What Are NFTs?
Have you ever read a headline about someone paying a million dollars for a digital image and wondered, “What the heck is all this about?” Welcome to the world of NFTs, where we explain what they are, how they work, and what the future of NFTs holds.
What are NFTs?
“NFT” stands for “Non-Fungible Token.” An NFT is a unique token on a cryptocurrency blockchain representing ownership of a digital version of a particular real, physical item such as a painting or a completely digital asset. The appeal of NFTs can be summarized as “Digital, Rare, and Collectible.”
NFTs are non-fungible, meaning that each one is unique. This compares to fungible items such as real-world dollars, bitcoins, or other cryptocurrencies like Ethereum, Tether, or Dogecoin. One bitcoin is the same as any other bitcoin, and a dollar is like any other dollar. In contrast, no two NFTs are exactly alike.
The most common NFTs represent digital artwork. Other popular types of NFTs are music, videos, and digital collectibles or trading cards. The Bored Apes digital cartoons and the NBA Top Shots video clips are some of the most famous NFTs.
NFT-based trading cards or collectible card games can have multiple images of “common cards,” but each one has its own blockchain ID, which is similar to a serial number. Proponents of NFT trading cards and CCGs cite their advantages over physical cards: They can’t be lost or damaged.
How Do NFTs Work?
NFTs are created using self-executing smart contracts embedded in a blockchain. Ethereum is the most popular blockchain for NFTs, followed by Solana.
Content creators choose an NFT marketplace such as OpenSea to host their work, whether art, video, or music. Using the marketplace’s creation tools, they upload their NFT with relevant metadata such as their identity, the identity of the piece, transferability rules, and the price. This information is embedded in a smart contract and entered into the blockchain.
Artists can hard-code the receipt of royalties earned from every transaction of NFTs that they create, opening a new revenue stream. Every time the NFT is sold, the artist is paid a royalty set when the NFT is created. Artists can also retain copyright and reproduction rights if they wish—it’s all encoded in the smart contract that makes up the NFT.
When someone purchases the NFT, they usually pay in the same cryptocurrency that the blockchain uses. The NFT is then moved from the artist’s crypto wallet to the buyer’s. All NFTs can have their chain of ownership, or provenance, traced on the blockchain, all the way back to their creation. This helps in identifying fake NFTs.
A Brief History of NFTs
The NFT market experienced a speculative frenzy from 2021 to late 2022 that ended in a sudden implosion that wiped out millions of dollars in value. By early 2024, an estimated 95% of all NFTs were worth… zero.
This was caused by the great crypto crash in 2022. Plunging cryptocurrency prices led to liquidity crises for millions of NFT investors/speculators. These forced NFT sales met with few if any, buyers. The glut of millions of NFTs, many created by speculators looking to get rich quick, was met with a crypto-connected public that had seen their net worth plunge and had no appetite for buying into a failing market.
Notable events during the NFT boom include:
- June 2017: CryptoPunks are released. CryptoPunk #5822 becomes the fifth-most expensive NFT in history when it sells for $23.7 million in February 2022. Five of the ten most expensive NFTs of all time are CryptoPunks
- November 2017: CryptoKitties debuts. The NFT cartoon cat breeding and trading game was blamed for Ethereum blockchain congestion that spiked fees and delayed transactions for up to a day.
- October 2020: NBA Top Shots are introduced. A collaboration between the NBA and the company behind CryptoKitties, Top Shots “digital trading cards” are licensed NFTs of video clips starring some of the most famous players and events in the NBA.
- March 2021: Beeple’s “EVERYDAYS: The First 5000 Days” NFT sells for $69.3 million in a Christie’s auction. It was the third-largest sale of an artwork of any kind by a living artist at the time.
- April 2021: The Bored Ape Yacht Club, or Bored Apes, are released. They are the first NFTs to break into the mainstream, thanks to the celebrities who purchased one.
The Future of NFTs
What does the future hold for NFTs? Focus is shifting away from speculative meme offerings towards more value-oriented and utility uses.
Some of these projects include corporate loyalty programs and unforgeable event tickets that include special perks like VIP access, backstage passes, and limited edition merchandise. NFTs can also be used for safe, secure blockchain-based IDs.
NFTs could fight counterfeiting by being used for authenticity tags on high-end fashion items like luxury handbags.
Self-publishing is also getting the NFT treatment. NFT publishing marketplaces like Bookwire allow authors to tokenize their work and receive royalties the way artists have been doing.
Of course, there will always be NFTs of artwork, music, and videos as a way for independent artists to be properly compensated for their work.
