A $560K New York Times column. Beeple’s $69M JPEG. A $7M Cryptopunk icon. Jack Dorsey’s $2.9M tweet.
Non-fungible tokens, or NFTs, are blowing up, driving huge prices and explosive hype and earning comparisons to the 2017 ICO (initial coin offering) mania. By the end of March, more than $500M in USD had been exchanged over sales of NFTs, according to NFT marketplace tracker Nonfungible.
In short, NFTs represent digital assets — which can range from images to songs to videos to tweets — that are verified through blockchain technology. Owning NFTs allows individuals to claim exclusive ownership over these digital assets. Crucially, NFTs offer a way to monetize digital goods by authenticating their scarcity and provenance.
In this report, we dig into what an NFT is and where the opportunities for NFTs lie.
What is an NFT?
NFTs are defined as “unique, digital items with blockchain-managed ownership,” per NFT marketplace OpenSea.
Imagine a rare baseball card. It has value because it’s scarce and can’t be replaced with just any other baseball card. The same can be said for digital files: Beeple’s $69M collage image file is among the most headline-grabbing NFT sales, but the Nyan Cat creator sold the iconic gif for $600K, Grimes sold a collection of short videos for $6M, and Kings of Leon released a new album along with concert tickets as NFTs.
These eye-popping prices are likely driven by speculation, but the question of the monetary value of art is something that the traditional art world has long grappled with.
Debate has arisen over what ownership actually means in the context of NFTs. In many transactions, NFTs don’t represent the actual asset itself (nor IP nor reproduction nor copyright), but solely a record of ownership. Some compare it to owning the deed of a house — rather than the house itself — or owning a verified, autographed copy of the Mona Lisa, but not the original Mona Lisa and not just a print. But the specific terms of a transaction can vary from NFT to NFT, driving much of the confusion around the definition of ownership.
That said, there are a few inherent baseline characteristics for NFTs that are commonly cited when defining the technology as a “new form of ownership,” including:
- Rare and unique — This is where the “non-fungible” part of NFTs comes in (fungible refers to interchangeable goods). NFTs are wholly unique, and no two NFTs are identical.
- Interoperability and trade — Due to the open nature of many blockchain standards, NFTs can be moved across different ecosystems, wallets, marketplaces, and more. As a result, users are able to use NFTs to trade goods outside of their original contexts (e.g., selling video game skins).
- Immutability — Once an NFT has been encoded using blockchain technology, no individual can alter its ownership data/history or metadata. NFTs allow holders to prove the authenticity and originality of their asset, verified through whatever blockchain they are stored on.
- Ownership — Holding an NFT token can allow people to prove that they are the owners of a unique asset.
Other features include the ability to program royalties into the token, allowing artists to collect a portion of sales thereafter, or include other technical features like fractional ownership.
Currently, the vast majority of NFTs are built using Ethereum standards, though technically NFTs can be minted on other blockchains, such as Algorand, Tezos, and Polkadot.
The typical process to buy or sell an NFT is as follows:
- Set up a digital wallet and buy cryptocurrency
- Connect your wallet to an NFT marketplace
- Mint/list your NFT or start bidding on pieces
Despite the ballooning hype, the tech isn’t actually new. In 2017, people spent millions buying and selling “CryptoKitties,” digital collectible cats, some of which sold for more than $100K.
But recently, a number of NFT marketplaces have emerged to capitalize on the soaring demand. OpenSea, for example, recently raised $23M led by VC firm Andreessen Horowitz. Other names in the space include Sorare, SuperRare, Nifty Gateway, MakersPlace, Decentraland, Rarible, and more. This follows the decentralized finance (DeFi) and yield farming craze of late 2020, when people rushed to make money by locking up their speculative tokens.
So why are NFTs attracting so much attention now?
Some cite the wealth effect, when an individual spends more as their net worth increases. At the end of Q1’21, the price of ether had skyrocketed by more than 1,000% year-over-year, while the price of bitcoin surged more than 600% over the same period to break $50K — meaning major returns for early crypto buyers. In turn, the purchasers of the most expensive NFTs are already deeply embedded in the crypto space: Beeple’s $69M artwork was bought by a Canadian crypto investor who wants to build a virtual NFT museum.
Where the opportunity lies
Gaming and digital art represent some of the earliest applications for NFTs, as well as some of the largest asset classes in the ecosystem.
In gaming, NFTs have manifested in digital collectibles like trading cards, within blockchain games like Gods Unchained or CryptoKitties, or as assets for virtual worlds (related: metaverses).
Within virtual worlds, users can buy things like virtual plots of land in The Sandbox, a hot dog hat wearable in Decentraland, or even Enjin’s “generic” axe — which was not developed for one specific game, hinting at the interoperability potential for trading items with NFTs. Think videogame platform Steam’s Community Market, in which gamers buy and sell in-game assets (such as a flamethrower for Team Fortress 2) from different games on the platform — but for broader ecosystems than Steam.
For art, the bulk of messaging has revolved around reforming the art world, with some artists eyeing a way to bypass gatekeepers and sell their artworks directly to the masses. NFT advocates say that the tech allows creators to monetize themselves beyond traditional frameworks, allowing for a tighter link between creators and fans.
Signaling the entrance of NFTs into the mainstream, big-name brands are getting in on the action, driven by FOMO and potential marketing opportunities. Examples include:
- Christie’s hosted the auction of the $69M Beeple artwork
- The NBA’s platform for NFT basketball cards processed about $250M of sales in February
- Food brands are in as well: Taco Bell’s taco-themed NFTs sold out within 30 minutes; Pringle’s sold a digital can of chips as an NFT; Pizza Hut Canada sold pixelated pizza slices
- Celebrities like Grimes, William Shatner, Paris Hilton, and Lindsay Lohan have all sold NFTs of digital art pieces
- Music artists 3lau and Kings of Leon both sold tokenized versions of their albums
- Time magazine auctioned off some of its covers as NFTs
Challenges and downsides
The current issues with trading NFTs, and decentralized apps (dapps) in general, revolve largely around the efficiency of these systems. Transactions can currently be prohibitively expensive and slow due to their “on-chain” nature, though several companies are working on potential solutions like “side chains,” “rollups,” and more.
Furthermore, digital content has long been plagued with nightmarish questions surrounding copyright. Smart contracts — agreements that can be hardcoded into blockchain transactions — may be binding from a technical perspective, but the legal enforceability is a difficult question to answer. Proponents of NFTs who claim the tech will certify ownership once and for all also have to consider the hazy definitions of digital ownership and intellectual property.
For example: what do you actually own when you buy a tokenized tweet? Where is the “owned” digital content actually stored? What happens if an NFT marketplace folds? How do you break down the ownership of memes and remixes of memes? What happens if the tokenized version of something that you bought turns out to be stolen?
Castle Island Ventures partner and Coinmetrics founder Nic Carter writes,
“NFT is a process, rather than a product. To NFT something is to assign it a distinct serial number that lives on a public blockchain. That’s it. ‘NFT’ conveys no additional information about the purpose or nature of the content-being-serialized aside from that.”
Another common concern is the immense environmental impact of proof-of-work (PoW) blockchains. The annualized carbon footprint of the Ethereum network alone is estimated to be almost 16 megatonnes of CO2 — comparable to the carbon footprint of Lithuania — while it consumes 34 terawatt-hours of electricity, similar to the power consumption of Denmark, per Digiconomist.
However, some are already working on ways to make PoW blockchain platforms more efficient. For instance, Ethereum, on which a large majority of decentralized apps are built, recently launched part of Ethereum 2.0 — a broad set of upgrades that promise a more environmentally-friendly system.
NFTs have the potential to impact industries far beyond gaming and digital art.
In content, companies like Mirror allow writers to own and sell their work as NFTs, opening up new ways of content distribution and monetization. The idea of decentralized autonomous organizations (DAOs) has begun floating up again as a result: Ark Gallery is an example of one for a niche community of CryptoPunk collectors.
Some companies are branching deeper into financial services, in a convergence of the DeFi and the NFT crazes. NFTfi allows users to leverage their NFTs as loan collateral, while NFTX launched NFT index funds, allowing buyers to own fractions of multiple NFTs. Nori says it has tokenized carbon removal credits.
The past few years have introduced cycles of hype as applications and protocols built on blockchain continue to evolve — including some popped bubbles when sky-high demand has overwhelmed the ecosystem. But as notions of the creator economy and definitions of ownership continue to evolve, there may be ever greater opportunity for NFTs.
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