Trends, challenges, and predictions for the blockchain industry The year 2020 made waves in the world of blockchain and digital currencies. While Bitcoin took phenomenal leaps in price, blockchain kept economies moving by facilitating cash-flow management (World Economic Forum). According to [...]
Here’s all you need to know about non-fungible tokens or NFTs, the latest craze in the crypto world.
Early last month, a piece of virtual land on blockchain marketplace and gaming platform Axie Infinity was sold for 888.25 ETH (ether, Ethereum’s cryptocurrency), or roughly US$1.5 million at the time.
Later the same month, Chris Torres, creator of the wildly popular Nyan Cat, an animated flying cat leaving a rainbow trail, sold a digital asset of the cat for about $590,000 in an online auction.
Last week, someone paid $208,000 for a video highlight featuring LeBron James, created by NBA Top Shot, a platform created by Canadian startup Dapper Labs in partnership with the NBA.
Around the same time, Miami-based art collector Pablo Rodriguez-Fraile, who had bought a 10-second piece of video art by digital artist Beeple in October 2020 for around US$67,000, sold it for a whopping $6.6 million.
Next week, in its first-ever sale of digital art, auction house Christie’s will finish a 14-day online sale of Beeple’s unique artwork called Everydays: The First 5000 Days. The artwork, a virtual collage of pictures he created over 5,000 consecutive days, had a starting bid of $100. At the time of writing, it had reached $3 million.
These are just a few examples of the growing asset class called non-fungible tokens, or NFTs for short. In the past couple of months, NFTs have surged in popularity and people are shelling out millions to own them. This comes amid the price rally of cryptocurrencies like Bitcoin.
Additionally, several celebrities are jumping on the bandwagon, further raising their popularity. Last week, YouTuber Logan Paul sold $5 million worth of his own NFT, of which $1 million worth of NFTs were sold in the first 30 minutes after their launch. Paul’s NFT features a cartoon image of himself styled as a Pokémon trainer.
The latest celebrity to join the NFT craze is singer Grimes, who sold around $6 million worth of digital artwork in an auction earlier this week. The highest selling piece, a one-of-a-kind video, sold for $389,000.
According to NonFungible.com, an NFT market analyst firm, the total value of NFT transactions quadrupled to $250 million in 2020, compared to $62 million the previous year. Meanwhile, the number of digital wallets trading NFTs nearly doubled from 112,731 in 2019 to 222,179 in 2020. Some traders were also able to generate profits of over $100,000.
“There’s this whole new culture of owning digitally native assets,” Justin Blau, a D.J., told The New York Times. “It’s an emotional thing.” Recently, Blau announced plans to offer an entire album as an NFT.
What is an NFT?
Non-fungible tokens or NFTs are cryptographically-generated tokens (or digital units) that leverage blockchain technology to link with a unique digital asset.
Cryptocurrencies like Bitcoin are fungible or interchangeable. To put it simply, imagine that two people own one Bitcoin each. These two coins are essentially indistinguishable from each other and will be equal in value. If they were to exchange their coins simultaneously, both individuals would still own the same amount as before.
In contrast, NFTs are unique and non-fungible. They are like a rare piece of art, a sculpture, or even a cat – truly one-of-a-kind. They can come in the form of video game assets, collectibles like cards or images, art, virtual real estate, or any other unique object stored and managed on a blockchain.
Some of the top NFT trading platforms include NBA Top Shot, CryptoPunks, Hashmasks, and CryptoKitties. As of March 2, NBA Top Shot has sold nearly $280 million worth of NBA video highlights, and saw over $8 million in sales in just the 24 hours between March 2 and 3.
How cats and punks changed the game
It all began with a Punk and a cat. The first Ethereum-based NFT experiment was CryptoPunks, which was released in 2017 by developers Larva Labs. These are unique collectible characters whose proof of ownership is stored on Ethereum. Originally, 10,000 of these uniquely-generated characters were given for free to those with an Ethereum wallet.
However, these initial characters were quickly claimed and can now only be purchased from someone else through the marketplace. In the market, users can buy, bid on, and offer Punks for sale.
Recently, a single buyer bought 34 Punks for 557.5 ETH ($875,164). According to NonFungible, as of March 2, total CryptoKitties sales stand at over $92 million, with over $17 million generated in the past week alone. In the most expensive Punk sale to date, Punk #6965 was sold for 800 ETH (around $1.54 million) last month.
However, it was CrytoKitties that popularized NFTs and took them mainstream. In December 2017, Dapper Labs launched tradable collectibles called CryptoKitties. These adorable kittens are like Pokémon cards but based on the Ethereum blockchain. The blockchain-based game allows users to buy, collect, breed, and sell virtual cats.
Their debut took the Internet by storm, so much so that back then it accounted for 15% of all Ethereum network traffic. Their popularity even briefly brought down Ethereum’s network.
Each CryptoKitty is unique and is represented by an NFT. It also has a digital genome, which is stored in a smart contract. When any two CryptoKitties are bred, it produces an offspring that has its own unique characters or “cattributes.”
To buy a CryptoKitty, a user only needs to own some Ether and have an account on the website cryptokitties.co. They can then either breed two kitties they own, or one kitty with a public “sire.”
As of March 2, the cheapest CryptoKitty costs 0.004 ETH ($6.03 at the current rate), and the most expensive one costs over 999 ETH (over $1.5 million). Meanwhile, total CryptoKitties sales stand at over 62,900 ETH ($97 million).
In the most expensive sale to date, a CryptoKitty named Dragon was sold for a whopping 600 ETH or $172,000 in 2018.
What makes NFTs attractive?
As each NFT is unique, they can reliably be proved to be authentic, and this makes them valuable. As the historical data of the NFT is stored on the blockchain, it can be traced to the original owner. Anyone can view the history of transactions and can easily detect any forgeries.
At a time when digital files can be accurately replicated with just a few clicks, an NFT token proves that only one digital file is original.
Another notable feature of NFTs is that they can be traded in open marketplaces. They are also interoperable, meaning they can easily move across multiple ecosystems. When a developer releases a new NFT, it can be viewed inside various wallet providers, displayed inside virtual worlds, and can be traded in marketplaces.
NFTs are also indestructible; as NFT data is stored on the blockchain using smart contracts, tokens cannot be destroyed, replicated, or removed. As the transactions are cryptographically linked together, it is near impossible to modify an old transaction. Furthermore, these tokens have immutable ownership, which means that collectors actually own their NFTs rather than leasing the NFTs from their creators.
Additionally, NFTs are indivisible. This means that they cannot be divided into smaller units like Bitcoins. They solely exist as a whole – you either purchase the whole NFT, or none at all.
How to buy an NFT
The process of purchasing NFTs varies from platform to platform. For instance, in Top Shot, when you register to buy a pack drop, the platform will add you to a waiting list. When a digital asset goes on sale, the system will randomly assign a place to each buyer on the queue.
While Ether is one of the most popular NFT currencies, it varies depending on the platform. In Top Shot, you can buy the NFT using USD or cryptocurrencies like Ether, Bitcoin, and Bitcoin Cash. In contrast, OpenSea accepts only cryptocurrencies, with Ether being the most common. Meanwhile, CryptoKitties accepts only Ether.
Should you buy an NFT?
The price of NFTs is driven by supply and demand in the market. Some NFTs can also be coded to enable the original creator to earn each time the token is traded, usually at a range of 2.5% to 10% of the sale price.
There are also other ways by which NFT owners can earn on their investments. For instance, in 2019, a gamer on the Decentraland virtual land platform purchased 64 lots to combine them into a single estate in the shape of a perfect square. Estate 331, dubbed “The Secret of Satoshis Tea Garden,” sold for over $80,000 for its many perks, including road access.
However, like many new niche investment areas, NFTs come with the risk of major losses if the hype dies down. And not everyone believes that the NFT boom is here to stay.
In a series of tweets, Litecoin founder Charlie Lee said, “There is zero cost to create unlimited number of tokens.”
“Unlike NFTs, real world art is not zero cost. It takes effort and time to create a piece,” he added. “A famous artist like Picasso can only create thousands of pieces of art in his lifetime. This limitation creates scarcity, which helps keep the value high.”
Conversely, due to the near-zero cost to create another NFT, “the market will eventually be flooded with NFTs from artists trying to cash in on this craze. Supply will overwhelm demand and the prices will eventually crash,” Lee predicted.
While the majority of NFTs could become worthless in the future, Andrew Steinwold, who launched a $6 million dollar NFT investment fund early this year, said that some items will continue to be popular.
“We’re spending a lot of our time digitally, always online, always plugged in. It makes sense to now add property rights to the mix and suddenly we have the emergence of the metaverse,” he told Reuters. “I think it’s going to reach into the trillions of dollars one day.”
Header image courtesy of Larva Labs.