This rise of Non-Fungible Tokens, or NFTs, has been one the most exciting development in crypto space recently. Although, NFTs existed since 2014, it was only in the last few years that they shot to popularity and took the world of art and gaming by storm, especially after the sale of certain NFTs at astronomical prices.
While many believe the future of NFTs to be bright, few understand their value and potential. Some consider this to be a ‘fad’, while some see it as a great new possibility for artists. Several brands like CocaCola to sports leagues like NBA and even several celebrities have hopped on this NFT bandwagon lately. So let’s break this down and understand what this hype is all about.
What are NFTs?
NFTs are, in technical terms, digital assets that are bought and sold online, often using cryptocurrency and encoded using blockchain. In simpler terms, NFTs are similar to physical art as they represent collectible assets, but only in a digital format. While one can argue that such files can be easily downloaded or copied from the web, why would someone spend millions of dollars in purchasing them? This is because an NFT allows the buyer to own the original item.
There is a unique and non-interchangeable unit of data stored on a digital ledger, like a built-in authentication system, that uses blockchain to establish proof of ownership, and that’s where the non-fungible starts to make sense. NFTs are unique in the sense that they cannot be exchanged like-for-like, again similar to physical art. For example, a US$ 100 note is fungible, i.e. it can be exchanged for another note, and you will have exactly the same value. However, a note with a celebrity autograph is non-fungible because the note then becomes unique and has a higher value. This note can then be converted into NFT and sold.
In other words, NFTs can be made from almost anything that can be stored digitally and holds value, like photography, art, music, and videos. So, instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file.
How does an NFT work?
An NFT can be created or minted from any digital object, tangible or intangible, including art, GIFs, video/sports highlights, collectibles, virtual avatars/video game skins, music and even tweets (Twitter co-founder Jack Dorsey sold his first ever tweet as an NFT for more than $2.9 million.) Similar to cryptocurrencies, NFT exist on blockchain, the underlying process which acts as a distributed public ledger that records transactions. While most of the NFTs are a part of the Ethereum blockchain, other blockchains such as FLOW and Bitcoin Cash have started to support them as well. This helps in making NFTs unique in the sense that the blockchain makes it easy to verify its ownership by giving exclusive rights to the owner. The creator/owner can also store specific information inside them, such as including their signature in an NFT’s metadata.
Therefore, the original file, whether it is a JPG, MP3 , GIF or anything else, is the NFT that identifies its ownership and can be bought and sold like any other type of art, with its price largely set by market demand.
What are NFTs used for?
NFTs are providing artists and content creators a unique opportunity to monetise their work by selling their art directly to the consumer. By skipping their dependence on art galleries and auctions, the artists can get a chance to keep more profits. Additionally, the artists can also program in royalties to receive a percentage of sales whenever their art is sold in the future. Some NFT art has sold for astronomical prices. Beeple's Everydays – The First 5000 Days holds the record for being the most expensive NFT ever sold at US$ 69.3 million at Christie's in March 2021, followed by Beeple's Human One that was sold for $28.9 million in November 2021. More than a dozen NFTs have been sold for over $1 million from popular artists including Bored Ape Yacht Club and CryptoPunks.
The scope of NFTs is not limited to art and artists. Recently, a toilet paper manufacturer auctioned off themed NFT art to raise funds for charity. Several celebrities like Snoop Dogg and Lindsay Lohan are using NFTs to release unique memories, artwork and moments. NFTs are also creating new opportunities in the space of in-game purchases in video games. The digital assets purchased inside a game continued to be owned by the game company. But NFTs are now making it possible to shift the ownership of such assets to the actual buyer. Entire games are now being built around NFTs. Separately, NFTs are also being utilised by brands as an attractive revenue stream. For example, Taco Bell launch 25 taco-themed GIFs and images with each NFT containing a $500 gift card which added to their initial popularity and sold out in just 30 minutes. The TacoCards are now selling on the secondary market for up to $3,500. Similarly, NBA - the US basketball league – launched Top Shot collectibles in the form of digital cards with iconic basketball moments embedded in them. This is likely to expand to include accessories and clothing.
Musicians are also selling the rights and originals of their work, as well as short videos to clips of their music as NFTs. Pushing the limits slightly further, you can even buy digital real estate and 3D assets like furniture as NFTs. A Canadian artist named Krista Kim built ‘Mars House’, the first digital house in the world, and sold it for a whopping $500,000. It was created with the help of an architect and video game software, and allows the owner to explore the mansion on Mars using virtual reality and can sunbathe outside the house (in the Mars atmosphere).
Where can one buy NFTs?
NFTs can be bought on a variety of platforms such as OpenSea, SuperRare, Nifty Gateway, Foundation and Rarible. But first, you need to get a digital wallet that allows you to store NFTs and cryptocurrencies, and then fill it with some cryptocurrency. The choice of cryptocurrency, however, depends on what currency the NFT provider accepts. Apart from the purchase price, several fees are also added to the cost, depending on the platform used. The high demand for NFTs is also leading to many NFTs being released as ‘drops’ , similar to events where tickets are released at different times.
Despite several systems being in place, some artists have fallen victim to impersonators who have listed and sold their work without their permission. The verification processes also vary significantly across platforms. For example, OpenSea and Rarible do not require owner verification for NFT listings. This makes it necessary for creators and collectors to be cautious before buying.
How to make and sell NFTs?
As mentioned above, NFTs can be bought and sold on a number of platforms. The first thing to start with is to set up a digital wallet which will be needed to pay the fees and receive payment if your NFT is successfully sold. The most popular NFT payment platforms include Coinbase, MetaMask, Torus, Portis, WalletConnect, MyEtherWallet and Fortmatic.
All the NFT auction platforms require an upfront fee to mint your NFT. This payment is generally made in cryptocurrency, with Ether (ETH) being the most popular, the native cryptocurrency of the open-source blockchain platform Ethereum. Once the wallet is set up and connected to the NFT platform of your choice, upload the file you want to turn into an NFT. The file can be in the form of PNG, GIF, WEBP, MP4 and MP3 files, or more depending on the platform. The next step is to set up an auction to sell the NFT. There are three options available to the seller for this — Fixed price, this allows you to set a price and sell your NFT instantly at a set price; Unlimited Auction, this will allow people to carry on making bids until you accept one; and Timed Auction, where an auction only lasts for a set time. It is then time to choose a minimum price and adding a description for your NFT. You can also select what percentage of royalties you wish to claim in this step.
Finally, the platform will connect to your digital wallet for the payment of listing fees, and a further fee to generate your NFT. Once the NFT is sold, the platform needs to be paid an additional commission fee, along with a transaction fee for the transfer of money from the buyer’s wallet. The fluctuating nature of cryptocurrency values is likely to add to the cost. It is therefore advisable to keep in mind all these costs before selling an NFT, since these costs are likely to reduce your profit.
Should you buy NFTs?
Despite the immense popularity, there is a lot of uncertainty revolving around the future of NFTs. One of the benefits of buying them is that it lets you financially support artists you like, along with some of the basic usage rights. It can also be used as a speculative asset, where the NFT is bought with the expectation that its price will rise in the future and you can sell it for a profit. However, investing in NFTs is largely a personal decision and can be bought if you have money to spare, especially if that particular piece of art holds meaning to you.
It should be kept in mind that the price of an NFT is not based on fundamental, technical or economic indicators, but purely on what someone else is willing to pay for it. So, it is highly probable that you may have to sell an NFT for less than what you paid for it. It is also likely that you may not be able to sell it at all if there is no buyer for it. Also, NFTs are subject to capital gain taxes as they are considered as collectibles, coupled with taxes on cryptocurrency that is used to pay for the NFTs, if their value has increased since you purchased them.
Risks associated with NFTs
Similar to other investments, NFTs also come with risks – the biggest risk being the uncertainty surrounding the future of NFTs. The astounding rise in popularity that has fuelled the growth in prices for NFTs may not last long. And since the prices of NFTs is largely driven by demand, a fall in demand for such pieces of art can lead to a massive fall in their prices, forcing many to either book losses, or lose their entire investment. Secondly, the authenticity of NFTs is another issue that needs attention. The process of ascertaining that you’re buying from the right owner of the piece is a daunting task and requires one to search for a credible platform that has a stringent verification process.
So, what next?
NFTs have opened up a new sphere of opportunities in terms of the sense of presence, history, and authenticity that was previously only reserved for physical objects. In the physical world, the status conferred to the object by its owner comes from its authenticity, which largely draws meaning from its history. Therefore, the deeper and more interesting the history of the object, the deeper its authenticity, and the more people are willing to pay for it. However, all of this depends on the perception in people’s minds. Higher values are being attached to NFTs sold by popular artists and celebrities, but at the same time, this is making it difficult for other creators for retaining long-term value for their pieces.
The surge in investment in the NFT space last year - from creators, collectors, and curators alike - has proven the vast interest not just in digital art, but specifically in the unique value proposition offered by NFTs in the form of digital scarcity and verifiable ownership. This makes it all the necessary for buyers to conduct a thorough research and understand the risks fully, including the fact that you might lose all your investment. Therefore, any kind of foray in the NFT space should be taken with caution.