Non-fungible tokens (NFTs) have recently taken the world of technology and finance by storm. As a new entrant to the digital asset marketplace, NFTs have garnered a lot of media and investor attention – and already gone through booms and busts. At the same time, some analysts argue that beyond these mere speculative movements, NFTs actually have the capacity to change how we percieve digital ownership.
So, are NFTs just the latest investor fad, or do they represent a paradigm shift in the way we perceive digital ownership? Only the future can tell. While they’re currently making waves in the worlds of art, music, and sports, it is possible that we are only scratching the surface of their potential.
As the technology matures and regulatory frameworks become clearer, we could possibly see NFTs transform a range of different sectors, redefining the concept of ownership in the digital age.
This article aims to illuminate these tokens, their importance, and their potential implications for different industries
Contents
Understanding Non-Fungible Tokens (NFTs)
Each NFT represents a unique digital asset. Just like cryptocurrencies, NFTs are built on blockchain technology. Examples of networks that are commonly used are Ethereum, Cardano and Solana. The NFT signifies ownership of the underlying asset, e.g. a work of art.
So, why is it called Non-Fungable Token? A cryptocurrency consists of fungible tokens, i.e. these tokens can be exchanged on a like-for-like basis – just like traditional money. You do not care exactly which $20 bills you receive from the ATM when you withdraw USD and you do not worry about exactly which ETH tokens you will receive as payment from a customer. This – the fungibility – is an important difference between cryptocurrency tokens and NFTs. As the name tells us, the main characteristic of an NFT is that it is a Non-Fungable Token.
NFTs are unique; each token carries specific information or attributes that sets it apart from all the other NFTs. This uniqueness and the ability to use the NFT to prove ownership of a digital item makes NFTs particularly useful for digitizing assets like art and music.
The basic idea behind NFTs is that an asset owner will “mint” an NFT on a blockchain (e.g. Ethereum) and link it to the asset. An NFT can this be seen as a digitial certificate or authenticity and proof of ownership. Each time the NFT is sold, the transfer is recorded in the blockchain. This helps build trust in NFT transactions and usage.
NFTs in Different Industries
NFTs are not just limited to the art world; they have potential applications in several other sectors. In the music industry, for instance, artists can sell their songs as NFTs, providing them a new revenue stream and more control over their work. The sports industry is also exploring NFTs to sell virtual merchandise and trading cards. The National Basketball Association (NBA) has already seen success with their NFT project, NBA Top Shots, which allows fans to own and trade licensed highlights as NFTs.
Important: Potential buyers need to keep in mind that the NFT field is still largely unregulated and many legal systems do not recognize NFTs as proof of ownership. It can be especially dangerous to rely on NFTs as proof of ownership for certain classes of goods where special rules exist regarding ownership transfers, such as real estate and motorized vehicles.
Speculative NFT Trading
In recent years, there has been a lof of hype surrounding NFTs and several high-profile purchases have helped keep the concept in the limelight. For example, a digital artwork by artist Mike Winkelmann (also known as Beeple) was sold as an NFT for a staggering $69 million. The buyer did not acquire a physical painting or even the copyright to the artwork – they merely purchased a digital token that proves they own the original work.
In 2020s, NFT speculation was all the rage and many high-priced NFT purchases took place, pushing the concept into mainstream media and adding fuel to the speculative frenzy. The snowball was moving even faster in 2021, and the size of the NFT trading market went from 82 million USD in 2020 to 17 billion USD in 2021. During the first three months of 2021, NFT purchases amounted to 200 million USD.
In 2022, the market cooled off significantly, and in May the Wall Street Journal proclaimed that the NFT market was collapsing. According to their research, the daily sales of NFTs were then down by 92% compared to September 2021, and the number of active NFT market wallets were 88% fewer than in November 2021.
Some analysts hoped that 2022 would bring a new upward trend, but this did not happen. On the contrary, investor interest in NFTs continued to plummet. In September, dappGambl released a report where they pronounced that over 95% of NFT collections now had zero monetary value.
The Early History of NFTs
Understanding the background and early milestones can help us better understand the NFT market of today. Here are a few examples of events that are good to know about:
“Monetized graphics “
In 2014, Kevin McCoy and Anil Dash created something they called “monetized graphics”. A video clip made by McCoy´s wife Jennifer was registered, by Kevin, on the Namecoin blockchain. He then sold it to Anil Dash for the eqvivalent of 4 USD. The transaction, which took place during a live presentation at the New Museum in New York City, linked a non-fungable, tradable blockchain marker to a specific work of art (the video clip) using on-chain metadata.
The Etheria NFT project
This project was launched at Ethereum´s very first developer conference (Devcon 1) in London in 2015. Etheria consisted of 457 hexagonal tiles and each individual tile had been hardcoded to 1 ETH. The tiles could be purchased and then traded, but investor interest was luke warm, as Ethereum was still a new thing and the concept of Etheria was rather “out there” by 2015 standards. For over five years, a majority of the tiles remained unsold. Then, all tiles suddenly sold out within 24 hours starting on March 13, 2021, bringing in a total of 1.4 million USD.
Rare Pepes
Rare Pepes is somewhat of a “semi-fungible NFT project”. In 2016, when Pepe the Frog became a household meme amidst the political tensions surrounding the U.S. Presidential Election, a number of artists contributed their Pepe the Frog-inspired works to a curated directory. The project emerged on Bitcoin through the Counterparty protocol.
ERC-20
2017 was a pivotal year in the early history of NFTs and several NFT projects emerged on Ethereum based on the ERC-20 standard. Curio Cards was an early art NFT project, soon to be followed by other endevours such as CryptoPunks and EtherRocks.
CryptoKitties
The blockchain game CryptoKitties made it possible for players to purchase, own, create and sell virtual cats using NFTs on Ethereum. The game became a huge hit, and by December 2017 its many players were causing a noticeable congestions of the Ethereum network. The game, developed by Dapper Labs in Canada, helped make NFTs more maintstream and also helped promote the NFT standard ERC-721.
During the height of the CryptoKitties boom, the market place OpenSea opened its virtual doors to traders and became a huge success. By 2021, it had reached a market cap of $1.4 billion.
ERC-721 – standard for NFTs and smart contracts
ERC-721 is a non-fungable token standard. Popularized in late 2017 by the blockchain game CryptoKitties, the ERC-721 is considered the first example of a true bona fide standard for NFTs. In 2018, the community-driven paper “ERC-721: Non-Fungable Token Standard” was published and this version of the ERC-721 was launched. This paper, which was published under the civic hacker initiative with William Entriken as the lead author, is considered seminal for its huge impact on the NFT eco-system. It established a standard for smart contracts, ensuring that each token has unique attributes and preventing two different tokens from being identical.
The Future of NFTs
The future of NFTs is still uncertain. As with any new technology, it’s faced with a fair share of skepticism and regulatory concerns. Critics question the environmental impact of NFTs, as creating these digital assets requires a significant amount of energy. Additionally, there are concerns about copyright infringement, as anyone can mint an NFT of a digital work without the creator’s permission.
Unsurprisingly, the speculation boom of 2020-2021 brought comparisons between the NFT market, tulip mania and various ponzi schemes. At the time of writing, the NFT market is very cold, and it is difficult to know if it will ever recouperate. Still, the basic NFT concept might prove useful and important in the future, outside the world of speculation bubbles.
Some analysts believe that NFTs will revolutionize the way creators, e.g. artists, can monetize their creations, as NFTs can be used to bypass traditional gatekeepers and intermediaries. We might also see a scenario where NFTs transform the payment structures for copyright and royalty payments.