NFTs have taken over the digital economy by storm. People are making millions of dollars by selling Digital Monkeys and Virtual Rocks. Large institutions such as Nike, Gucci, and Coca-Cola are getting involved as well. But why are these large players dabbling in NFTs, and what’s this NFT thing all about?
Brew yourself a cup of coffee and get comfy while we explain what these NFTs are all about.
What exactly are these NFTs?
NFTs are a unique and non-transferable unit of data stored on the blockchain, a digital immutable ledger. They are the tokens that represent ownership of one-of-a-kind items like a video, song, in-game item, or work of art.
Once an NFT is created or “minted,” its code is permanently woven into the blockchain and it can be traded on a marketplace with a digital currency (cryptocurrency) – ETH, SOL, and so on.
How is it different from every other cryptocurrency?
Physical cash and popular cryptocurrencies such as Bitcoin and Ethereum are both “fungible.” They can, in other words, be traded or exchanged for one another.
To understand “fungibility” better, consider a physical cash exchange between you and a friend
- You give your friend $1 in cash in exchange for another $1 in cash.
- Your $1 and your friend’s $1 have the same monetary value.
They both obtain the same products and services.
Similarly, 1$ BTC or one 1$ ETH will always be equal to 1$ BTC or 1$ ETH and can be traded. This is known as “Fungibility,” and cash and cryptocurrency are both “Fungible.”
However, NFTs are “Non-Fungible.” NFT is an abbreviation for “Non-Fungible Token.”
Non-fungible means that it is unique and cannot be replaced with anything else. One NFT is not the same as another.
Let’s look at an example of “non-fungibility.”
Consider an iPhone. Assume there are two of them that are the same version, size and color.
They are currently the same and can be exchanged for one another. They are “fungible.”
Now assume one of them has the autograph of global superstar Cristiano Ronaldo.
Will they be similar?
Obviously not. The one with Ronaldo’s signature would be one-of-a-kind, valuable, and not exchangeable with the other iPhone.
Ronaldo’s autographed iPhone is now “Non-Fungible.”
Similarly, all NFTs are “Non-Fungible,” distinguishing them from other cryptocurrencies.
What gives these NFTs any value?
NFTs are the digital equivalent of physical scarcity.
Because they are limited and non-fungible (they cannot be duplicated), NFTs not only create “digital scarcity,” but also ensure the authenticity and verifiability of the NFT’s owner, making it a collectible item with value.
As a result, it is a desirable asset for both buyers and sellers. Creating an NFT allows sellers to easily monetize (without the use of intermediaries such as galleries or auction houses) their digital content (products) such as digital pictures, animations, music, videos, and so on.
NFTs aren’t just about collectibles and digital art; they can also be used to generate income for artists and musicians by allowing royalties (a percentage of future sales) to be paid to the creators as NFTs change hands.
When you put all of this together, it’s easy to see why big brands and investors are getting involved.
How are NFTs becoming a new asset class?
The pandemic two years ago shook the world to its core. Entire industries have been destroyed, and completely new ways of working have become the norm. Government money printing has not ceased, and global inflation is at an all-time high.
It doesn’t take a rocket scientist to recognise that we’ve reached a tipping point in financial history, where the current financial system and its accompanying architecture have run their course, similar to the end of the gold standard in 1971.
Evident to that, in 2021, the NFT market took off. As of November 2021, the NFT market cap was worth more than $7 billion.
Analysts predict that it will grow by more than $80 billion by 2025
Trading volume increased tenfold year on year in the fourth quarter, reaching $11.7 billion, and there were 2.7 million unique active NFT wallets (digital storage to hold NFTs) by the end of the year.
The trading volume on OpenSea, the largest NFT marketplace, has exceeded $30 billion in 2022. A whopping 156 percent increase in volume.
NFTs are emerging as a new way of transacting value across both the physical and digital realms, much like the rise of “fiat money” in 1971, which introduced a new way of value exchange around the world.
If the above statistics didn’t convince you, here are some of the reasons we believe NFTs are here to stay.
1) Digital Ownership
Never before have we had the option to truly “own” digital items.
With NFTs, you could do whatever you want with your NFT – grant, revoke access to events/concerts, trade it with a friend, list it on a marketplace and sell it, receive airdrops by holding it for a period, etc.
Imagine if you could get into a virtual call with the best minds in your industry to learn, network, and have fun.
You can do that now by owning a Bored Ape NFT, which is a collection of 10,000 unique NFTs created by Yuga Labs called Bored Ape Yacht Club – a virtual lounge reserved only for its members.
2) Metaverse and Gaming Ecosystem
NFTs could have a significant impact in the metaverse and gaming ecosystem.
NFTs go well with digital lands, skins, and characters. Traditional gamers already buy skins, guns, swords, and other in-game items from the games they play.
With NFTs, you can now lend, borrow, and trade in-game items, further improving your gaming experience.
With The Sandbox, you can now buy, sell and trade digital lands.
The primary function of LANDs is to host and play experiences such as games, dioramas, galleries, social hubs, and so on, which can be monetized as a source of income by the owner.
Artists can launch their albums as NFTs and distribute it directly to fans cutting out the middlemen. Fans on the other hand, can receive exclusive content, artwork and a way to get in touch with the artist. In February of 2021, DJ and producer 3LAU famously sold $12 million of NFTs. The offerings included a custom song, access to never-before-heard music, custom artwork, and new versions of existing songs.
Snoop Dogg, the world's most famous rapper, has released a collection of songs on the NFT marketplace OpenSea as part of a marketing strategy centred on rights and remixes.
The first new song, “High,” is available as part of the “Dogg on it: Death Row Mixtape Vol. 1” non-fungible token collection – four distinct audio files, each attached to an image of an NFT from the Bored Ape Yacht Club. The first, in an edition of 420 tokens, contains the vocal track for “High” without the instrumental track; the second, in an edition of 500, contains just the instrumental; the third, in an edition of 250, contains the instrumental and hook without the verses; and the fourth, in an edition of 500, contains the complete song.
These are just the tip of the iceberg. Other industries that could be impacted by NFTs include real estate, voting, course certificates, and medical records.
With time and capital, the possibilities of NFTs are nearly limitless, and they could significantly disrupt our daily lives.
A fair warning! Not everything is rosy…
NFTs, like any other asset class, have risks. And they’re as volatile as they come.
- Only a few “blue chip” NFT collections are limited in supply and have a clear roadmap, while the rest, like every other asset class, are fraudulent and exist solely to enrich the creators.
- Depending on which blockchain you choose to mint your NFT on, there may be some transaction fees to pay. To transact on blockchains such as Ethereum, Tezos, and Flow, a fee is required.
- Minting or purchasing an NFT can be very exciting; however, simply creating or purchasing an NFT does not guarantee that you will make money. If you are not cautious, you may actually lose money.
You do not have to invest in NFTs just because they are NFTs. Before purchasing/minting NFTs, conduct your own research, understand the risks, and understand the underlying asset’s value. We do not advise investing your life savings in NFTs.
Whether you like it or not, NFTs are quickly becoming the digital age’s gateway to social proof. NFTs are a new way of flexing both your digital self and your social proof.
Alternative assets have always been met with scepticism throughout history. However, adoption occurs when someone creates something useful and people realise these can be invested in.
Did you know that commodity futures were created to allow farmers to lock in prices ahead of a harvest?
Fast forward to now, global derivatives market is now worth hundreds of trillions of dollars. Similarly, the most recent alternative asset class to emerge is Non-Fungible Tokens (NFTs).
Views expressed above are the author’s own.
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