What the heck is an NFT?
Better late than never I guess... Here is my breakdown of research on the NFT market
I’ve thought about doing this post for a while, but to be completely candid, I was overwhelmed with the minutiae of blockchain applications. The saying still rings true, the more I learn, the less I know. But this one is a little different. As I learn the processes and details of blockchain applications, there is a compounding benefit of knowledge. Take a listen to this episode of Acquired on Ethereum, and see how much more you will begin to understand.
The market for NFTs, or non-fungible tokens, has been surging since the pandemic rally began, reaching total sales of $2.5 billion for the first half of 2021. That is up from a mere $13.7 million in the first half of 2020.1 Talk about onwards and upwards.
So, NFTs are hot. Here’s what they are:
An NFT is a digital asset that exists on a public leger, also known as a blockchain, allowing for anyone to verify it’s authenticity - hence “non-fungible”
Unlike other digital assets and items, NFTs can not be endlessly produced and have a specific signature for verification. Anything can be turned into an NFT - art, gifs, videos, pictures, music, text. So how do transactions take place?
The Ethereum blockchain is what makes these transactions possible:
NFTs live on the Ethereum network and are bought and sold on any Ethereum-based NFT market
Transaction data is publicly verifiable and thus easy to prove ownership
Transactions can be peer to peer and do not require a central trading platform
The steps to actually purchase an NFT are new and unfamiliar for many. You likely need to purchase a cryptocurrency (usually Ether) through a wallet, link that wallet to a website that transacts with NFTs, and bid on/purchase the desired asset.
Links to websites to browse NFT markets: KnownOrigin, Rarible, OpenSea
This can all be confusing as to why these things are becoming a desirable alternative investment, so here’s a pretty simple quote from the founder of cyrptocurrency investment company CoinFund, Jake Brukhman, explaining why exactly there is value in NFTs:
“You’re not buying the picture, you're buying the property rights to the picture."2
Replace “picture” with any item, and that’s how it works. As an owner of an NFT, you are the rightful owner of that specific token, which can never be taken from you or otherwise duplicated.
Here’s a quick look into just how hot these assets can get:
Bull Case:
Advocates for the NFT world are stating that they are the future of ownership. There is going to be a transition to tickets for events, even housing or car titles that will be minted as NFTs. While this is all seemingly impossible, nobody thought the iPhone would be where it is today after the initial release in 2007.
Another benefit that is cannot be overlooked is that the power is now shifting into the hands of the digital content creators. Before, the platforms in which the transactions took place, maintained ownership of the content and thus received a majority of the compensation, if not all. Now, the ownership is embedded into the artwork and grants the creator the ability to:
Create resale royalties for themselves (any secondary transaction will earn them a royalty)
Easily prove that they are the creator
Determine the scarcity of the asset
Decide where and when to sell the asset
This transition of ownership has benefits in the gaming world too. The previous norm in gaming would be play, build up your character, and sometimes purchase in game add-ons for visual reasons only (that is extremely simplified). If the add-ons purchased were NFTs, then the buyers would be able to sell it to recoup their money when they are done with the game, or even for a profit if the demand is up. It essentially creates a new and useful economy that can easily reach a large scale.
NFTs, similar to cryptocurrencies, can be used to collateralize a loan as well. Instead of using another token as collateral for a loan you want to take out, you could use an NFT. Check off another practical use for NFTs.
Risks:
Because anyone has the ability to create an NFT, there can be some easy routes to losing money. Scarcity does not directly correlate with value, and owners can quickly see their NFT values depreciate if the initial hype dies down.
In the growing digital space, pseudonyms are very popular. This could lead to a large amount of fraud.
This chart of TopShot NFT sales shows how quickly hype can appreciate and subsequently deflate asset values.
Opposite of this, Jack Dorsey listed his first ever tweet as an NFT which sold for close to $3 million.
It is hard to not write off this market as a completely speculative bubble because many of the participants seem to be following the crowd and buying into peak hype. However, as with the entire decentralized ecosystem, it is worth watching and learning about. If you are well equipped with a thorough understanding of the underlying functions and use cases of NFTs, you will be prepared to participate when things settle into place and applications become normalized.
Thank you for reading as always! Have a great Sunday.
Joey
https://www.reuters.com/technology/nft-sales-volume-surges-25-bln-2021-first-half-2021-07-05/
https://www.npr.org/2021/03/05/974089381/whats-an-nft-and-why-are-people-paying-millions-to-buy-them
Other Sources:
https://www.reuters.com/business/nfts-are-hot-so-what-are-they-2021-03-17/
https://ethereum.org/en/nft/#nft-gaming