $10,000 and included works by Da Vinci and Van Goh.
In general, famous cultural figures and institutions are using their influence to create subjectively valuable memorabilia, but in digitized form. With this, the development of NFTs opens up new possibilities for the world of art, music, and collecting.
NFTs use blockchain technology to create scarce and verifiable digital items. This does not make them more effective or useful in the real world than any other image or data file. However, it does add an element of authenticity to objects in the virtual world. Through this, invaluable cultural value can be assigned to very specific tokens, increasing their price astronomically.