Non-Fungible Tokens (or NFTs) are a unique type of crypto asset where each token is one-of-a-kind. This aspect makes NFTs different from “fungible” assets such as dollar bills or Bitcoin, all of which all have the same value.
Individuals can use NFTs to verify ownership of digital assets because each token is unique. Examples of such assets include recordings, artworks, virtual real estate, or pets.
What Does “Non-Fungible” Mean?
On the one hand, every bitcoin is equal in value to every other bitcoin. On the other hand, each non-fungible token is unique (hence the non-fungible part of the name). “Fungibility” is a term that refers to assets or goods that can be interchangeably swapped because they have the same value. Another example is the dollar bill — each dollar is worth exactly one dollar.
On the other hand, concert tickets are non-transferable. Even though each concert ticket has the same price, you cannot directly exchange them. Each ticket features a unique seat and a date, and no other tickets will have the exact same characteristics.
How do NFTs Work?
Those familiar with DeFi will have heard of the ERC-20 standard, which allows anyone to create Ethereum blockchain-compatible tokens (which are fungible by nature). By contrast, the majority of non-fungible tokens use the ERC-721 and ERC-1155 standards. These standards allow creators to use smart contracts to generate unique crypto assets.
Every NFT is stored on a blockchain, meaning that there is a historical record of every sale, and even creation of that token.
What Makes NFTs so Popular?
A 10-second video made by an artist by the name of Beeple sold online for $6.6 million in February 2021. Simultaneously, the famous auction house Christie’s announced around the same time it was selling a collage made up of 5,000 digital works by Mike Winkelmann (Beeple’s real name). The collage was placed on a virtual auction block at a starting price of $100. It fetched an astonishing $69 million on March 11.
One other thing fascinated observers aside from the stellar price. Collectors who purchase Beeples do not receive any tangible manifestations of the artwork in return for their money — not even a framed print. Instead, they receive an NFT, a crypto token certifying that each owner’s version is genuine.
The Importance of NFTs
NFTs are essentially digital certificates of authenticity. Individuals use them to buy and sell a wide range of virtual collectibles, such as:
- Virtual real estate in Decentraland
- A tweet by Mark Cuban, the Dallas Mavericks owner
- The original “Nyan cat” meme
- Grimes’ video art
- Video clips and music from EDM stars such as Deadmau5
- NBA virtual trading cards
NFTs are enjoying a boom in popularity similar to the soaring of Bitcoin and other cryptocurrencies. Storing every NFT takes place on an open blockchain, which is typically Ethereum’s. Anyone can follow the creation, selling, and reselling of these tokens. Additionally, smart contract technology allows NFTs to be set up in a way that ensures the original artist keeps a portion of every subsequent sale.
These tokens have also raised exciting philosophical questions about ownership along the way. For example, where is the value of digital artifacts that one can copy and paste endlessly?
NFT advocates point out that not all types of collecting are based on intrinsic value. In the past, comic books were printed using paper and ink worth mere pennies. Similarly, rare sneakers often use the same materials as worthless ones. Furthermore, there are countless paintings displayed in the Louvre, while others end up in mere thrift shops.
Case in point, the collector who sold his Beeple piece for $6.6 million noted that one can take a picture of the Mona Lisa but the picture is just a copy. In other words, it has no value because it lacks the history and prominence of the original. Therefore, most artwork is considered valuable simply because of the person who created it — the same logic also applies to non-fungible tokens.
What Can You Do With NFTs?
Some individuals display their digital artworks on massive monitors. Others buy virtual real estate with NFTs to build virtual museums and galleries for the same purpose. You can also visit virtual worlds such as Decentraland to view other people’s collections.
However, most fans find the process of selling and buying assets to be the most appealing part. For instance, the collector who sold the $6.9 million Beeple piece bought it in October 2020 for a “mere” $70,000.
Summary
The NFT space is seeing increasing involvement from mainstream artists, especially those in the music industry. For instance, Kings of Leon, a Nashville band, announced that their next album would be available in the form of multiple NFTs.
There are many perks that fans can unlock depending on the type of NFT they buy. Examples can include limited edition vinyl, alternate cover art, or even a golden ticket to a VIP concert.
Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
