What are Non-Fungible Tokens (NFTs)?
NFTs seem all the rage lately in the crypto world, but what are NFTs anyway? NFT stands for non-fungible tokens. Don’t worry, it is not as complicated as it sounds! Let’s break it down to make things simple:
What does fungible mean?
Fungibility in economics refers to a currency, good or asset that can be exchanged for another exactly like it of the same value. For example, you can lend your friend a €/$100 note and he can return another €/$100 note back at a later date. It is not the same note, but it has the same value. It’s the same for an ounce of gold, a barrel of oil, a kilo bag of flour etc.
In other words non-fungible is the opposite and means the currency, good or asset cannot be exchanged with a like item. Usually these are collectors’ items like for example the Mona Lisa by Leonardo da Vinci or The Scream by Edvard Munch. They are unique and cannot be replaced, as a result they are usually more valuable.
What are tokens?
Previously blockchain facilitated the exchange of value using cryptocurrency over the internet. Now it has been expanded thanks to the Ethereum platform to also include the purchase of a tokens with crypto. The tokens are the non-fungible works of art and other assets. In this case they are for the time being mostly limited to digital art or digital assets.
So what are NFTs?
In short NFTs are unique digital assets, that can be purchased with crypto. Once purchased the transaction will be permanently logged and publicly displayed on the blockchain. Since tokens are scarce they can be worth a pretty penny.
NFTs are supported mostly by the Ethereum platform using smart contracts. There was a surge in popularity in 2021 as NFTs reached a market cap of $23 billion. However there are NFT blockchains other than Ethereum.
Examples of NFTs
There have been some examples of NFTs that have made it in the news. Mostly this is because of the price they were bought for and also because of the novelty of certain tokens that are being sold.
The most expensive NFTs
The most expensive token was a digital artwork by Beeple called “Everydays”. It is a compilation of his first 5000 days of artwork from when he made a commitment to creating a piece of art everyday since May 2007. The artwork sold at the well-known auction house Christie’s for an incredible $69.3 million! The buyer received all 5000 individual pieces of artwork.
Image source Christie’s
Novelty NFTs
An interesting NFT that sold for millions is the first Twitter tweet by its founder Jack Dorsey. When he was setting up his Twitter account back in 2006 he created a tweet that stated “just setting up my twttr”. The buyer was CEO Sina Estav from Oracle who paid $2.9 million for the tweet. Although he owns the tweet it is kept on the Twitter platform.
Another example is an NFT is of LeBron James which is a video clip of him dunking. It sold for $208,000. The thing is that although someone bought the clip and owns it outright users online can still view the clip.
Although it sounds rather odd, the situation can be compared to a physical piece of artwork. A collector owns a Van Gogh painting but will loan the painting for an exhibition put on for the public. The only difference however, is that it is more accessible online as users are able to look up the video any time they want.
There are a lot of other examples of NFTs that have sold for high prices and also quite a lot of others that have sold for less. There are also a whole range of different types of NFTs for sale like those for video games, sports memorabilia and music.
Sale conditions
The terms and conditions of sale are set by the artist. For example the artist might want to allow the NFT to mint other NFTs or the artist might like to get a cut every time the NFT is sold.
Auction houses that hold the item and place it for sale also get a cut just as it would in a regular auction. The online auction platform Valuables made a 5% on the Jack Dorsey tweet and Christies made 13.5% on Everydays.
NFTs FUD – Critique
As with everything new until it finds its place or establishes its true value there has been critique on NFTs. There are a number of people that are saying NFTs are a digital bubble. That is to say it will eventually look like the over evaluated stock market in the year 2000 before it crashed.
This is partly because people that are selling artwork might not be the creators of the piece. In addition people may make more digital copies of the original artwork and resell them. There is nothing stopping them from doing so.
Counter FUD NFTs – making the case for NFTs
The critique of unauthentic and unoriginal artwork is nothing new. Artwork replication of the original has likewise also has been a problem in the real world by fraudsters. You will find fraudsters everywhere whether they are online or offline.
True the digital world can make exact copies where there will be no absolute difference between the original and the copy. However, thanks to blockchain this will not be an issue. Blockchain records the time when a transaction, any smart contract or in this case NFT is made, this is called time stamping.
The blockchain will record the creation of the NFT, when it was sold and for how much and will continue recording any additional resales. The original artwork will be provably verifiable.
Moreover it is to be expected that real life expectations and idea of value will be transferred onto the digital world of NFTs. There have been sports cards, books, stamps and other collectable items that were printed or made one way only to be amended slightly some time later. The originals will be worth more than the ones that came after.
It is quite normal in the collectors world that even if a particular collectable was amended due to a mistake, the original will regardless be the most valuable. As a result of NFTs we now have a way of applying the world of collectables into the digital world. This is a revolutionary step and will open up a lot of possibilities.
Could NFT values crash down?
Sure they could come crashing down. Like anything new sometimes there is no way of knowing what is going to work out and what will not. Let us take the example of the dot come bubble again back in the year 2000. A lot of companies and individuals invested a lot of their time, energy and money into tech stocks before the crash.
During that period people had faith and misallocated over enthusiasm of the space. Yes the internet was an amazing step forward for humanity, but not all companies are built well and provide value. Consequently this lead to the dot com’s demise, but that’s not to say it was all bad.
The collapse shook out the malinvestment and the robust companies that built solid products moved on to grow into great successes. For instance; Amazon and Google are the most prominent that survived the times.
This will most likely be the case with NFTs. There will be a lot of hype around these new collectables and their valuations will sore across the board. Consequently it will make a lot of people rich in the process. People will get caught up in the hype and a lot will get sucked in. However, no one really knows when it will all crash down. The best advice is to ignore they hype use common sense and invest wisely.
Tips on what to buy
By any means we are not collectors so we are not the best advisors. However, it would be a good to get ideas from the real world and see what collectors tend to look for. Whether they are selling something of fame or notoriety like from something related to Star Wars or a first of something like Jack Dorsey’s first tweet. It could be something that is tied to something real like a one ounce gold coin or something rare like a massive natural diamond.
How to buy NFT tokens
If you are interested in buying NFT tokens there are a whole range of different tokens to consider buying. For example you can buy art, collectables, trading cards, sports moments, music and more. We have an article on how to buy NFT tokens here. This article covers the different marketplaces where you can buy NFTs, how to buy them and other related information.
