NFTs, or Non-Fungible Tokens, actually function much like most cryptocurrencies. But, instead of being tokens traded for various platforms and projects, they are digital files recorded on the same blockchains.
The difference comes from the “Non-Fungible” part, which means that every NFT, unlike cryptocurrencies, is unique and differentiated from others- even those that look exactly alike.
Basically, NFTs are usually little JPEGs that are bought and sold online, most commonly on the Ethereum blockchain.
What is baffling is why these little pictures can go for such insanely high prices when basically anyone can right click and download the same images for free.
Beauty is in the eye of the Beholder
Pricing NFTs is hard because most NFTs are simply viewed as forms of art or collectibles, with no real utility and therefore achieve their prices based on what people are willing to pay for them.
Though physical pieces of art often go for millions without anyone batting an eyelid, those prices are often justified with the reason that such artwork is one of one and having it in one’s collection means no one else can see it.
However, they draw the line at NFTs as they are literally the same image that anyone can view for free and therefore not unique.
For example, take a look at this artist impression of the founder of Bitcoin, Satoshi Nakamoto — an image that anyone can see which was bought and sold multiple times, with each time being valued at least worth 69ETH (USD$261,000).
So, how can we justify anyone spending the equivalent of a car purchase on a bunch of pixels on a screen?
NFTs can be verified on the blockchain
Much like physical art, originals are valued in the NFT world. Even the Mona Lisa recreated would be worthless if it were not the original. Unlike physical art, NFTs can be instantly verified through the blockchain.
Purchasing physical artworks usually requires an expert’s opinion or certification to verify that it is indeed genuine. However if the piece was to be swapped for a dupe, the naked eye would not be able to tell the difference and still continue to believe that they are in possession of the original.
Thanks to the beauty of the Blockchain however, transactions of NFTs are fully transparent and easily traceable.
You can even dig deeper to access transaction details such as the exact transaction hash, time of transfer and even the gas fees for the transaction, all of which are easily accessible to the layman.
Though the prices may seem outrageous, not all NFTs are sold in the hundreds of thousands of dollars and the ability to assess the validity of the NFT without an expert makes it all the more easier for everyday folk to enter the art space.
NFTs with utility
While most people may associate NFTs only with artworks, some NFTs have use cases that people hold them for.
The Bored Ape Yacht Club, one of the most successful NFT projects to date, treats their NFTs as a proof of membership, which is required to access their website for certain perks.
Those who set their profile pics as a verified ape also say that it helps them to connect with members of the community and are able to find those interested in similar spaces.
A more engaging use case would be Axie Infinity, a Pokémon-inspired game where players can battle, collect, raise and build a kingdom around their “pets”, which are actually NFTs.
These pets are also required to start the game and can eventually be bred and sold. Each Axie created also has unique qualities that affect their stats and appearance. The rarer these qualities are, the higher the prices these Axies often sell for.
Axies aren’t the only NFTs in this game too — almost everything from the land to build on to items used to progress in the game are also minted as NFTs.
These use cases have already seen a 100,000% appreciation in Axie Infinity’s native token ($AXS) in a year and sees Axies being sold for hundreds of dollars every minute, reflecting the demand for such a “pay to play to earn” game.
In fact, this was one of the visions that Ethereum founder Vitalik Buterin had when he created Ethereum, to decentralize gaming.
These use cases are also just the beginning for NFTs. With the ability to verify virtually anything on the blockchain, increasingly innovative ways to use them have been emerging such as real estate, vaccination certificates and music.
Mainstream adoption of NFTs
So what’s to prevent NFTs from going down the path of tulipomania? Well, mainstream NFT adoption might be the answer. Though NFTs have already been embraced by many in the crypto community, legitimizing it as a form of art or collectible that holds value is the best way to get those outside of the space to acknowledge their worth.
Christie’s, a world-leading art and luxury business, auctioned off an NFT from American digital artist Beeple (Michael Winkelmann) for 42,329.435 ETH or roughly USD$69 million to a Singaporean-based crypto enthusiast Vignesh “MetaKovan” Sundaresan.
Breaking into the high-flying world of fine art is a huge first step for NFTs and signals the warming of mainstream art collectors towards digital art.
Celebrities are also helping bring the NFT space to light, offering their own collectibles that often come with special exclusives.
Eminem’s SHADYCON offered a video NFT that came with an original, new instrumental for the NFT holder and physical signed merchandise giveaways.
Popular franchises such as Taco Bell and the NBA have also capitalized on the craze by releasing NFTs based on their target markets.
So should I go all in on NFTs?
Before moving your whole portfolio into the NFT space, remember that not all NFTs are created equal. The NFTs that sell for thousands of dollars sell for the same reasons as other collectibles — an interesting story surrounding them or their ability to appreciate in value.
Much like other assets, finding good NFTs to buy takes time, research and sometimes a bit of luck.
Featured Image Credit: CNBC