You’ve probably heard the term “NFT” a lot lately, which makes sense; the NFT market has gotten a lot of recent press. But what exactly is an NFT, and how do they work? More importantly, why have they become so popular? In this blog, we’ll walk through what exactly an NFT is, how it works, and where this new asset came from.
What is a non-fungible token (NFT)?
NFT stands for “non-fungible token.” They are cryptographic assets, like digital works of art or goods, with built-in digital authentication supported by blockchain technology. This blockchain authentication can be thought of as the digital version of documented provenance that should accompany traditional artwork such as paintings or sculpture. NFTs are non-fungible, which means they are designed to be unique and not replaced with something esle. Their ownership is clearly delineated through the blockchain. Beyond digital collectible assets, some believe that NFTs could represent many other types of assets, such as bonds or even real estate.
How do NFTs work?
Cryptocurrencies, like paper money, are fungible. This means that they can be traded or exchanged with a one to one ratio. For example, one Bitcoin will always be equivalent to one Bitcoin, so you can exchange them easily. NFTs, however, are non-fungible, meaning each token is entirely unique, with a non-transferable identity. One NFT can never be equivalent to another NFT.
Like cryptocurrency, NFTs hold ownership details, making identification and transfer between token holders clear and simple. NFT owners may also choose to add metadata or attributes pertaining to the asset. For example, an artist could add their signature to their digital artwork in the metadata.
The benefits of NFTs
NFTs are commonly used in digital art and content, which have historically been hard to monetize. Digital files can be easily copied and replicated, and, in the past, it has been challenging to verify ownership of online digital assets. However, NFTs can provide a way for digital artists are creators and collectors to overcome these issues. Through the metadata on the blockchain, artists can more easily monetize their work, while buyers can actually verify the authenticity of the item they’re purchasing.
Origins of the NFT
NFTs were originally created around 2013 or 2014, but this new asset started to gain real momentum in 2017 when the virtual game CryptoKitties when viral. CryptoKitties is a blockchain-based virtual game in which players adopt, raise, and trade virtual cats on the Ethereum blockchain. Each unique cat has an ETH (Ethereum’s cryptocurrency) price. Shortly after being launched, CryptoKitties’ growing fanbase spent roughly $20 million in ether on trading these virtual cats.
The growth of the NFT market
NFTs have entered into the mainstream vernacular and the purchase prices for some NFTs have reached astonishingly high amounts. The artist “Beeple” recently sold an image for $69 million, and a signed copy of Jack Dorsey’s first Tweet sold for nearly $3 million.
Sales volumes for NFTs reached $2.5 billion in the first half of 2021 alone, up from $13.7 million in all of 2020. NonFungible.com found that somewhere between 10,000 and 20,000 buyers have bought an NFT on the Ethereum blockchain every week since March 2021, with transactions totaling $1.3 billion during the first half of the year. Further, according to DappRadar, secondary trading volume of these assets across all blockchains was just under $2.5 billion for the first half of 2021.
Why do NFTs matter?
NFTs represent a significant evolution for the cryptocurrency space, and they have implications that go beyond digital art and content. Many speculate that they could have a long-reaching impact on the infrastructure of our current financial systems. While NFTs are popularly used in art and digital content, they have the potential be used to represent real-world, physical assets, such as real estate. While this idea of having unique digital representations of physical assets is not new, the security and tamper-resistance design of the blockchain is. By tokenizing these physical assets, could potentially be bought, sold, and traded more efficiently while also reducing the potential for fraud. Should this concept be applied more widely, it could change the financial landscape as we know it.
*****
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
