On February 25, 2021, Christie’s auction house listed an unassuming piece of digital artwork for a two-week auction, with bids starting at $100. The picture, titled “Everydays: The First 5,000 Days,” was a little-known type of digital asset called an NFT, which stands for non-fungible token. By the time bidding ended on Thursday afternoon, the picture had sold for a whopping $69.3 million – shattering expectations in the art world and proving to the public that the era of the NFT had arrived.
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What is an NFT?
NFTs have only gained in popularity since Christie’s record sale, with NFT transactions hitting $2.5 billion in the first half of 2021. While the rise of NFTs is unprecedented in the digital space, a clue to the crypto asset’s appeal can be found in its name. Each NFT is “non-fungible,” meaning that every NFT ever created has a unique digital signature that cannot be replicated or destroyed.
Cryptocurrency, such as Bitcoin, is a “fungible” token that derives its value from its scarcity. While every Bitcoin is identical and can be exchanged with another Bitcoin at no loss, the cryptocurrency holds its value because its supply is fixed at 21 million coins.
NFTs are not limited by supply constraints. They are digital assets that link ownership of any number of digital items, such as real estate, music, videos, or works of art. They are bought and sold online, frequently with cryptocurrency, and vary in price and demand depending upon the unique characteristics of the digital piece they verify. At a fundamental level, NFTs can be considered certificates of authenticity or proof of ownership for digital artifacts.
Where are NFTs Stored?
NFTs are stored on a blockchain, a public ledger that creates a record of transactions that can’t be edited or destroyed. Because the blockchain is decentralized, the software doesn’t live in a single location but is spread out across the globe, existing on thousands of computers. This makes tampering with NFTs virtually impossible and eliminates the need for third parties such as banks and governments – entities that could interfere with the creation process.
While Bitcoin is currently the largest cryptocurrency in terms of market cap, Ethereum remains the most used blockchain for NFTs. This is because Ethereum’s blockchain contains greater flexibility, allowing not only the storing of value but the execution of code on a digital ledger. This code can be used for a number of purposes, including creating secure transactions, trading other cryptocurrencies, and using and storing NFTs.
The Unique Properties of Ethereum
Ethereum’s flexibility is manifest in its ability to execute smart contracts – the technology that makes the creation and sale of NFTs possible.
Smart contracts are written in computer code and serve as automatic agreements between two parties. These are stored on the Ethereum blockchain, creating a digital record that can never be altered or destroyed. One helpful way to think of an NFT is as a tokenized smart contract. When an NFT is minted, it not only creates a special token but also establishes a contract on the Ethereum blockchain.
The NFT itself is an ID number contained within the smart contract’s code. Other information such as the digital wallet address, the date of creation, and the previous owners is also stored here. By keeping the smart contract on the blockchain, proof of ownership remains easy to validate.
In addition to the Ethereum network, other blockchains such as Flow and Tezos also support NFTs. Regardless of the network used, anyone can review the blockchain ledger, making it easy to trace and verify NFT ownership. Despite this traceability, the person that owns the token always has the choice to remain anonymous.
What Makes NFTs Valuable?
Throughout the rapid rise of NFTs, many have wondered why digital art that can be copied and pasted over and over has any intrinsic value? The answer lies in the human urge to both collect old items, and assign a higher value to items that are original or rare. While an NFT and a digital file may each display the same picture, only the NFT contains the technology to prove its age and one-of-a-kind status.
Simply put, NFTs buy original traceability, which carries with it social prestige.
For most people, possessing one of the millions of reproductions is worth little compared to owning a digital asset that can be directly traced back to the artist that made it. An NFT created by the digital artist Beeple, for example, is packed with history and is a link to an artist that produced the $69.3 million masterpiece sold by Christie’s.
Although NFTs and physical art have many differences, both art forms value originality and place high prices on works that can be authentically verified. These works also tend to appreciate in value over time, making them ideal investments and places to park physical money. While valuations can be driven by speculation, pricing action tends to stabilize over time and increase in value as the digital asset matches inflationary movement.
Lastly, NFTs are valuable for the simple reason that they can be used in popular industries to attain key benefits. Video games are a prime example as players can keep track of who owns in-game assets, as well as ensure transactions are completed. NFTs are also increasingly used as event tickets, unlocking free perks for concerts and sporting events when certain NFTs are purchased.
In the end, the value of the non-fungible token is only going to increase as we move into the future. As major companies develop NFTs to provide benefits and services in the digital economy, as well as reduce their carbon footprint, non-fungible tokens will only become more desirable – driving engagement from fans and consumers alike and turning into a staple of personal finance.
How Can NFTs be purchased?
The first step to owning NFTs is to acquire a digital wallet, which allows the owner to store NFTs and cryptocurrency. Since most users will only be able to buy NFTs using cryptocurrency, it will also be necessary to purchase Bitcoin, Ethereum, or any number of digital assets that can be used in the transaction. Buying cryptocurrency today is a straightforward process, and platforms like Coinbase, Kraken, eToro, PayPal, and Robinhood all accept credit cards and common forms of payment.
Investors can only purchase NFTs from certain online marketplaces. In these exchanges, the creator or current owner may choose a specific price, or there may be an auction format requiring potential buyers to bid on the NFT.
Below are some of the largest NFT marketplaces:
- Foundation: A community-maintained NFT marketplace that requires creators to receive an invitation from existing members in order to showcase their art. Rating high in exclusivity, the platform draws higher prices which attract top creators and collectors.
- OpenSea: One of the largest and most well-known NFT marketplace, OpenSea is available to anyone willing to create an account.
- Rarible: Combining characteristics of both OpenSea and Foundation, Rarible’s NFT collection maintains a focus on art and allows anyone to sell NFTs. The exchange also issues a “RARI token” to members to allow them to weigh in on key site decisions.
What are NFTs used for?
While NFTs have a number of use cases across a wide variety of industries, they are most commonly associated with artists and content creators. Much like the freedom blockchain technology gives to investors, artists no longer have to rely on third parties such as galleries to showcase and monetize their creations. NFTs allow artists to sell directly to their audience – and keep more of the profits in the process.
Although artists have spearheaded mass NFT adoption, larger entities such as brands and corporations have also jumped into the NFT space. Companies such as Taco Bell and Charmin have auctioned off themed NFT art to raise funds for charity. Taco Bell’s own NFT art sold out in minutes, with the highest bid equal to $3,723.83.
NFTs have also been used to commemorate key historical moments and highlights. Twitter founder Jack Dorsey’s first-ever tweet was also sold for $2.9 million, while a single LeBron James highlight NFT fetched more than $200,000.
Even though the NFT market is still in its infancy, some see NFTs as a potential way for brands to reward top customers. Certain discounts and benefits could be made available to individuals who hold certain tokens, allowing them to be used as event tickets or giving them preferential access that isn’t available to the average customer.
In early March, for example, the American rock band Kings of Leon announced their next album would arrive in the form of multiple NFTs. The band stated that various perks would be unlocked depending on which NFT a fan bought. These could range from the alternate cover art, limited-edition vinyl, and even a “golden ticket” to a VIP concert experience.
Not only would the tickets allow fans to better engage with the band, but the group’s NFT tickets also reduced the pollution and carbon footprint of tens of thousands of fans who would not have to dispose of their physical tickets.
What are some of the most valuable types of NFTs?
While there are perhaps tens of thousands of different non-fungible tokens that exist on the blockchain, a few distinct series of NFTs are known as the gold standard in NFT collecting. These NFTs usually sell for significantly higher amounts than comparable NFTs on the market, and rare models have the potential to sell for millions of dollars. The three highest valued NFT types are known as Cryptokitties, Cryptopunks, and the NBA Top Shot trading cards. Each one of these NFT lines has varying strengths and weaknesses, but all possess serious resale value.
Cryptokitties
The first game built on the Ethereum network, Cryptokitties‘ beta launch was released on November 23, 2017, and it has since become a viral sensation that has changed what it means to collect NFTs. The game itself is relatively straightforward – players buy, trade, and breed cute digital cats on the blockchain. Those who have lived through the 90s will intuitively understand the similarities with Pokemon and Tomagachi.
What makes Cryptokitties unique is that each Cryptokitty is represented on the blockchain as an NFT. Additionally, players can breed two separate cats to create a whole new NFT with its own separate “Cattributes.” The genetic algorithm produces a new Cryptokitty with a distinct visual appearance – all stored on the blockchain.
While the average Cryptokitty sells for around $60 today, original Cryptokitties can be valued at tens of thousands of dollars. The most expensive CryptoKitty, named Genesis, was at one point valued at $114,481.59.
Cryptopunks
Starting in 2017 after two coders challenged themselves to create computer code that “could provide a sense of ownership and value,” Cryptopunks has gone on to become one of the most coveted NFT brands in existence today – and one of the most valuable.
There are only 10,000 Cryptopunks ever made, and each photo measures just 24 pixels by 24 pixels. Each character is created algorithmically and has unique characteristics, such as a mask, hair, or a bandanna, that add or detract value from the piece. The punks include men and women, as well as strange species like aliens, zombies, and apes.
Sold in March 2017 for $7.58 million, Cryptopunk #3100 holds the record for the most expensive Cryptopunk ever purchased.
NBA Top Shot
Perhaps the most famous type of non-fungible tokens for its eye-popping price tags, NBA Top Shot is a series of collectible trading cards that each represent a special moment from basketball history. You can think of NBA Top Shot as physical cards that have data stored on the blockchain. This allows them to be kept in a virtual wallet or sent to friends and family.
Like real sports cards, they come in digital packs, and there are multiple cards for each moment. Packs are released in various sizes, with smaller packs increasing the rarity of the cards. The common tier includes packs that have 10,000 cards or more, the rare tier has packs of 150-4,999 cards, and the legendary tier limits them to 25-499 cards.
Within each pack, each card has its own serial number. But these can cause prices to vary wildly. Although there are similarities between Top Shot and regular sports cards, they do not have the same value. Currently, the most valuable Top Shot is a clip of a Derrick Rose layup that is valued at around $1,000,000.
What do you do with NFTs once you buy them?
Although many collectors interested in buying NFTs appreciate their rising value, not everyone is sure of what to do with them after the initial purchase. Some people display their digital art on large monitors, while others buy virtual real estate in which they’re able to own galleries or museums. And with the creation of virtual worlds such as Decentraland, NTF owners are able to virtually display their NFT artwork while browsing those of their peers.
Indian-born blockchain entrepreneur Vignesh Sundaresan, the man behind the $69.3 million purchase of Everydays: The First 5000 Days, has stated that he wants everyone to download a copy of the masterpiece for free. In the end, Sundaresan believes the beauty of digital art is when everyone gets to enjoy it.
What does the future hold for NFTs?
The NFT remains one of the most exciting pieces of blockchain technology today, and experts still argue about the different potential use cases that will exist for the tokens in the future. While the NFT will undoubtedly evolve with the rise of computing power, the basic structure of NFTs and the blockchain network they occupy means that some possibilities may soon become a reality.
NFT Royalties
One prediction that has recently been implemented is that of NFT royalties. Within the last year, certain NFTs have been developed that automatically pay out royalties to their creators every time they’re bought and sold. For example, original owners of NFT collections such as EulerBeats Originals earn an 8% royalty every time the NFT is sold on. And some platforms, like Foundation and Zora, support royalties for their artists. This process is fully automatic so NFT creators do not have to actively implement any technology as collectors buy NFTs that they’ve created.
Real-Time NFT Creation
Many experts have also pointed out the advanced use cases of smart contracts and their role in the future development of the non-fungible token.
Many of these contracts now involve third-party APIs known as Oracles that allow trusted external sources of data to be integrated into the contract. This means that real-world events can be factored into the execution of code. In theory, this technology can be used to create NFTs that respond or change depending on external events.
Imagine a piece of digital art, for example, that features a clone whose expression changes in relation to the outdoor weather or the day of the week. Or an NFT representing a professional sports team that is minted automatically every time the team wins a game or a playoff series. The possibilities are endless, and creators have only just scratched the surface of this unique phenomenon.
Sharing Ownership of Goods
The emergence of new technology will also allow for shared ownership of real-world items, similar to the way that shares in a company represent the greater whole.
The Crossroad NFT, for example, is worth astronomical sums of money, beyond the financial reach of most people who seek to own NFTs. However, by fractionalizing the NFT, investors can buy a piece of the token at a price they’re comfortable with. Once the NFT is fractionalized, it becomes represented by millions of fungible tokens which could cost less than a dollar. The NFT is still worth millions of dollars, but it is now subsidized by thousands of people as opposed to one person.
Ownership of Virtual Assets
The same blockchain technology that makes possible the shared ownership of physical assets also allows for the ownership of virtual assets. Many video games today allow players the option to store digital objects as NFTs that can be traded with other players both online or outside the game. These supply cards or player badges can also be sold, bought, and traded securely on NFT marketplaces or even used for applications.
The ability of the NFT to establish virtual asset ownership and in-game items like wearables, digital land ownership, and access badges makes it a one-of-a-kind technology that could create a whole new secondary market for virtual goods. It’s still early days, but tapping into blockchains could potentially play a huge role in new virtual worlds such as the Metaverse.
