What is an NFT?
NFTs are Non-Fungible Tokens.
An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.
Non-Fungible Tokens (NFT) are digital assets such as collectibles, gaming, art, and virtual assets that are exchanged over blockchain platforms such as Ethereum, OpenSea, Rarible, Axie Marketplace, or NBA Top Shot Marketplace and come with their digital signature that designate ownership of the asset. Thanks to the growing popularity of NFTs creators, businesses, and celebrities now buy and sell NFTs in a bid to explore ways to commercialize their brand and generate revenues through NFT collections.
What exactly is an NFT?
NFTs are tokens that we can use to represent ownership of unique items. They let us tokenise things like art, collectibles, even real estate. They can only have one official owner at a time and they're secured by the Ethereum blockchain – no one can modify the record of ownership or copy/paste a new NFT into existence.
NFT stands for non-fungible token. Non-fungible is an economic term that you could use to describe things like your furniture, a song file, or your computer. These things are not interchangeable for other items because they have unique properties.
Fungible items, on the other hand, can be exchanged because their value defines them rather than their unique properties. For example, ETH or dollars are fungible because 1 ETH / $1 USD is exchangeable for another 1 ETH / $1 USD.
Early history (2014–2017)
The first known "NFT", Quantum, was created by Kevin McCoy and Anil Dash in May 2014, consisting of a video clip made by McCoy's wife, Jennifer. McCoy registered the video on the Namecoin blockchain and sold it to Dash for $4, during a live presentation for the Seven on Seven conference at the New Museum in New York City. McCoy and Dash referred to the technology as "monetized graphics". A non-fungible, tradable blockchain marker was explicitly linked to a work of art, via on-chain metadata (enabled by Namecoin). This is in contrast to the multi-unit, fungible, metadata-less "colored coins" of other blockchains and Counterparty.
In October 2015, the first NFT project, Etheria, was launched and demonstrated at DEVCON 1 in London, Ethereum's first developer conference, three months after the launch of the Ethereum blockchain. Most of Etheria's 457 purchasable and tradable hexagonal tiles went unsold for more than five years until March 13, 2021, when renewed interest in NFTs sparked a buying frenzy. Within 24 hours, all tiles of the current version and a prior version, each hardcoded to 1 ETH ($0.43 at the time of launch), were sold for a total of $1.4 million.
The term "NFT" only gained currency with the ERC-721 standard, first proposed in 2017 via the Ethereum GitHub, following the launch of various NFT projects that year. The standard coincided with the launch of several NFT projects, including Curio Cards, CryptoPunks (a project to trade unique cartoon characters, released by the American studio Larva Labs on the Ethereum blockchain) and rare Pepe trading cards.
Increased public awareness (2017–present)
The 2017 online game CryptoKitties was monetized by selling tradable cat NFTs, and its success brought some public attention to NFTs.
The NFT market experienced rapid growth during 2020, with its value tripling to $250 million. In the first three months of 2021, more than $200 million were spent on NFTs.
In the early months of 2021, interest in NFTs increased after a number of high-profile sales and art auctions.
How does it work?
Typically, creators (or, if you prefer, artists) will mint their work on an NFT marketplace, which includes platforms like OpenSea, SuperRare, Nifty Gateway, Foundation, and many others. Minting is the act of creating an NFT, which means creating a smart contract that will be stored on the blockchain. The smart contract contains a lot of important information: it lists the creator of the work and ensures that the creator, or other parties, receive royalties each time the NFT is sold.
The ability for artists to collect returns on resale value automatically is part of NFTs’ draw for artists (all platforms make their money by receiving a small percentage of royalties through the smart contract). But the process isn’t perfect: technological glitches can make it so that parties don’t always receive royalties. And a smart contract does not have the legal weight of copyright — it will take a relevant court case to see how the law regards smart contracts.
- Digital Art:
- Real World Items:
- Deeds to a car
- Tickets to a real world event
- Tokenized invoices
- Legal documents
Smart contracts are stored on blockchain, but the artwork itself is most often not stored on-chain because storing that much data is too laborious and expensive; accordingly, most smart contracts contain a link to the work they represent. This means that many NFTs comprise two parts, the smart contract and the asset itself. This can cause some confusion about where the value actually resides. However, there are works that are not only stored on-chain but are also created using blockchain tech (more on this below).
While artists are constantly encouraged by their peers to make big bucks making NFTs of their work, there are obstacles. Perhaps the most prohibitive is that minting an NFT is not free, and its cost increases the more congested the Ethereum network becomes, and the more computational effort is needed to do the job. The financial cost of that necessary computational effort is the “gas fee,” which is constantly fluctuating. Currently, it costs some $70 to mint an NFT on Ethereum. The NFT creator doesn’t always do the minting; certain platforms will offload that process and the subsequent cost to the consumer.
- Fungible items can be exchanged with one another with ease because their value isn't tied to their uniqueness. For example, you can exchange a $1 bill for another $1 bill, and you'll still have $1 even though your new bill has a different serial number.
- Non-fungible items aren't interchangeable. With NFTs, each token has unique properties and isn't worth the same amount as other similar tokens.
How do Non-Fungible Tokens Work?
Essentially a non-fungible token transforms a digital work of art and other collectibles into a one-of-a-kind, verifiable digital asset that can be traded on the NFT market or NFT blockchain technology. Many NFTs come with their own unique information, including ownership and transaction details stored under its smart contract. NFT creators can also add details to their NFTs such as the creator’s identity, secure links to files, and more during transactions,
Those interested in collecting or investing in non-fungible tokens need a digital NFT wallet. A digital wallet is a cryptocurrency wallet that supports the blockchain protocol on which NFTs are built. Users often use Bitcoin, Ethereum network, and Dogecoin as cryptocurrencies which are the medium of exchange.
So why are people shelling out so much money for NFTs?
- Digital artist Beeple sold "Everydays — the First 5000 Days" for $69.3 million through a Christie's auction.
- A 20-second video clip of LeBron James "Cosmic Dunk #29" was sold for $208,000.
- A CryptoPunk NFT sold for $1.8 million at Sotheby's first curated NFT sale.
- Twitter CEO Jack Dorsey auctions an NFT of his first tweet, which sells for $2.9 million.
In early March 2021, a group of NFTs by digital artist Beeple sold for over $69 million. The sale set a precedent and a record for the most expensive pieces of digital art sold thus far. The artwork was a collage comprised of Beeple's first 5,000 days of work.
What's the difference between NFTs and cryptocurrency?
NFTs and cryptocurrencies rely on the same underlying blockchain technology. NFT marketplaces may also require people to purchase NFTs with a cryptocurrency. However, cryptocurrencies and NFTs are created and used for different purposes.
Cryptocurrencies aim to act as currencies by either storing value or letting you buy or sell goods. Cryptocurrency tokens are fungible tokens, similar to fiat currencies, like a dollar. NFTs create one-of-a-kind tokens that can show ownership and convey rights over digital goods.
How to buy an NFT
You can buy, sell, trade, and create NFTs from online exchanges or marketplaces. The creator or current owner may choose a specific price. Or, there may be an auction, and you'll have to bid on the NFT.
- Foundation: A community-curated marketplace that requires creators to be invited by other creators who are already part of the platform.
- Nifty Gateway: An art-focused marketplace that works with big-name brands, athletes, and creators.
- OpenSea: One of the first and largest marketplaces where you can find NFTs for a wide-range of collectibles.
- Rarible: Offers a range of NFTs with an emphasis on art. Uses its own RARI token to reward members.
- SuperRare: A marketplace that focuses on curating and offering digital art.
What Are NFTs Used For?
Blockchain technology and NFTs afford artists and content creators a unique opportunity to monetize their wares. For example, artists no longer have to rely on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT, which also lets them keep more of the profits. In addition, artists can program in royalties so they’ll receive a percentage of sales whenever their art is sold to a new owner. This is an attractive feature as artists generally do not receive future proceeds after their art is first sold.
Art isn’t the only way to make money with NFTs. Brands like Charmin and Taco Bell have auctioned off themed NFT art to raise funds for charity. Charmin dubbed its offering “NFTP” (non-fungible toilet paper), and Taco Bell’s NFT art sold out in minutes, with the highest bids coming in at 1.5 wrapped ether (WETH)—equal to $3,723.83 at time of writing.
Nyan Cat, a 2011-era GIF of a cat with a pop-tart body, sold for nearly $600,000 in February. And NBA Top Shot generated more than $500 million in sales as of late March. A single LeBron James highlight NFT fetched more than $200,000.
Even celebrities like Snoop Dogg and Lindsay Lohan are jumping on the NFT bandwagon, releasing unique memories, artwork and moments as securitized NFTs.
WHAT YOU NEED TO KNOW
- NFTs are unique cryptographic tokens that exist on a blockchain and cannot be replicated.
- NFTs can represent real-world items like artwork and real estate.
- "Tokenizing" these real-world tangible assets makes buying, selling, and trading them more efficient while reducing the probability of fraud.
- NFTs can also function to represent individuals' identities, property rights, and more.
While there may be many practical applications for NFTs in the future, they're primarily used with digital art today.
"For creators, NFTs create a seamless way to sell digital art that might not have much of a market. Additionally, there are ways in which creators can get paid fees for each subsequent sale of the art," says Ceesay. "On the flip side, collectors are able to speculate on digital art as well as have bragging rights on rare collectibles on the chain."
If you're considering purchasing an NFT as an investment, know that there's no guarantee it will increase in value. While some NFTs sell for thousands or millions of dollars, others may remain or become worthless.
Subscribe to DefiDao.dev
Sign up to our newsletters and we'll keep you in the loop.