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Non-Fungible Token (NFT) Explained

Thursday, April 8, 2021 | MarketBeat Staff
Non-Fungible Token (NFT) Explained

If you understand the adage that price is what you pay for something and value is what it’s worth, you are ready to explore the concept of non-fungible tokens (or NFTs). NFTs are unique cryptographic tokens that are supported primarily on the Ethereum blockchain.

A key word to understanding NFT is the word unique. You can’t take a picture of your rare Willie Mays baseball card and pass it off as NFT. The original card exists in a physical form. You could however create an online rendering of your favorite baseball player, post it in an online NFT marketplace and extract whatever price someone is willing to pay.

That may sound like an oversimplification, but if NFTs are going to become more than a passing fad, transactions like that will have to be made millions of times. And the fact is that may be exactly what is happening. The big-name stories, like the video that sold for over $6 million in a Christie’s auction, get the headlines. But the real story of NFTs is happening at smaller dollar amounts and is giving the NFT movement legs.

Introduction

The idea of buying digital goods is not new. Gamers of the popular Fortnite franchise can buy cosmetic upgrades for their avatars. In 2019, the average amount spent on in-game content was $82.

So from there it’s not too much of a leap to suggest that artists could sell their digital work for whatever price they can get. And that is the basic idea behind a non-fungible token (NFT). It is one of the trends that is taking the investment community by storm or surprise, or maybe a little of both.

In this article, we’ll attempt to explain what an NFT is, when they originated, and how to purchase one. We’ll also wade into the debate about whether NFTs are collectibles or something more and present the opinions of NFT advocates and critics.

What is an NFT?

An NFT (or non-fungible token) is a cryptographic token that represents something unique. To say something is non-fungible means it is one-of-a-kind. Although NFTs exist on the Ethereum blockchain, they are distinct from a cryptocurrency. A Bitcoin can be exchanged for a Bitcoin and there is nothing unique about the two digital ledger entries. Likewise a Bitcoin could be exchanged for a similar amount of another currency and it would still lack uniqueness.

By contrast, an NFT cannot be replaced with something of the same intrinsic value. I suppose you could find something of the exact same value to “trade,” but the piece you receive will not be the same as the piece you give away. The uniqueness will be gone.

Most NFTs take a digital form which makes it easy for creators to generate something that is rare and unique. With that in mind, it should be noted that an NFT can be copied, even downloaded. But owning the original will confer to the owner some unique rights.

When did NFT’s originate?

NFTs are a relatively recent new occurrence having got their start in 2017. At that time the CryptoKitties were launched. These one-of-a-kind digital cats got the attention of collectors much like the Beanie Babies. Overall over $32 million went into the collecting, trading, and breeding of these digital images of which there were 10,000 in total.

What made these items different was the use of blockchain that kept track of file ownership. This provided scarcity in the form of proof of ownership. Each buyer owned a unique barcode to ensure their ownership of one of these 10,000 characters.

What Does Ownership Of An NFT Mean?

This is an evolving question. For example, one purchase that has pushed NFTs center stage was the video by Beeple that was sold for $6.6 million through the auction house, Christie’s.

However, people can still go online and copy that digital file, including the art that’s part of the NFT. And furthermore, the artist can still retain the copyright and reproduction rights, which is true of physical artwork.

So what does the owner get? Essentially, they get proof of ownership. To make a comparison to physical artwork; someone could own a Picasso print. But only one entity owns the original.

Here’s another example. In March 2021, the band Kings of Leon released its new album as an NFT. Does this mean that fans of the band will not have access to their music without buying one of the $50 NFT albums? No, those will still be available in all the traditional formats. However the owners of the NFTs are getting limited edition extras. Furthermore, the NFT versions were available for only two weeks, creating scarcity.

How do you buy an NFT?

If you’re going to sell anything online, you need some sort of marketplace where people can find them. In this case, there are NFT marketplaces and their number is increasing by the day. Some of the most popular (and trustworthy) NFT marketplaces include: OpenSea, Rarible, SuperRare, and Nifty Gateway.

Are NFTs collectibles or something more?

To the extent that some people may view cryptocurrencies like Bitcoin as a collectible, the same could be said of NFTs. An owner is getting something that is limited in quantity. However, whereas the price of Bitcoin is somewhat driven by the broader market, the price of an NFT will be completely based on perceived value. And, as mentioned above, a defining attribute of an NFT is that the item is unique.

There is a segment of NFT buyers that view these pieces as collectibles. The hope is that, at some future date, the asset will rise in value. At that point, they can sell the NFT to another buyer via the blockchain for a higher price.

This is where it’s important to understand what both the advocates and critics of NFTs are saying.

What do advocates of NFTs say?

One of the benefits of NFTs is their ability to compensate digital artists for their work. For many years, digital artists have faced a sort of Catch-22. On the one hand, the internet provides an opportunity to display their work instantaneously.

However, it can become difficult for artists to sell their work for an appropriate value. The NFT market gives buyers and collectors and opportunity to support their favorite artists in a tangible way.  

On a broader scale, advocates of NFTs say that the selling of NFTs supports the larger evolution of blockchain technology.  

What do critics of non-fungible tokens have to say?

One of the primary critiques of NFTs is their environmental impact. Because they use the same technology as energy-devouring cryptocurrencies, there is an environmental cost in terms of the electricity that is used to place them on the blockchain.

How significant of an issue this remains to be seen. After all, cryptocurrency mining isn’t going away, and so it’s unlikely that the environmental impact will have a negative impact on NFTs. Plus, Ethereum which is the primary blockchain that support NFTs is already taking steps to reduce its environmental impact.

Perhaps a more clear and present critique of NFTs is how they fit with existing copyright laws. Some artists have had their original work copied, then sold as an NFT without their permission. And that brings up the question of access. Artists do have to pay an amount – anywhere from $40 to $200 to have their work posted on an NFT marketplace. Concerns exist about ensuring that artists of all socio-economic segments can have access to these marketplaces.

The final word on non-fungible tokens

Opinions about non-fungible tokens are wide-ranging. On the one hand, many see them as a revolutionary way to level the playing field for digital artists and make blockchain technology mainstream. On the other hand, there are many people who believe that non-fungible tokens are merely a fad and perhaps even worse, a bubble.

As is usually the case, the answer is probably somewhere in-between. As NFTs become more commonplace, we may not see the eye-popping sales numbers that mark the start of any new asset class. However, to completely dismiss NFTs is to miss the point of the digital revolution.

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