It is remarkable how crypto and blockchain technologies continue to introduce new powerful concepts to disrupt conventions. In 2020, the world watched as a new financial paradigm, DeFi, became a viable alternative to traditional finance. The same level of hype seen during the DeFi boom of 2020 has started to fuel a new crypto sector, albeit with even more mainstream appeal. In 2021, non-fungible tokens or NFTs became the toast of the crypto world, thanks to the unprecedented demand for blockchain collectibles and the transparency that comes with them.
In this guide, we’ll take a look at everything you need to know about NFTs, including their benefits and drawbacks.
What is NFT?
Those familiar with the world of cryptocurrencies know that NFT is not a new concept. There have been different variations of this functionality since 2012 and it finally evolved into its current form in 2017 following the release of the ERC721 token framework. However, it is better for the uninitiated to explain how rudimentary NFTs are, how they came about, and what they contribute.
In a nutshell, NFTS are blockchain-based digital assets that are unique and rare. From its name, it is clear that this token framework adopts a non-fungible design. Therefore, no two NFT tokens are the same. Rather, you maintain the value of your holdings when you exchange a $100 bill for another $100 bill. This example shows the fungibility of fiat currencies. The same is true for Bitcoin and the like. In contrast, each NFT is unique and establishes ownership of real-world and digital assets such as collectibles, GIFs, tweets, arts, game skins, and much more.
The goal is to enable the scarcity of digital assets, which, in turn, will boost the value of said tokens. Each non-fungible token comes with data that validates its authenticity. And since it’s on the blockchain, the data is publicly available and traceable. Therefore, it is easy to trace the creator of a work represented by NFT. Also, you can find out the previous owners and the historical price of the token.
It’s easy to see why these features have become popular in industries plagued by counterfeiters.
More significantly, NFT appeals to independent artists who prefer to control how their works are distributed and priced. It ensures that the creator of a digital asset receives a fair share of the revenue generated.
Some argue that NFT preserves the rarity and uniqueness of digitized assets and provides a means of trading them. In other words, NFT replicates the physical attributes of assets on the Internet while enabling a marketplace that promotes decentralized transfer of ownership. Anyone can mint non-fungible tokens. Likewise, there are no restrictions when it comes to trading such tokens. In other words, the possibilities are endless.
What is the history of NFTs?
As mentioned above, the concept of rare and unique digital assets is not exactly new. This idea came about in 2012 when Bitcoin advocates started playing with the possibilities of colored coins. These coins are small denominations of BTC that can represent the value of assets on the Bitcoin network. This design worked best in an authoritative environment, as participants must always come to a consensus on the status of the colored coins and the assets they are linked to. The drawback was that the system tends to fall apart if any of the counterparties choose to object to evidence that equates colored coins with a specific asset.
For example, 3 entities agree that 1,000 colored coins represent the property. This link will only be maintained if the 3 parties reach a consensus. The system is bound to fail when 1 or 2 participants fail to match the 1000 colored coins with the property. Although Colored Coins lacked the robustness of current NFT designs, it laid the foundation for what we have today.
Later in 2014, Counterparty came up with advanced use cases for the Bitcoin blockchain that enabled the creation and sharing of memes and card games. These functionalities finally found their way to the emerging Ethereum network in 2017 with the release of Peperium. The advent of this feature later spurred the release of Cryptopunk, Ethereum -based characters designed by John Watkinson and Matt Hall. The two creative technologists created 10,000 unique characters and freely distributed them to Ethereum users. Cryptopunk has since pushed back on a secondary market where the cards can be traded.
However, it is worth noting that Ethereum had not released the NFT token framework when Cryptopunk came on board. So the characters were distinguishable ERC20 tokens, making Cryptopunk more or less a hybrid of the ER20 and ERC721 frameworks. Then came the official launch of the ERC721 token standard on the Ethereum blockchain, which marked the advent of NFTs.
Before the launch, the Ethereum ecosystem used the ERC20 standard, which is unsuitable for creating non-fungible tokens. In contrast, the ERC721 standard has the additional benefit of enforcing ownership and tracking of individual tokens on the blockchain.
Cryptokitties was the first to use this new standard in 2017. This virtual game allows users to create, breed, and trade cats on the Ethereum blockchain. Every cat is unique, and very rare felines often fetch good prices on the NFT markets. The most expensive virtual cat sold for $170,000 in 2018.
Following the success of Cryptokitties, the NFT ecosystem saw explosive growth with various NFT platforms and marketplaces aiming to capitalize on non-fungible promises. According to Nonfungible.com, the NFT mania has resulted in over $500 million worth of non-fungible tokens being traded.
Due to the promising nature of this innovation, most smart contract-enabled blockchains have introduced their native token standards for NFTs. In other words, Ethereum is not the only NFT-compatible blockchain available today. Tron recently released the TRC-721 standard for NFT compatibility.
Why is NFT a compelling concept?
The most compelling selling point of NFTs is that they are unique. No two NFTs can be the same. Even when they look similar, as in the case of trading cards, it is possible to identify them by checking their serial numbers on the blockchain.
Likewise, ownership of NFTs is verifiable on the blockchain. Since it is nearly impossible to alter or destroy information on blockchains, the NFT framework is not susceptible to tampering.
Also, they are negotiable. Unlike conventional rare item trading methods, it is easier to exchange NFTs and transfer ownership to the buyer instantly. More importantly, it is possible to exchange an NFT for a completely different one.
The NFT framework allows creators to retain ownership rights to their creation and even receive resale royalties each time their work is resold to a new owner.
Interestingly, NFTs, depending on their value, can also be used as collateral to secure loans.
Due to these unique qualities, NFT has become a hot topic, and businesses and individuals are increasingly embracing technology. For one thing, gaming is quickly becoming one of the most popular use cases for NFTs. The possibility of owning in-game assets and trading them on the markets is too fantastic to ignore. Players can now own exclusive avatars, in-game currency, and weapons and trade them on secondary markets. It is worth mentioning that this system is more flexible than conventional game designs with restrictive proprietary and commercial policies.
This functionality also drives virtual games, such as Decentraland, where players can own and develop virtual land and lease or sell it for a profit. Aside from the gaming industry, the art world also embraces the innovative benefits of NFTs. Artists now have a direct means of selling the digital form of their work in a global marketplace. With this, artists can generate more profit from sales as NFT allows them to weed out third parties. The technology is also a viable means of claiming royalties from the resale of digital artwork or songs.
Please note that the examples above are just some of the applications of NFTs. Since it is a nascent technology, we expect the blockchain community to reveal new use cases in the coming years. In the meantime, however, the growing demand for NFTs is closely related to the explosion of digital and collectible artwork. Other use cases leverage the representation of real-world assets on the blockchain with smart contract capabilities. We have witnessed how NFT can affect the real estate economy, supply chain, and identity management techniques.
NBA Top Shot introduced another exciting iteration of NFT solutions in partnership with Dapper Labs. The platform, which launched in October 2020, offers video trading cards of NBA highlights and has recorded $200 worth of sales. Millions. Collectors can resell these moments on a secondary market. A Lebron James standout from 2019 recently sold for $208,000, indicating that there is a market for such NFTs.
What are the main NFT projects?
Below is some of the projects that positively contribute to the NFT narrative by enabling an enabling environment to create, launch, trade, manage, store, and purchase NFTs.
Flow has emerged as a developer-friendly blockchain with next-generation games, apps, and assets functionality. This blockchain was developed by the team behind CryptoKittes and Dapper Wallet. Notably, it is the base blockchain for NBA Top Shot and has partnered with established brands like the UFC and Samsung to implement and manage NFT-based games and apps. Like most blockchain networks, the project has a native token, called FLOW, with its market capitalization currently above $700 million.
Enjin is a platform created to enable the trading of integrated digital products. ENjin allows users to buy or sell expendable and non-expendable in-game assets. Developers can tokenize their game items using the ENJ ERC20 token to create a marketplace for digital assets from multiple games. On its website, Enjin claims that it has facilitated the creation of over $2 billion worth of assets, and users have installed over 1.8 million wallets. ENJ’s market cap is around $1.8 billion.
Decentraland is an Ethereum-based virtual reality platform that offers a digital real estate gaming experience. Users can buy virtual land, develop it and exchange it for real money. The project has two native tokens. The first is MANA, an ERC20 token that is burned to acquire virtual land in Decentraland, while the second is LAND. The latter is an ERC-721 token representing a specific part of the Decentraland virtual world. The largest district in Decentraland has 8,008 LANDs, with each LAND representing 100 square meters of land.
Axie Infinity is a blockchain game that allows users to breed, trade, and battle against in-game creatures called Axies. It is also possible to buy or rent land. Depending on the rarity of the NFT, the price of digital assets in Axie Infinity cans sell for up to $1 million. Recently, 9 parcels of virtual land sold for approximately $1.5 million, which marked the most expensive virtual land in the NFT market.
Terra Virtua provides a marketplace that is not focused on a single NFT niche. As such, it’s possible to find a variety of NFTs in Terra Virtua, regardless of whether they’re arts, tweets, virtual items, in-game resources, etc. Partnering with top movie studios, including Paramount Pictures and Legendary Entertainment, Terra Virtua has the license to create NFT collectibles that depict characters in blockbuster movies. The platform currently holds the license to create collectibles for Top Gun and Pacific Rim Uprising.
Origin Protocol prefers to call itself a decentralized buying platform for NFT crypto products. Its goal is to allow artists to connect directly with their fans without having to resort to the services of distribution companies or labels. In February 2021, 33 NFTs representing an album of tokenized music notes were sold for $11 million on Origin Protocol. Buyers of the NFTs would redeem the token and receive a limited edition vinyl of said album that contains previously unreleased songs by the artist. This milestone indicates Origin Protocol’s growing status in the creative and entertainment industry.
Chromia Studios is a blockchain gaming platform launched in August 2019 to enable proper and sophisticated tools to create interactive games on the blockchain. The project already has a mining pool that supports property items. In the future, the project looks to develop a massively multiplayer online game on the blockchain for an even more immersive and interactive experience.
Rarible is an NFT marketplace that provides creators with a platform to create NFTs and sell directly to buyers. The platform has a native token, called the RARI token, which is the core of the network’s governance system. You can buy collectibles or arts on Rarible with RARI, and the token also gives you a say in the governance of the ecosystem. Rarible explains that creators or collectors do not have the coding skills to create NFTs on the platform.
The self-proclaimed King of NFTs, Worldwide Asset Exchange, or WAX is another prominent project in the NFT sector. The platform has helped established brands and personalities like deadmau5, Atari, William Shatner, Capcom, and Topps mint and sell their NFTs. Also, developers can create their games and markets on WAX. Like Rarible, WAX rewards active participation in its ecosystem with its governance token. Contributors receive WAXG or Ethereum tokens as rewards.
Sandbox is another gaming platform that provides users with the infrastructure to build and monetize virtual assets. The website explains that The Sandbox metaverse contains 166,464 LANDS, and you as a user can choose to create online games on your purchased LANDS or rent them to other players. The platform claims that the process involved is straightforward even for those with little to no coding skills. Additionally, the utility token of the ecosystem is SAND, which can be used to purchase LANDS or create a gaming experience on the platform’s game builder. You can earn extra ARENA when other players buy or use your digital assets.
Other notable mentions are Opensea, Sorare , Superare , and Nifty Gateway, prominent NFT marketplaces supporting NFT minting and trading.
NFT in the field of digital content
We recognize that the ridiculous price tags for NFT-based digital artworks are currently the main driver of the explosive media coverage that the NFT sector is currently enjoying. Therefore, it is vital to analyze the craze for NFT art pieces and their absurd prices.
To gain more control over their works, content creators and artists are increasingly embracing NFTs. The goal is to receive a fair share of the profits generated from the sale of digital content or artwork. Before the advent of NFTs, creators often found it difficult to monetize their craft unless they set up shop with marketing or distribution companies who, in turn, will claim a share of the revenue generated.
With NFTs, creators can join global, decentralized marketplaces, create the NFT version of their content or artwork, and sell it directly to buyers. This process promotes a self-publishing culture and generates more revenue for creators. As mentioned above, creators can also write royalties into the NFT code to receive a percentage of the profits generated each time their work is resold to new users.
Robert Alice, a London-based artist, explained that the technology offers a secure means of cashing in on his art and years of networking. “NFTs are the biggest reorientation of power and control back into the hands of the artist, basically since the Renaissance and the printing press,” Alice says. “Attract people who have built their own audience, maybe on social media, to sell your work directly to their audience.”
Why do NFTs have value?
The value of NFTs comes down to supply and demand. In other words, the uniqueness and rarity of an NFT often determine its value. The more scarce a non-fungible token is, the higher the price investors, collectors, or players are willing to pay for it. There are many cases where NFTs have generated huge profits for their creators or owners. For example, a virtual property in Decentraland sold for $80,000 because the site it sits on is desirable.
Most buyers buy NFTs in the hope that the value will increase exponentially in the future. Therefore, some believe that the NFT market is speculative. Amy Castor, a crypto-journalist, reportedly stated that the lack of regulations and protections affirms the speculative part of the NFT market.
“Anyone can create an entity on any topic and sell it on a market. There probably aren’t that many protections in place. But, I mean, the key is that you’re not buying anything,” according to Castor. “If you buy the identity as a token, it’s just this currency. It doesn’t really have any intrinsic value, other than what someone else will pay you for it,” he added. “It’s all speculative at the end of the day.”
Furthermore, Buckenham, a London-based digital artist, told The Guardian that he doesn’t find NFT attractive enough as an art market.
“The point of owning a work of art is to look at it and enjoy it, and buying an NFT does nothing to help you achieve that. An NFT is just an entry in a fancy database somewhere that claims you ‘own’ the artwork. The only thing it does is to allow you to sell that database entry to someone else later on.”
On the other hand, proponents have argued that the value of NFTs comes from technology innovation.
“Some of that interest is coming from people who enjoy supporting the work of independent creators by buying their work,” said Mike Steib, CEO of Artsy, in an interview with CNN. “Others are intrigued by the idea of taking a digital asset that anyone can copy and claim ownership of. The recent headline price records for NFTs seem to have been largely driven by newly minted crypto millionaires and billionaires looking to diversify their bitcoin holdings and increased interest in the crypto ecosystem.”
Regardless of the divisive nature of NFT, it is safe to say that the concept and the technology that drives it will remain a recurring theme even as the world seeks to establish a digitized economy.
NFTs and DeFi
Not surprisingly, developers and startups have started looking for ways to combine NFT and DeFi for even more advanced features. This integration unlocks and unites two budding blockchain applications to ensure that the NFT economy retains elements of decentralization and the high-yield opportunities of DeFi. Some of the use cases of NFT and DeFI integrations are:
Now that the world knows that NFTs are valuable, it makes sense to build a secondary economy that feeds off this value and provides additional use cases for NFTs. To this end, startups have started experimenting with the idea of NFT-backed loans. This initiative builds on the popular DeFi lending design to create a line of credit for NFT holders. In other words, NFT owners can collateralize their tokens and borrow other cryptocurrencies against them. For example, you can guarantee a Cryptopunk card to access a fraction of what it is worth as a loan. If you don’t repay the loan in the predefined time, the protocol can sell the card or send it to the lender.
The NFT market is also experimenting with the idea of fractional ownership, which allows more than one entity or individual to own an NFT collectively. This concept is intended to provide the means to enable collective ownership that will fractionate the value of an NFT item. For example, 20 people can co-own a piece of digital art. So you don’t need to buy everything to become an art owner. You can decide to own only part of the digital asset.
Experts believe this possibility will attract more investors and democratize the NFT market so that you won’t have to pay millions of dollars to invest in expensive collectibles and rare items. Furthermore, this opens up the opportunity for investors to trade shares of NFT-linked assets on decentralized or centralized markets. The global value of the NFT is subject to the prices of its fractions.
It also allows incorporating decentralized autonomous organizations (DAO) as a governance system for jointly owned NFTs. Below are some of the projects looking to implement DeFi-based NFT solutions.
This is a startup that makes it possible to own NFTs fractionally. Other additional features that are planned to be released are the fractional distribution of royalties, governance, and decentralized autonomous organization. These functionalities will come together to make fractional ownership of NFTs possible and more accurate.
Ark built a DAO that wraps Cryptopunk cards so they can become expendable. This platform also introduced liquidity tools that have since contributed to the thriving Cryptopunk market.
As its name suggests, Mintbase focuses on providing the tools necessary to mint non-fungible tokens. An added feature also allows royalties to be shared between 1,000 people. This will be useful for people interested in owning a fraction of an NFT.
This platform is working on creating community-owned index funds that will allow one token to represent ownership of multiple NFTs. NFTX hosts index funds that track the value of specific NFT categories and those that represent a spectrum of NFT markets.
This protocol works similarly to Ark Gallery in that it offers the tools to wrap non-fungible tokens with ERC20 tokens for further exposure to DeFi services. Wrapped NFT tokens can easily generate value in DeFi lending protocols, liquidity pools, etc.
Zora is focused on building an auction platform that enables the bidding system to buy NFTs. The only selling point of this offer is that buyers can bid in any currency. The team hopes that this feature will attract more investors to the NFT market.
Unifty describes itself as the WordPress of NFT. The platform has a marketplace that offers copyright management systems, among other features.
This is a yet-to-be-released protocol for crowdsourced NFT evaluations. The project aims to provide a cost-effective way to solve NFT price discovery problems.
This is a peer-to-peer network for NFT trading. Please note that it is still in the beta phase. Therefore, it is advisable to use the platform with caution.
This project offers a series of services that seek to establish a thriving NFT economy. It hosts a decentralized exchange for NFTs, a fractional ownership solution, and an NFT security system. It also plans to create a system for DeFi gamification.
What do the skeptics say?
no intrinsic value
Like all new technologies out there, NFT has faced its fair share of criticism. Some seem to believe that the technology is unnecessary, as anyone can download copies of digital artwork online for free. Although the NFT market grew 705% in 2020, skeptics believe it is destined to crash just like the ICO boom did in 2018. This argument revolves around the absurdity of the prices NFTs are being sold for. Tokens in the markets.
Popularly known as Beeple, Mike Winkelman recently sold a collage of 5,000 images created every day for the last 13 years for $69.3 million. After that record sell-off, Beeple himself noted that NFT is showing signs of a bubble market. However, he explained that this does not mean that the long-term viability of the NFT market is in doubt. People stated:
“I absolutely think it’s a bubble, to be honest. I return to the analogy of the beginning of the Internet. There was a bubble. And the bubble burst. But it did not end the Internet. So the technology itself is strong enough where I think it will survive that.”
Nadya Ivanova, COO of L’Atelier, an independent subsidiary of investment bank BNP Paribas, explained that although there are risks involved, the NFT market is likely to mature in the long term. She said:
“There is a huge amount of risk. The important thing to understand about the NFT market is that it is very new. And we’re still going through different cycles that are establishing what the real value of something is.”
Ethereum.org further argued that downloading copies of an NFT artwork does not dilute the essence of the technology. The organization wrote:
“But does Googling an image of Picasso’s Guernica make you the proud new owner of a multimillion-dollar work of art? Ultimately owning something real is only as valuable as the market makes it. The more a piece of content is captured, shared, and generally used, the more value it gains.”
The impact on climate change
Critics have also pointed out that the Ethereum blockchain, which protects most NFTs and facilitates their transactions, harms our environment. The process involved in protecting the Ethereum blockchain is not energy efficient. Participants must dedicate their computing power to secure the network and validate transactions to receive rewards.
While this is a fact, Ethereum will continue to mine new cryptocurrencies whether or not NFT transactions are executed. Do not forget that the Ethereum ecosystem is also the popular hub for DeFi protocols. So, even if investors and creators decide to drop NFTs for this reason, the Ethereum blockchain will continue to function. However, as Ethereum explains, this argument does not minimize the concern raised about the environmental impact of NFTs and the Ethereum ecosystem as a whole. Ethereum wrote:
“So yes, there is a carbon footprint associated with creating blocks through mining, and this is also an issue for chains like Bitcoin, but it is not directly the fault of NFTs. Much of the mining uses renewable energy sources or untapped energy in remote locations. And there is an argument that the industries that NFTs and cryptocurrencies are disrupting also have a huge carbon footprint. But just because existing industries are bad doesn’t mean we shouldn’t strive to be better.”
To permanently put an end to this challenge, Ethereum has released a series of updates that will significantly reduce the power requirement of validators. The plan is to change the blockchain consensus model to a more energy-efficient one. Ethereum is projected to transition to the less energy-intensive validation system by 2022 finally. Whether the NFT community is ready to wait that long remains to be seen. Note that other alternative blockchains with greener consensus models like Tron could take advantage of this situation.
The influx of scammers and practices that infringe copyright
Unsurprisingly, scammers are capitalizing on the NFT hype to defraud unsuspecting collectors. Since there is no standard way to verify the authenticity and ownership of artworks, the market is flooded with NFT artworks created by malicious individuals posing as original creators. It seems that artists and collectors are slowly waking up to this new threat.
One report chronicled how Derek Laufman, a famous digital artist, discovered that he was being personified in Rarible. Laufman explained that the incident represents a new challenge for him even though he had previously dealt with several attempts to steal the arts from him. Laufman stated:
“Basically, I was kind of upset that somebody, quote, quote, verified me on that platform. I dealt with my art being stolen for years. And I’m a little numb to that. But when someone claims to be you… that kind of, you know, pisses me off.”
Although Rarible has taken down the auction and removed the impersonator’s profile, this security incident poses a new challenge for NFT markets to introduce more accurate and sophisticated identity verification systems. It would be interesting to see if NFT markets can strike a balance between decentralization and identity management.