Non-fungible tokens (NFTs) seem to have exploded this year. From art and music to tacos and toilet paper, these digital assets are selling in millions of dollars. But are NFTs worth the money–or the hype? Some experts say they are a bubble poised to pop, like the dotcom craze or Beanie Babies. Others believe NFTs are here to stay, and that they will change investing forever.
What are NFTs?
NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos. Although they have been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. A staggering $174 million has been spent on NFTs since November 2017.
NFTs are one of a very limited run and have unique identifying codes. Arry Yu, managing director of Yellow Umbrella Ventures says, “NFTs create digital scarcity”. This stands in stark contrast to most digital creations, which are almost always infinite in supply. Hypothetically, cutting off the supply should raise the value of a given asset, assuming it is in demand. But many NFTs, at least in these early days, have been digital creations that already exist in some form elsewhere, like iconic video clips from NBA (National Basketball Association) games or securitized versions of digital art that are already floating around on Instagram.
For instance, famous digital artist Mike Winklemann, better known as “Beeple” crafted a composite of 5,000 daily drawings to create perhaps the most famous NFT of the moment, “EVERYDAYS: The First 5000 Days,” which sold for a record-breaking $69.3 million.
Anyone can view the individual images — or even the entire collage of images online for free. So, why are people willing to spend millions on something they could easily screenshot or download? Yu says this because an NFT allows the buyer to own the original item. Not only that, it contains built-in authentication, which serves as proof of ownership. Collectors value those “digital bragging rights” almost more than the item itself.
How is NFT different from cryptocurrency?
NFT stands for non-fungible token. It’s generally built using the same kind of programming as cryptocurrency, like Bitcoin or Ethereum, but that’s where the similarity ends. Physical money and cryptocurrencies are ‘fungible,’ meaning they can be traded or exchanged for one another. They are also equal in value — one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain.
NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible). One NBA Top Shot clip, for example, is not equal to other creative digital drawings as both are unique in their own ways.
How does NFT work?
NFTs exist on a blockchain (a system in which a record of crypto transactions is maintained across several computers that are linked in a peer-to-peer network), which is a distributed public ledger that records transactions. NFTs are typically held on the Ethereum blockchain, although other blockchains support them as well. NFT is created or minted from digital objects that represent both tangible and intangible items, including Art, GIFs, Videos and sports highlights, Collectibles, Virtual avatars, video games, Skins, Designer sneakers, Music, and Even tweets count. Twitter co-founder Jack Dorsey sold his first ever tweet as an NFT for more than $2.9 million.
Essentially, NFTs are like physical collector’s items, only digital. So, instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead. They also get exclusive ownership rights. NFTs can have only one owner at a time. NFTs’ unique data makes it easy to verify their ownership and transfer tokens between owners. The owner or creator can also store specific information inside them. For instance, artists can sign their artwork by including their signature in an NFT’s metadata.
What are NFTs used for?
Blockchain technology and NFTs afford artists and content creators a unique opportunity to monetize their wares. For example, artists no longer have to rely on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT, which also lets them keep more of the profits. In addition, artists can program in royalties so they’ll receive a percentage of sales whenever their art is sold to a new owner. This is an attractive feature as artists generally do not receive future proceeds after their art is first sold.
Art isn’t the only way to make money with NFTs. Brands like Charmin and Taco Bell have auctioned off themed NFT art to raise funds for charity. Charmin dubbed its offering ‘NFTP’ (non-fungible toilet paper), and Taco Bell’s NFT art sold out in minutes, with the highest bids coming in at 1.5 wrapped ether (WETH) — equal to $3,723.83 at the time of writing. Nyan Cat, a 2011-era GIF of a cat with a pop-tart body, sold for nearly $600,000 in February 2022. And NBA Top Shot generated more than $500 million in sales as of late March. A single LeBron James highlight NFT fetched more than $200,000. Even celebrities like Snoop Dogg, Lindsay Lohan, Amitabh Bachchan, and Salman Khan are jumping on the NFT bandwagon, releasing unique memories, artwork, and moments as securitized NFTs.
Businesses to be benefited from NFTs
Dhrubabrata Ghosh, Managing Director, Data & Digital expert at Protiviti told International Finance that businesses are expected to benefit from NFT-based developments.
“NFTs have the potential to bridge the gap between digital communication and asset ownership. NFT-oriented factors can not only benefit the online gaming industry but it can also shape the way brands engage with new customers and retain their current customers. Several investors and traders, of different industries, intend to utilize NFTs for their characteristics of uniqueness, originality, and demand elevation capability. Business can gain advantages from NFT utilization such as an increase in marketing value, new ways to raise capital, content creation, and elevation of brand awareness”, he said.
Prashant Kumar, founder, and CEO, weTrade, a cryptocurrency startup told International Finance that through NFT usage, business-to-business (B2B) companies can remove their reliance on extreme paperwork with regard to supply chain management and remove geographical limitations from where a business can earn revenue.
“NFT usage has the potential to help businesses in the areas of trade license, product-oriented testing, and marketing. NFTs can also be used as a metaverse-based advertisement medium,” Kumar said.
Various reports note that NFT-based businesses will enable customers and sellers to engage in an ecosystem, with the deployment of protective measures such as authenticity, originality, and the presence of tamper-free data.
“I believe businesses, through NFT usage, can tap into customers from unexplored quarters through protection against data plagiarism. Furthermore, business-oriented NFTs have the capability to allow users to trade in money markets for the creation of invoice finance so that invoices turned into NFTs can be used as collateral or for the purposes of bill discounts and invoice clearances,” Shantanu Sharma, CEO, EasyFi Network told International Finance.