You’ve likely heard the term NFT being thrown around in recent months. The mysterious blockchain assets have become popular collector’s items, with several artists digitizing their works and offering them up for sale at hefty prices as NFTs.
Celebrities have also gotten in on the action — Twitter CEO Jack Dorsey is auctioning off his very first tweet as an NFT, while musician Grimes sold $6 million USD worth of digital art through NFTs.
So what is an NFT?
NFT stands for non-fungible token. These digital tokens exist on a blockchain and are unique and cannot be replicated. In other words, if you own a particular NFT, it cannot be interchanged with something else.
“It is a technology which enables true ownership of any type of digital asset or good,” explains Dan Kelly, president of NonFungible.com.
Whale Shark, an NFT collector, explains that these cryptographic tokens are created on a blockchain and are used to prove scarcity and ownership of a digital asset, whether that be a picture, a piece of music, or a gaming asset.
“In layman’s terms, NFTs are digital stuff that you can truly own and manage.”
For example, 39-year-old digital artist Beeple, also known as Mike Winkelmann, sold an NFT of his purely-digital work of art at Christie’s for $69 million USD.
Before the sale of his piece, Beeple explained:
“Anybody can still view the work, but I think of it like the Mona Lisa. Anybody can view a JPG of the Mona Lisa, but you’re not going to take that JPG and say you own the Mona Lisa.”
The buyer of Beeple’s artwork did not receive a physical piece of art through the transaction, but instead gained indisputable ownership over the highly-coveted digital asset.
How is an NFT valued?
The value of an NFT can vary widely based on the digital asset up for grabs. Kelly explains that NFTs are becoming an increasingly popular way to acquire and sell digital artwork, so valuing an NFT would look at the popularity of an artist along with the historical sales of NFTs.
“Currently, assets are either valued by historical sales or by market floor pricing (the lowest price available),” Whale Shark said. “But in the future, I believe that professional valuation mechanisms that take into account the past, present and future using predictive analytics will provide a clearer picture on valuation.”
How do I buy and sell an NFT?
NFTs are typically acquired from different curated platforms that specifically deal in digital assets. Open marketplaces, like OpenSea.io, are popular for buying and trading NFTs. For digital art, buyers can go to MakersPlace, Nifty Gateway, SuperRare and KnownOrigin.
“NFTs are typically acquired from the publishers themselves on the ‘primary market’ and are sold from the producer to the consumer,” Kelly said. “In order to sell an NFT, you would enter the ‘secondary market,’” which provides the interface needed to trade freely using blockchain technology.
Which blockchains offer NFTs?
While most NFTs exist on the Ethereum blockchain, other competitors including Flow, WAX, Matic, EOS and Tron have also recently become involved in the crypto-craze.
Why would someone purchase an NFT over a physical item?
To some, the idea of dealing in digital assets may sound strange. But many digital content creators and collectors see NFTs as a more secure and long-term investment.
“An NFT is digital in nature, thereby eliminating some of the limitations of physical items such as the need for physical space and physical degradation,” said Whale Shark, adding that as the world becomes increasingly digital, people are spending more time online and are acquiring more digital “real estate,” like desktop screens and tablets.
“These screens are all potential ‘mantle spaces’ for digital collectibles.”
According to Kelly, NFTs are also more reliable authentication tools.
“I would elect to purchase an NFT over a physical item since the authenticity and scarcity is easily proven, cannot be replicated and the tools to prove it are open and free.”
He added that NFTs cut out a lot of the intermediaries involved in trading goods.
“I don’t need to consult and pay a centralized organization to certify and validate my digital item. NFTs are transparent, permissionless, and self-service in the same ways that Bitcoin or Ethereum are.”
What types of NFTs are being offered?
There are tons of different types of digital assets being offered up as NFTs across several platforms.
For example, if you’re into sports, there’s a popular NFT platform called NBA Top Shot, which allows basketball fans to collect game highlights in digital form. The space boasted an impressive $205 million USD in sales by the end of February.
There is also a growing market for virtual fashion, or “crypto clothing.” RTFK, a virtual sneaker company, designs entirely digital products that can be purchased as NFTs and “worn” by the winning bidder using a custom AR filter.
The music industry is also eager to get involved in the sale of NFTs. Deadmau5 released a series of digital collectibles using NFT on the WAX blockchain, while electronic musician 3LAU sold $11.6 million USD in NFTs via an online auction.
What is the environmental cost?
Recently, there has been some discussion about the environmental impact of using blockchain technology, a major component of NFTs.
Blockchains are digital databases that store long chains of information, and creating these digital ledgers requires a large amount of computation. New blocks of information are added — or “mined” — to the decentralized blockchain network based on a process called proof-of-work, which requires expensive computer hardware that consumes a lot of power.
According to an article published last year in the International Journal of Engineering and Research and Technology, a single Ethereum transaction consumes enough energy to “easily power multiple U.S. households for one full day.”
“The electricity consumed by blockchain mining causes problems like heat generation carbon by-products, which leads to a rise in temperature in the environment.”
Ethereum says that it is working to change its proof-of-work algorithm to a more energy-efficient process called proof-of-stake. The mechanism is still in the early stages, though Ethereum says it does not require “huge investments in hardware or energy.”
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