Nonfungible tokens are the new wave currently in the crypto space, this article gives an exposition on NFTs and all they entail.
NFTs are digital objects with properties such as uniqueness and non-interchangeability that are confirmed on the blockchain. They can be in the shape of almost anything, but they’re most commonly seen as art, music, items in blockchain-based video games, and video.
The artworld is one sector where NFTs have taken off, with digital tokens selling for tens of millions of dollars at prominent auction houses and beyond.
Young artists who used to upload their work for free or sell it for a low price are now understanding that blockchain technology and NFTs can help them monetize their talent.
Nonfungible tokens, which were propelled into the spotlight in 2017 with a decentralized application (DApp) called CryptoKitties, where users can purchase, sell, and collect virtual cats, are still in their early stages.
These fascinating digital assets have captivated the interest of traders and creative types alike after the NFT market grew by about 300% in 2020, to more than $250 million year-over-year (YoY).
The number of NFT wallets on which NFT transactions have happened has nearly doubled in 2020, to more than 222,000 YoY, indicating significant adoption.
You don’t have to be in the crypto world for very long to hear about NFTs; in fact, you don’t have to be in it at all.
When you do, it won’t be long before you join the rest of the community is going down the NFT rabbit hole, either in search of a large scale or to diversify your own portfolio with some digital art. But before you do that, it’s a good idea to familiarize yourself with the NFT ecosystem and what it entails.
The mechanics of NFT
Collectors, investors, and traders all appreciate nonfungible tokens. They are a digital version of a product, such as a work of art, that provides the owner with a certified copy of the asset.
In sectors like the art world, where owning the real deal — the official, one-of-a-kind version of an object — is far more valuable than owning a copy, this goes a long way.
Take, for example, the David statue. Do you want the original sculpture or a flawless replica? The answer to that question is personal, and it is based on how you value art.
A similar notion applies to NFTs, in which the owners of these digital assets, whose proof of ownership is confirmed on the blockchain, believe that the asset will increase or add immeasurable value to their collection.
The value of an NFT is based on its fungibility or lack thereof. NFTs, like the art world, profit from the concept of an auteur or creative genius bestowing monumental worth on an object.
Nonfungible tokens can be issued or purchased on a variety of platforms. This usually necessitates the use of a digital wallet as well as digital currencies to fund the purchase of the desired token.
There are also several options for purchasing such tokens, including a direct sale or an auction.
NFTs can be purchased not just on digital platforms, but also at a number of prestigious auction houses such as Sotheby’s, which can sell NFTs purchased using cryptocurrency.
NFTs’ value is based on their nonfungible nature, which distinguishes them from cryptocurrencies. NFTs and cryptocurrencies are not the same things.
Each NFT has its own set of characteristics — such as size, scarcity, creator, and so on — and hence cannot be swapped for another asset. Bitcoin (BTC) is a fungible asset in comparison.
Nothing has changed if you are fortunate enough to own 1 BTC and trade it for another 1 BTC. You still have the same amount of Bitcoin to use or hodl.
The same may be said about fiat currencies like the US dollar or the euro, as well as other fungible assets. Regardless of attributes like the serial number or whether the note is in your pocket or in a bank account, one dollar or euro note can be exchanged for another dollar or euro note.
If you have a coin that is regarded as a collector’s item, you are dealing with a murky area. In this scenario, the coin qualifies as a nonfungible item.
Baseball cards are another real-world example, which is more closely connected to nonfungible tokens because no two cards are identical.
Major League Baseball (MLB), the National Basketball Association (NBA), and other sporting organizations, individual clubs, and athletes are all aware of the concept of nonfungible tokens.
NFTs originally debuted in the cryptocurrency market in 2012/2013, depending on how broad a net you cast for the category, but they didn’t make it to the Ethereum blockchain until 2017.
However, since then, the majority of tokens have been stored on the Ethereum blockchain. Although Ethereum is not the only blockchain on which tokens can be created and sold, it is the most widely used. ERC-721 is the Ethereum blockchain’s primary standard for non-fungible tokens.
When a transaction takes place on Ethereum, the wallet initiating the transaction must pay a gas charge to the miners in exchange for their efforts.
The issue with nonfungible tokens on the Ethereum blockchain is that it is a costly network, and gas fees might rise to arbitrarily high levels when transaction demand is strong.
For example, the price of an NFT could be as low as $60, yet half of that could be spent on fees to allow the token to be transferred.
This takes a lot of the joy out of utilizing Ethereum to interact with NFTs. In some rare situations, the gas fee may be greater than the asset’s cost, hence it may be worthwhile to wait for the demand on the blockchain to decrease, resulting in lower fees for transferring the item.
The high costs are due to the popularity of NFTs, as well as the present version of the Ethereum blockchain’s lack of scalability.
This scalability issue is expected to be resolved as the project transitions from a proof-of-work (PoW) consensus method to a proof-of-stake (PoS) consensus mechanism, known as Ethereum 2.0. (Eth2).
Until then, token creators must decide whether the high fees are worth it, if they should try a different blockchain, or if they should forsake NFTs entirely.
NFTs are causing a stir in the art world.
Cave art from the Lower Paleolithic Era, often known as the Old Stone Age, dates from between 290,000 and 700,000 BCE.
However, art has progressed far beyond cave paintings and rock carvings, and NFTs are providing creative individuals with new opportunities to monetize their work and gain new followers.
Look no further than Christie’s, an auction house with a history of more than 250 years, to see how nonfungible tokens have already altered the art industry.
That’s where digital artist Mike Winkelmann, aka Beeple, famously sold one of his pieces in JPG format for $69 million: “Everydays: The First 5000 Days.”
It was a symbol of the times, demonstrating how much the blockchain industry has inspired contemporary art.
In terms of the cash raised through an auction, Beeple is among the top three most expensive living artists. While you might see NFTs on display in a museum, as with some of Christie’s other well-known auctions, you can be confident that the owner receives bragging rights while the work is verified on the blockchain.
Beeple’s tale is especially noteworthy because his involvement in the fine art world began only after he discovered NFTs, demonstrating how rapidly a new artist may become a phenomenon in this digital age.
Asian investors were first in line when Christie’s revealed it was auctioning off a Beeple NFT, accounting for over one-fifth of the 33 bidders for the digital art.
In the end, Singaporean cryptocurrency investor “MetaKovan” won the auction.
Beeple isn’t the only one who has made a fortune from NFTs. Take CryptoPunks, a collection of 10,000 24×24-pixel quirky figures developed on the Ethereum blockchain, including zombies and aliens.
CryptoPunks has taken off like wildfire, claiming to have constructed the first NFT on Ethereum and serving as an inspiration for the market.
These digital painters, like Beeple, have made a fortune from their NFT artwork, including the sale of nine pictures for about $17 million at Christie’s auction house. CryptoPunks are extremely valuable because to their limited-edition nature.
CryptoPunk 635, for example, is a member of the group of nine who wears sunglasses and has a blue face. It’s one of only nine extraterrestrial portraits in the collection.
Not to be outdone, musician Grimes got on the NFT bandwagon and made almost $6 million from the sale of digital artwork and videos.
Her most popular work was a video titled “Death of the Old,” which is one of a kind. This NFT alone sold for about $380,000.
NFTs and gaming are a perfect match.
NFTs have also made an impact on the bitcoin gaming business, as well as the wider gaming scene.
In 2017, CryptoKitties was the first to mix gaming with NFTs by issuing digital cats on the blockchain and allowing users to interact with and trade with them. The strategy was so successful that it temporarily jammed the Ethereum network with a large number of transactions.
Since then, gaming has emerged as a prominent use case for NFTs, which isn’t surprising considering the prevalence of in-game sales for items like skins and more in the traditional market.
There has been a crossover between traditional gaming firms and decentralized startups when it comes to NFTs, as both sides aim to capitalize on digital cards, artwork, and even fashion on the blockchain.
NFTs and gaming go together like a hand in a glove, and the combination is set to destabilize the industry as players want to score not only as rivals but also as investors.
Functionality and security
Just because there isn’t a physical safe where NFTs can be stolen doesn’t mean security isn’t an issue. The NFT sector, like the Bitcoin industry, is still in its early stages, with developers ironing out the problems and users learning the ropes.
There will undoubtedly be some bumps in the road in the meantime. Even if the architecture is still being developed, NFTs have made their way into the spotlight, which might spell tragedy if they fall into the wrong hands.
Newcomers to the cryptocurrency business may still have difficulty sending Bitcoin (BTC) or Ether (ETH) to the correct addresses.
They now need to learn about MetaMask wallets and the many blockchains on which NFTs can be formed, thanks to the advent of NFTs.
It can be intimidating for a beginning user, and mistakes can be made that are irreversible in a decentralized environment with no third party to refund funds or things to their rightful owners.
Meanwhile, there are concerns about security. While the blockchain’s immutability is supposed to deter fraud, it hasn’t stopped scams from occurring in the NFT arena.
Bad actors always find a way into emerging industries, and NFTs are no different, especially when it comes to copyrights.
Scammers allegedly managed to grab the tweets of certain accounts and resell them as their own NFTs, according to social media accounts.
While the industry was alerted to this activity, and Twitter has already taken action, it serves as an example of the scams that can still exist in a developing business.
Perspectives for the Future
Much of the NFT market’s tremendous growth occurred in just one year. Most popular NFT platforms weren’t even around in 2020, but the beginning of 2021 saw an incredible spike in activity and trading volume.
Even if this tendency slows down, the aggregate rate of NFT adoption in the coming years will almost certainly be unparalleled.
While valuing nonfungible tokens might be challenging, factors such as uniqueness, tradeability, talent, and whether or not the original artist is behind the sale all influence the price.
The tokens could make their way into yet another frenzy that has swept the bitcoin market: decentralized finance, in the next wave of the NFT market (DeFi).