What are Non-Fungible Tokens (NFTs)?

In February 2021 an artist, Mike Winkelmann, popularly known as Beeple made headlines by selling a 10-second video for a staggering $6.6 million. Shortly after, in March 2021, Christie's auctioned a collage of Beeple's first 5,000 vector drawings and animations, fetching a jaw-dropping $69 million. What captivated the audience beyond the exorbitant prices was the unique aspect that buyers received no physical artwork; instead, they obtained a non-fungible token (NFT), a type of token gaining popularity.

NFTs are essentially digital certifications of authenticity for digital assets and have surged in popularity. From pictures of animals to tweets, the NFT market reached an astonishing $41 billion in 2021, rivaling the total market value of fine art globally. Artists who were once undervalued now leverage blockchain technology and NFTs to earn substantial sums. As the NFT phenomenon continues to grow, some invest millions, recognizing their value, while others remain oblivious to this transformative trend.

This article goes into the world of NFTs, exploring their significance, the surge in market value, and the ongoing debate about their worth and impact.

What are Non-Fungible Tokens (NFTs)?

NFTs, or Non-Fungible Tokens, are digital assets verified on the blockchain, unique, and non-interchangeable.

Two NFTs may appear identical, but they are distinct from each other, unlike other crypto tokens that are identical and interchangeable. NFTs cannot be replaced or exchanged due to their "Non-Fungibility."

These discrete tokens contain valuable information and represent online collectibles such as images, art, and music. Similar to physical forms of art, NFTs can be traded for cash, crypto, and other NFTs, deriving their value from the market and demand.

How Do Non-Fungible Tokens (NFTs) Work?

NFTs, or Non-Fungible Tokens, are created using digital objects and serve as representations of both digital and non-digital assets. This includes digital art, films, music, as well as tangible items like legal papers and signatures. NFT digital art acts as an authenticity and ownership certificate, specifically as an Ethereum-based asset.

These tokens are generated through a process called minting, where NFT data is recorded on a blockchain. The minting process involves initiating a new block, having a validator verify NFT data, and subsequently closing the block. At any given moment, an NFT can only have a single owner. Ownership is tracked through a unique ID and proprietary metadata, both generated by smart contracts that also govern ownership assignment and NFT transferability.

NFTs are minted using code from smart contracts following different standards, such as ERC-721. Most non-fungible tokens adhere to ERC-721 and ERC-1155 standards, enabling creators to issue unique crypto assets through smart contracts. The blockchain manages the NFT, storing its data. Even if 10,000 non-fungible tokens represent the exact same thing, each token possesses a unique identification, distinguishing it from others.

In contrast to other cryptocurrencies, NFTs cannot be listed, purchased, or sold on decentralized or centralized exchanges. Instead, individuals must use specially designed NFT platforms for listing and trading. Beyond widely known platforms like OpenSea and Rarible, numerous alternatives exist based on the NFT collection of interest.

Why Are Non-Fungible Tokens (NFTs) Valuable?

The primary factor contributing to the value of most NFTs is their utility. Many possess real-world applications, creating new revenue streams. Consider if Mozart were alive and created an NFT for a concert ticket, offering owners VIP access to the show, forever recorded on the blockchain. The extraordinary value lies in owning a collectible object commemorating an event by Mozart, a musical legend, potentially reselling it for a profit exceeding the ticket's cost.

As with other assets, supply and demand are the key market forces influencing NFT pricing. High prices are often driven by scarcity and robust demand from investors, collectors, and gamers. Certain NFTs can yield substantial financial gains for owners. For instance, a gamer on the Decentraland virtual land platform bought 64 lots, creating "The Secrets of Satoshi's Tea Garden," which sold for $80,000 due to its prime location and easy access.

NFTs also hold value by providing proof of ownership and authenticity for digital assets, enabling content providers to monetize their work in unprecedented ways. Additionally, some NFTs align with broader cultural movements or trends, deriving value from the excitement and hype surrounding them.

Various Applications of NFTs

Art: NFTs find their most common application in programmable art, blending technology and creativity. Limited edition artworks, responsive to blockchain-driven asset value fluctuations, showcase the adaptability of NFTs through oracles and smart contracts. Sports: Tackling counterfeit goods and tickets, NFTs leverage blockchain's immutability and non-fungibility to combat fraud, ensuring authenticity in sports collectibles and ticketing.

Music: Musicians employ NFTs to counterbalance the influence of record labels, allowing unique audio snippets to be minted, exchanged, and owned by fans, offering a direct connection beyond industry intermediaries.

Gaming: NFTs revolutionize the gaming landscape by intertwining with in-game transactions. From CryptoKitties pioneering digital cats on the blockchain to broader gaming experiences, NFTs significantly impact the gaming market.

Community Membership: NFT ownership fosters a sense of community, encouraging owners to network and build relationships. Some decentralized autonomous organizations (DAOs) collaborate for communal NFT management and fractional ownership.

Fashion Industry: Blockchain integration enhances the fashion industry, curbing counterfeiting through easily accessible ownership information. Brands like Louis Vuitton innovate by creating games around NFTs, while others release metaverse-appropriate apparel collections, shaping trends.

Certifications and Licenses: NFTs simplify verification for licenses and certifications. Digital NFT-based certificates streamline the reference process for academic and professional credentials, reducing administrative burden and enhancing proof-of-authenticity monitoring.

DeFi: NFTs play inventive roles in decentralized finance (DeFi) protocols, establishing tamper-proof ownership records without intermediaries. From executing blockchain transactions to serving as collateral for loans, NFTs contribute to novel financial services in both traditional and blockchain-based lending.

How to Buy Non-Fungible Tokens (NFTs)

For those looking to purchase NFTs, several considerations and prerequisites come into play.

Firstly, securing a digital wallet is crucial to safeguard your cryptocurrency and NFT holdings. Following that, acquiring compatible cryptocurrency for the chosen NFT platform, typically Ethereum, is necessary. Platforms like PayPal, Coinbase, OpenSea, and Kraken can facilitate the purchase of cryptocurrency.

Upon acquiring it, the next step involves transferring your cryptocurrency from the exchange to your wallet, bearing in mind that some exchanges may charge minor gas fees for transactions. Once your wallet is prepared, you can explore NFT markets such as OpenSea, Magic Eden, Binance, Rarible, or Foundation for your purchases.

Conclusion

NFTs represent a leap beyond basic cryptocurrency concepts, combining digital object representation with unique identification, empowered by blockchain, smart contracts, and automation. The NFT market's remarkable growth within a year, especially in 2021, suggests unprecedented adoption, notably in crypto art. Valuing NFTs involves factors like rarity, tradeability, creator involvement, one thing is clear — NFTs redefine our digital landscape, promising an exciting journey into the future of unique, blockchain-backed assets.