NFTs, or non-fungible tokens, have exploded into the public consciousness, sparking conversations across industries, from art and collectibles to gaming and beyond. You might have heard about digital artworks selling for millions, or celebrities flaunting their “Bored Ape” avatars. But what exactly are NFTs, and why are they generating so much buzz?
Let’s break down this complex topic into understandable terms.
To begin, let’s decipher the term itself: Non-Fungible Token.
In economics, “fungible” describes items that are interchangeable with others of the same kind. Think of a dollar bill. If you exchange a dollar bill with a friend, you both still possess the same value and purchasing power. Most cryptocurrencies, like Bitcoin, are also fungible. One Bitcoin is essentially the same as another Bitcoin, regardless of its origin.
However, most things in the physical world are non-fungible. Consider a house or a car. Each has unique characteristics, history, and condition. You can’t simply exchange them for another of the “same type” without considering these individual differences. While you might trade one 2020 Honda Civic for another, you’d still need to assess the mileage, condition, and specific features of each car before agreeing to the swap.
In the crypto world, a “token” represents a unit of value recorded on a blockchain. Cryptocurrencies like Bitcoin and Ethereum are tokens intended for use as currency. But not all tokens are designed to be money. Tokens can represent ownership of physical items – for instance, Nike is exploring crypto tokens to link to the ownership of physical sneakers. Tokens can also represent intangible assets, such as access to exclusive online communities or cloud storage.
So, non-fungible tokens are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, which are fungible and interchangeable, each NFT is unique and cannot be replaced by another identical token.
So, NFTs are like cryptocurrencies, but with unique traits, and not necessarily used as money? Why does this distinction matter?
Until recently, the concept of truly unique digital items was virtually non-existent on the internet.
The internet has historically operated as a vast copying machine. Any digital file, from images to music to documents, can be duplicated endlessly without losing quality. Each copy is an exact replica of the original.
This infinite replication was fantastic for making digital content widely accessible and abundant. But it presented a challenge when it came to scarcity and ownership. If you were a digital artist wanting to create limited editions of your work, or a sports star aiming to sell digital trading cards with lasting value like physical collectibles, the traditional internet offered limited solutions.
Around 2014, the technology behind cryptocurrencies, blockchains – the decentralized, shared ledgers – offered a solution. Blockchains could be used to create unique, uncopyable digital files. Because these files exist as verifiable entries on a public, distributed database, ownership and transfer of these digital assets could be tracked and confirmed transparently by anyone.
This realization paved the way for the creation of the first NFTs.
But aren’t most NFTs simply JPEG images that can be copied by right-clicking and saving? How does an NFT solve the problem of digital copying?
You’re right. NFTs don’t prevent the copying of digital files like JPEGs. However, NFTs enable the creation of a unique digital asset that is linked to a JPEG or other digital content. This link acts as a digital certificate of authenticity, marking a specific copy as the “original” or the verified one.
Think of NFTs as analogous to a certificate of authenticity you might receive when buying a limited-edition print or an expensive sculpture. The artwork itself might be copied or forged. But the certificate confirms that you possess the authentic original. Similarly, while anyone can save a copy of a digital image associated with an NFT, the NFT itself serves as proof of ownership of the genuine digital asset.
Okay, I’m starting to understand. NFTs are essentially a way to establish and claim ownership of a digital file?
Precisely. While it might seem like a subtle distinction, the ability to definitively claim ownership of a digital item is considered revolutionary by many in the NFT space.
They argue that scarcity is a fundamental driver of value for many objects in the physical world. By introducing scarcity to the digital realm through NFTs, they believe a completely new market for unique digital goods is being unlocked.
I can see the technological innovation behind NFTs. But why are people spending vast sums of money on them? You can at least drive a luxury car or admire a Picasso painting. What practical value does a JPEG NFT have?
It’s true that the value of most NFTs isn’t derived from inherent utility in the traditional sense. In the high-end NFT market, particularly collections like the Bored Ape Yacht Club or NFTs auctioned by prestigious houses like Sotheby’s for millions, value is largely driven by speculation and social status.
However, proponents of NFTs offer a perspective on their value that extends beyond mere functionality. They argue that humans frequently spend money on items with little practical use. These purchases are often driven by emotions, social signaling, and the desire for belonging. Luxury goods like designer clothing, expensive jewelry, or even digital items like premium Fortnite skins or short, memorable Instagram usernames all fall into this category. Throughout history, entire industries have thrived by selling non-essential luxury items to affluent individuals. Even if NFTs solely represented a new form of digital luxury good, their emergence as a significant industry warrants serious attention.
What about the cartoon apes and penguins I see crypto enthusiasts using as their social media avatars?
These are known as community or PFP (profile picture) NFTs. These collections typically consist of thousands of unique, but thematically related, NFTs, released in limited quantities.
Once these NFTs are “minted” and released, they transform into digital collectibles and, importantly, membership passes to exclusive online communities. Many NFT projects host private chat groups on platforms like Discord, where NFT holders can connect and interact. Some community NFT projects even organize real-world events and parties, accessible only to verified NFT owners.
These community NFTs serve as status symbols, signifying membership within a specific group. Displaying them as social media profile pictures, like a Bored Ape or a CryptoPunk, signals this in-group affiliation. Because top-tier NFT collections command prices reaching millions of dollars, celebrities and influencers like Jay-Z and Snoop Dogg proudly display their NFTs, further amplifying their status and desirability.
But are NFTs just a fad, like digital Beanie Babies? Will most NFTs eventually become worthless?
That’s the multi-billion dollar question – or rather, the $40 billion question, representing the estimated size of the NFT market at its peak. It’s possible that NFT enthusiasts are correct, and we are witnessing the dawn of a revolution in digital ownership and commerce. In this scenario, early NFTs could indeed become as culturally and financially significant as original Picassos or Monets.
However, the NFT market has shown signs of cooling down. Transaction volumes have decreased, and high-profile NFT auctions have been canceled. Even staunch NFT advocates are expressing concern about market saturation. Gary Vaynerchuk, a prominent NFT entrepreneur, has publicly predicted that 98% of NFTs will become financially worthless.
98 percent! That sounds concerning.
Yes, NFTs are a divisive topic, even within the cryptocurrency community itself. Some crypto investors avoid NFTs altogether, while others view them as speculative investments or purely for recreational collecting.
Within the NFT space, there’s a growing emphasis on “utility.” This involves incorporating additional benefits with an NFT purchase, such as concert tickets, signed merchandise, or early access to future releases. The goal is to ensure the NFT offers tangible value beyond just digital ownership, even if the NFT’s speculative value declines to zero.
That still sounds a bit risky. Are NFT scams prevalent? What about money laundering concerns?
Unfortunately, yes, the NFT space is rife with scams. “Rug pulls” are a common occurrence, where NFT project developers abruptly abandon the project and abscond with investors’ funds. Several hyped NFT projects have turned out to be rug pulls, including Evolved Apes, where the creator disappeared with $2.7 million in investor money.
“Whitelisting” is another practice that raises ethical questions. This involves granting privileged access to certain individuals to purchase NFTs before public release. Whitelisting often benefits well-connected insiders who can buy NFTs at discounted prices and then resell them for substantial profits on the open market. A study by Chainalysis revealed that whitelisted users who resold their NFTs profited 75% of the time, compared to only 20% for non-whitelisted buyers.
Money laundering, wash trading (artificially inflating an asset’s value by repeatedly buying and selling it to oneself), and other illicit activities are almost certainly present in the NFT market. While the extent of these practices is unclear, the risk is significant enough that financial regulators in various countries, including China, have issued warnings about the potential use of NFTs and other crypto assets for money laundering.
Proponents argue that illicit activities exist in traditional markets too, citing money laundering in the traditional art market as an example. They suggest that crypto might simply make these activities more easily conducted in the digital space.
Let’s revisit NFT mechanics for a moment. I saw a comparison online likening NFTs to “name a star” gift packages, where you get a certificate saying a star is named after you, but no actual ownership of the star. Do NFTs actually confer ownership or usage rights?
Not necessarily. In many NFT sales, the buyer acquires the unique blockchain entry confirming their ownership of the token, but not necessarily ownership of the underlying digital asset or its associated intellectual property rights.
For example, the buyer of the famous Nyan Cat NFT didn’t acquire the copyright to the Nyan Cat image or the right to create Nyan Cat merchandise. The original creator, Chris Torres, retained those rights. The NFT buyer essentially purchased an “official,” cryptographically signed copy of the image.
NFT creators can choose to include additional rights with an NFT sale, but they are not obligated to. This has already led to copyright disputes in the NFT world, such as the lawsuit filed by Miramax against Quentin Tarantino over his planned auction of “Pulp Fiction” screenplay excerpts as NFTs.
I’ve also heard about NFT theft being common. Is that true?
Yes, NFT theft has become increasingly prevalent as NFT values have risen. High-profile thefts have targeted owners of valuable collections like the Bored Ape Yacht Club. Thieves have used phishing tactics to trick users into revealing their crypto wallet passwords, granting access to their NFT holdings. A recent hack of the OpenSea NFT marketplace resulted in the theft of $1.7 million worth of NFTs from users.
Another form of theft involves minting NFTs from copyrighted material without permission. Many artists have reported their artwork being turned into NFTs and sold as “official” versions without their consent. While platforms attempt to combat the sale of stolen NFTs, the decentralized and largely unregulated nature of the market makes complete prevention challenging.
If NFTs have so many drawbacks, why are they so popular? What are the potential benefits I might be missing?
After engaging with NFT creators and collectors, their core arguments in favor of NFTs often revolve around these key points:
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Decentralization of the Internet: The current internet is dominated by centralized platforms. NFTs offer a potential path to decentralization. Creators currently rely on platforms like Spotify, YouTube, and Facebook to distribute their work. While these platforms offer reach, they often take a significant portion of revenue. NFTs enable creators to sell unique digital works directly to audiences, retaining a larger share of the profits. For instance, an artist like 3LAU could sell a single album NFT to a dedicated fan for millions, potentially earning more than a lifetime of streaming revenue.
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The Metaverse and Digital Ownership: We are moving towards a metaverse era, where digital interactions and experiences will become more immersive and central to daily life. Just as digital skins and accessories have become valuable in games like Fortnite and Roblox, NFTs will cater to the growing demand for digital ownership in virtual worlds. As people spend more time in digital spaces, they will seek digital assets to express themselves and enhance their virtual lives, and NFTs are positioned to fulfill this need.
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Early Stage Technology with Untapped Potential: NFTs are still a nascent technology. The full range of their applications is yet to be discovered. The concept of digital scarcity enabled by NFTs is genuinely novel and could unlock unforeseen economic opportunities and creative possibilities. Proponents argue for patience and open-mindedness as the NFT ecosystem evolves and matures.
Didn’t we hear similar promises about the “creator economy” with platforms like YouTube and Twitter years ago? Could the NFT market also become dominated by a few large corporations, similar to social media?
Large platforms are indeed emerging in the NFT space. OpenSea, the dominant NFT marketplace, is valued at over $13 billion. Some crypto purists criticize these platforms for actions that seem to contradict the principles of decentralization, such as OpenSea’s decision to delist NFTs deemed stolen or fraudulent.
NFT ownership is also relatively concentrated, with a small number of holders controlling a significant portion of high-value NFTs.
However, concentrated ownership is distinct from centralized technology. Certain structural factors may make it harder for large corporations to completely control the NFT market.
Crucially, NFTs are designed as personal property in a way that most digital goods are not. When you upload a video to YouTube, YouTube hosts it and dictates the terms of its distribution, monetization, and even censorship. NFTs, however, reside in their owners’ crypto wallets, independent of any single platform. Owners have greater control over their NFTs and how they are used.
Interoperability is another key aspect. NFTs are designed to be interoperable. Unlike in-game items limited to a specific game, NFTs can theoretically be used across different virtual environments. An NFT sword purchased in one game could potentially be used in another. An NFT avatar could be used across various metaverse applications. If a user is dissatisfied with a platform like OpenSea, they can easily move their NFTs (stored in their personal wallet, not on the platform’s servers) to a competing platform.
This level of portability and user control is absent in traditional social media. You cannot easily transfer your YouTube subscriber base to TikTok, for example.
I’m an artist myself. How can I start creating and selling NFTs?
You can transition from selling crafts on platforms like Etsy to selling NFTs of your digital artwork on marketplaces like OpenSea or Foundation. However, financial success is not guaranteed, and the NFT market can be volatile.
Almost any digital file can be turned into an NFT.
The process generally involves these steps:
- Set up a Crypto Wallet: Use a browser extension like MetaMask to create a cryptocurrency wallet. This wallet will be used to manage your NFTs and cryptocurrency.
- Connect to an NFT Marketplace: Create an account on an NFT marketplace like Foundation or OpenSea, and connect your crypto wallet.
- Mint Your NFT: “Minting” refers to the process of creating your NFT. This typically involves uploading your digital file to a decentralized storage service and creating a blockchain-based asset that points to this file.
- List Your NFT for Sale: Once minted, you can list your NFT for sale on the marketplace.
The entire process can be completed in a few hours, although minting NFTs often involves “gas fees,” which are transaction fees on the blockchain. These fees can vary in cost.
I understand the theoretical advantages of NFTs. But are they really being used for anything beyond speculative trading? Are NFTs actually integrated into video games or other applications?
While much of the current NFT activity is speculative, NFTs are starting to find real-world applications. Games like Axie Infinity are examples of NFT-based games where players can earn cryptocurrency by playing and trading NFT game characters.
However, it’s fair to say that the primary driver of the NFT market currently is speculation. If another digital asset class emerged offering similar opportunities for quick profits or community engagement, some NFT traders might shift their focus.
Ultimately, the core value proposition of NFTs isn’t necessarily about ease of trading (transaction fees can be high), permanence of the linked digital files (NFTs themselves are durable, but the linked files are not always guaranteed to be), or resolving intellectual property complexities (copyright law still applies).
The fundamental value proposition of NFTs is that they enable the creation and trading of scarce digital objects. Whether this scarcity will lead to lasting value and transformative applications remains to be seen.
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Conceptual illustration relating to DAOs
Conceptual illustration relating to DeFi
Go Deeper:
“What Critics Don’t Understand About NFTs” by Jonathan Zittrain and Will Marks in The Atlantic explores the philosophical underpinnings of NFT value and the nature of digital ownership.
“How NFTs Are Building the Internet of the Future” A TED Talk by Kayvon Tehranian, founder of the NFT platform Foundation, presents a bullish vision of NFTs as the foundation for a creator-centric internet.
“Why NFTs Are Bad: The Long Version” A lengthy critical analysis of NFTs by programmer Antsstyle, arguing against the concept of digital ownership through NFTs.
“Line Goes Up: The Problem With NFTs” A popular YouTube video by Dan Olson offering a comprehensive and critical perspective on the flaws and broader issues within the NFT and crypto space.
