NFTs Explained

More and more often the news explodes with the reports that some NFT pictures sold for several million dollars, or that people pay unprecedented amounts of money for songs, various art pieces, or even virtual NFT land.

The NFT market has been valued at $40 billion at the end of 2021. The popularity of non-fungible tokens continues to gain momentum, and in this article, we’ll help you understand what NFT tokens are and why the whole world is talking about them.

The information buzz around NFT tokens is a combination of factors. Celebrities like Paul Logan and Elon Musk are constantly pushing this topic into the spotlight. Despite the recent crypto market drop, sales on NFT platforms are still increasing each month.

The demand for NFTs emerged due to the growing interest in blockchain technology and the increased number of investors in the crypto sphere. Coincidentally, the pandemic hit the world and more people started looking for ways to make money online. And lastly, one of the biggest triggers for the growth of NFTs was the gaming industry.

NFT-technology was first used in 2017, based on the Ethereum blockchain, for the ‘Crypto Kitties’ game. Players breed virtual cats, each with unique properties. The most expensive kitty was sold for 600 ETH, or about $1.799 million.

Last year, when people started selling NFTs for millions of dollars, these digital assets became a new investment opportunity. Even though some investors remained skeptical, others were quite confident that NFTs would change the market forever.

For example, Twitter founder Jack Dorsey sold a tokenized version of his first personal tweet for $3 million. FYI, he put the tweet up for sale with the words: ‘Just setting up my tweet’, and the demand was insane.

So, what is it: a new market with the promise of fast earnings or a bubble that is about to burst?

What is an NFT?

Let’s start with the basics for a moment.

NFT (non-fungible token) is a certificate of ownership of a digital asset. Most often an image, music, or an object in the virtual world. This ‘certificate’ is stored on a blockchain, which means that the NFT cannot be forged. NFTs are usually encoded by the same software used for cryptocurrencies. After the NFT is minted (‘published’ on the blockchain) you can buy it on the respective digital marketplace with the fiat or cryptocurrency, depending on the platform.

If we’re talking about a cryptocurrency, all of its records on the blockchain (=tokens) are equivalent and interchangeable. Which makes total sense, right? For example, each Bitcoin is equal to any other Bitcoin.

For an NFT it’s quite the opposite. Each NFT-token is unique and cannot be replaced by another one. All information about its owner and all its transactions are securely stored on a blockchain. Therefore, this technology is well suited to confirm ownership of artworks. In fact, an NFT can be created for any digital item, but the most popular ones are images.

So, what does NFT technology provide?

  1. It allows content creators to gain digital ownership and monetize their work. The artwork can be tokenized and put for sale on special marketplaces.
  2. The direct sales system avoids serious fees usually paid to third parties for brokering transactions.
  3. The technology reduces the risks of fraud: all transactions are secured with smart contracts on the blockchain.
  4. NFT brings additional income to content creators. Some solutions enable the token creator to charge a commission for each subsequent sale of NFT.

How does it work?

Now let’s get a little more technical.

Tokens such as Bitcoin and Ethereum-based ERC-20 tokens are fungible. The standard for non-fungible Ethereum tokens used by platforms such as CryptoKitties and Decentraland is ERC-721. Although Ethereum was the first blockchain to gain widespread adoption, the NFT ecosystem is expanding, and blockchains including Solana, NEO, Tezos, EOS, Flow, Secret Network, and TRON now support NFTs.

NFT’s ability to reliably prove digital ownership is an important advance for an increasingly digital world. But here is an important detail that many people don’t fully understand. When you buy an NFT, you are not buying the object itself, but only ownership of it in the form of a token on the blockchain.

Simply put, the meme with the Doge won’t disappear from the Internet, it will be freely copied and distributed (we are talking about Elon Musk’s favorite meme with a Shiba Inu dog named Cabosu, which was sold for $4 million as an NFT). In fact, it’s the NFT token that is traded, not the object it’s attached to.

What is worth buying?

The NFT market is already attracting thousands of investors, artists, and ordinary people, who are here just for an easy-to-make profit. The idea of buying NFTs is the same as with any investment. You expect price growth.

This article is not supposed to be used as financial advice, hence we cannot tell you what’s worth buying and what’s not. Be aware that the NFT market is still in its infancy and some assets are extremely volatile.

Negative Thoughts surrounding NFTs

Of course, as with any technology, NFTs have their cons and negative examples of application. The following controversial issues about NFT are being discussed nowadays:

  • The thriving growth caused overwhelming skepticism from market experts, and many of them still insist that NFT is a trivial bubble. But global brands such as Nike or Microsoft continue to experiment with NFTs and the metaverse.
  • Some experts argue that NFT doesn’t have enough history to evaluate its profitability.
  • There is still a chance that the NFT certificate was not created by the author of the content. For example, artist Derek Laufman discovered that someone verified on the platform instead of him and created a token of one of his works.
  • The possibility of stealing an NFT is still present on a technical level. It might require hacking most of the computers that process the blockchain to make changes to the smart contracts.
  • NFTs can harm the environment’, claims artist Memo Akten. He analyzed 18,000 tokens and found out that each token has a carbon footprint comparable to that of the average EU resident in a month of electricity consumption.

Our opinion on why NFT will last

Let’s take a look at some numbers and current market performance to clarify the current situation in the NFT area. Total NFT sales in 2021 are estimated at $7.13 billion. Last year this number was just $16.5 million. You can clearly see the growth, right?

On the OpenSea platform, more than 60% of transactions are made with tokens worth up to $200. The share of really pricey deals is very small.

According to nonfungible.com, which deals with daily transaction statistics, we can see that the number of sales, as well as total sales volume since January 2022 has declined. The deal volume has decreased 72%, from $81.2 billion to $22.8 billion by the end of May 2022 with nearly $8 billion in sales in the first quarter of 2022.

While the gaming segment shows an overall loss, art remains the predominant segment in the NFT industry.

The decline in the NFT sales for the last months strongly correlates with the overall decline in the stock and crypto markets. So we cannot assume, the NFT hype is over. In fact, despite the market fluctuations, the NFT sphere looks more than alive and thriving.

What we can expect in the future

Much of the attention is currently being paid to NFTs that are focused on the artwork and games. However, this is only the beginning.

Further and possible applications of NFTs include but are not limited to: copyright and intellectual property rights, ticket sales, music, certifications, software licensing, warranties, and even birth/death certificates. Maybe one day our digital wallets will be able to contain proof of all certificates, licenses, and assets we own.

For example, our company Studio Twenty Two aims to revolutionize the method of seed funding for independent filmmakers with the help of NFTs. Our animation studio is about to release an animation series called Zombie Film Crew. NFT technology would be the crucial instrument in our campaign.

The world is just beginning to appreciate the value behind blockchain technology, and more and more specialists and enthusiasts dedicate their time to applying it in different spheres of our lives.

References

  1. Quarterly NFT Market Report. Q1. 2022. (2022, April 28). https://nonfungible.com/reports/2022/en/q1-quarterly-nft-market-report
  2. Crypto art – statistics & facts. (2022, May 23). https://www.statista.com/topics/7626/crypto-art/#dossierKeyfigures
  3. Sergeenkov A. (2022, May 25). How to Mint an NFT. https://coinmarketcap.com/alexandria/article/how-to-mint-an-nft
  4. Louis DeNicola. (2022, February 17). What to know about non-fungible tokens (NFTs). https://www.businessinsider.com/personal-finance/nft-meaning
  5. Everydays: The First 5,000 Days – Christie’s sells digital artwork for the first time. (2021, February 18). https://newstyle-mag.com/everydays-the-first-5-000-days-christies-vpervyye-prodayet-tsifrovoye-proizvedeniye/

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