How fun are non-fungible tokens? Exploring the NFT craze gripping the world of crypto currencies
Here are some key ideas that you should know about NFTs.
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If you thought the world of cryptocurrencies was already verging on the unbelievable a rash of new records are being broken by the related “art-form”– NFTs. Everything from Jack Dorsey autographing his first ever tweet to Nyan Cat have been put up for sale as an NFT.
But what is this new craze? What does NFT stand for? Why should you care?
Here at MoneyLens, we’ve done the investigating for you, and whittled it down to the key ideas that you should know about NFTs.
What is an NFT?
NFT stands for non-fungible token – but that doesn’t make things much clearer. A quick look in the dictionary and you’ll find that non-fungible defines an item that is unique and can’t be replaced.
Most currencies can be described as fungible including cryptos like bitcoin, if you trade one bitcoin for another, you still have the same, identical asset.
Take paper printed Pokemon cards. Each card, for each character, is distinct from any other. So your first edition base set Charizard (for you Pokemon fans out there) is genuinely non-fungible. If you traded it for another card, let’s say a second edition Charizard, you’d have something completely different.
In general, anything digital can be made into an NFT, whether it’s art, music, or an X-ray of William Shatner’s teeth (yes, that’s a thing). But the key thing of course is that those images or digital artworks CAN be replicated, so for them to be NFTs they need to be “certified” and made non-fungible or unique. And that is done through blockchain.
The excitement, as with cryptocurrencies, is in this process of being unique or finite. The blockchain acts as a guarantee that these things cannot be reproduced limitless time. It’s also why NFTs appear to be catching on in the traditional art world because, like grand master paintings, you can’t make more of the originals.
Hence the enormous publicity surrounding the sale of digital artist Beeple’s collage for $69 million by auction house Christie’s.
So, can I just copy and paste something and sell it for millions?
Uh, no. Anyone can go and copy a digital file and say it’s an original but, as above, the point of NFTs is that they are unique. The reason people are paying millions for NFTs is that the ownership is verifiable and the item, while it can be copied (as a painting can be photographed), cannot be replicated.
In real life terms, anyone can own a print or a photo of the Mona Lisa but the real one only exists in the Louvre.
How do they work?
The platform where you’ll find the most NFTs is the Ethereum blockchain. The blockchain has its own crypto currency, which you may have heard of – Ether. Ethereum is slightly different from other blockchains, though.
Whereas standard blockchains, such as bitcoin, allow you to just use digital money without banks or payment providers, Ethereum’s blockchain actively supports the creation and selling and buying of new, digital assets, such as NFTs.
Every blockchain creates a history of every single transaction that has ever taken place on it. This adds to why NFTs are becoming so sought after as buyers and sellers are able to track the NFT right back to where it started and can authenticate its originality through the blockchain.
Other blockchains are cottoning on to how mainstream NFTs are becoming and have begun to implement their own versions to support their creation.
But where did it all start?
Along with everything on the internet, NFTs started with kittens. Yes, really. When the Ethereum blockchain became capable of supporting unique digital creations, one of the first uses was in a game called CryptoKitties – the crypto equivalent of Nintendogs. Users could trade and sell virtual kittens depending on their taste, with the most expensive kitten selling for an eye-watering $170,000.
Why should I care, though?
For the artist or seller (whether that be music, painting, or GIFs), it’s a way to get your work out there and sell it in a market that isn’t oversaturated. On top of that, NFTs have a sell-on clause that will pay you a percentage every time it gets sold on.
For the buyer, the obvious reason is for the bragging rights of owning and being able to use the original NFT, while also supporting artists you like.
There’s also the personal aspect of NFTs. In real life terms, you want to buy your limited edition Match Attax Wayne Rooney card from 2007 because he’s your favourite player – just like you can buy your favourite NFT because it’s your favourite.
No doubt some people will use NFTs as a speculative asset. In the world of crypto, anything can happen. You might make a killing. Or lose your shirt.
One other thing to mention, here, is that NFTs can be valuable when related to online games. An NFT might give you a special ranking, or an object that other players can’t use. Gamers know how important and impressive it is to have a valuable object that sets you apart.
What does this mean for the real world?
There have been attempts to connect NFTs to real, physical objects. The most famous of these is Nike’s CryptoKicks. The aim, here, is to verify the authenticity of a pair of shoes.
People already collect limited edition trainers to keep or sell on, so Nike patented a system where blockchain is used to secure digital assets to a physical product – making that physical product completely unique. When someone buys a pair of CryptoKicks, they also receive a digital asset attached to the unique identifier of that shoe. Cool, huh?
Nike isn’t the only big-name brand who is now realising the potential of crypto - Taco Bell has jumped on the bandwagon and released some taco GIFs. British indie band Kings of Leon’s newest album was released as an NFT and generated $2 million in sales.
There is a slight nuance that we should include. Cryptocurrencies (like bitcoin) have already been used to buy physical pieces of art. Here, purchasers have replaced usual, physical currency, like a dollar or a pound, with a crypto currency.
This is an example of how bitcoin is a fungible asset because it acts like a real-world currency and can be exchanged as a form of payment.
How secure is all of this?
Part of blockchain’s rise in popularity has been its ability to keep assets secure as it stores a record of every single transaction undertaken, as already mentioned. NFTs are stored in the same way as cryptos in a digital wallet which is password protected. It should be said though that cryptos have been stolen in the past so it’s only as secure as the person who owns it wants it to be.
What’s the overall opinion on them?
Many arguments for and against NFTs are similar to why people like and dislike cryptos in general. The ability to buy something original and genuine at the simple click of a button is a huge plus to many. It’s also opening up a whole new world of digital art that is yet to be explored completely.
However, NFTs use the same blockchain technology as cryptocurrencies. This tech uses a whole lot of electricity and isn’t great for the environment. Ethereum has announced that it is working on how to mitigate it, but, at the moment, cryptos have a big carbon footprint. NFTs are also drawing the criticism that they are just, in reality, worthless – but that all depends on what you value and what you don’t.
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