If you haven’t heard of NFTs or non-fungible tokens now, it’s only a matter of time. Whether its digital sports cards or digital artworks, NFTs have been taking the internet by storm. So what are they?
What does NFT mean?
An NFT is a non-fungible token existing on a blockchain. A token is the sign of ownership of an asset. For instance, a concert ticket is a sign of ownership of one space for a concert. A Bitcoin (BTC) is the title of ownership to the underlying value of the Bitcoin. A token is a digital asset, stored on the blockchain. As the blockchain is transparent, everyone can see who is the holder of what token.
Fungible refers to an asset that can be easily exchanged. A dollar is very fungible, you can give me a dollar in exchange for some good and I can then re-exchange it for another service. A neighbor could borrow sth and buy me another one in a few days when he goes to the supermarket. It doesn’t matter that the sugar is different, it is easily replaceable and exchangeable.
A non-fungible token is a unique token so it isn’t easily exchangeable with another. The foremost use case is artworks. Artworks have been selling on the blockchain for millions of dollars (or in this case a blockchain native currency, Ethereum). Examples abound but the most famous NFT artist so far is Beeple who first sold 21 pieces of artwork on digital marketplace Nifty Gateway for a total of $3.5 million. He then sold his masterpiece “EVERYDAYS: THE FIRST 5000 DAYS” at Christie’s for $6.5 million. Beeple is Mike Winkelmann, previously a graphic designer from Charleston South Carolina.
Artworks are not the only things exchanged in these marketplaces. More and more volume in the NFT space is coming from digital sports trading cards. Actually, fans of basketball have already spent $230 million trading NBA Top Shot cards. These cards show certain classic moments for the sport and there is only a limited amount of each. The ownership and the scarcity of these cards are insured by the Ethereum blockchain. Recently, a rare Lebron James highlight sold to the highest bidder for a crisp $200,000.
Why would anyone pay for this?
The crazy thing about these purchases is that anyone is able to download Beeple’s artwork or Lebron’s highlight. It is as simple as clicking ‘save image’ on your laptop. What buyers are after is not the artwork in itself but the proof of ownership for that artwork. The buyers are akin to art collectors putting their most prized possessions on display in museums. non-fungible tokens are a way for art collectors to encourage financially their favorite artists online.
As humans evolve more and more, particularly in lockdown, it seems only natural that we decide to purchase art in the digital world as well. One step further, certain platforms such as Decentraland enable users to buy land or real estate in a digital world.
While this has been no more than a niche sector of the internet, in the last six months it has truly exploded onto mainstream media and looks to be here to stay. While the first experiments with NFTs date back to 2013-2014, the market seems to arrive to a certain maturity and mainstream appeal in 2021.
Many issues remain with the NFT market, however. As the main currency of exchange and the network on which marketplaces are built is Ethereum, transaction fees are very high and it is commonplace to have to pay $50 to transfer the property title of an NFT from its creator to the buyer. On platforms like Rarible or OpenSea, the current market leaders, not only does each transaction (creation of the NFT, bids, transfer of ownership) costs users large sums, they also amount to the terrible carbon footprint of the Ethereum network.
There is hope, however, as Ethereum is planning to change its architecture by the beginning of 2022 to be much more eco-friendly. In the meantime, certain marketplaces have found technical solutions to these limitations. Drops.is, an upcoming NFT project that allows you to do a lot more with NFTs than just buy and sell. It enables users to create NFTs, bid, stake, take loans by using your NFT as collateral. It’s also using a Layer 2 solution by building on Polygon network, reducing both the costs of these transactions to a few cents (which are paid for by the platform itself) and the important environmental costs.
The new creator economy
The most exciting part of the NFT revolution is that artists specialized in digital arts will eventually be compensated for their work. Until now, it was very difficult for artists to monetize their creations because of the very nature of digital art and its infinite reproducibility. Now, true fans of the artists can directly support them with any middle-men or platform.
Mainstream artists seem to have caught on to this trend with artists like Grammy-winning Kings of Leon releasing their latest album as an NFT. It’s also the case of Grimes, Lindsay Lohan or even Soulja Boy who all released NFTs representing music, digital artworks or even the ownership of a limited-edition vinyl.
But it is not only artists who can make money from NFTs, the market for digital sports card for instance has already exploded. Soccer trading card platform Sorare has seen the unique 2020-2021 Kylian Mbappé card sell for $65,000. Cashing in on sports fans stuck at home has turned out to be extremely profitable for these platforms, so much so that it has brought the attention of gaming giant Ubisoft who has now partnered up with Sorare for future projects.
NFTs are the hottest item in the recent crypto craze and as mainstream artists begin to discover them they will only become more popular and coming soon to a digital market near you.