NFTs: Art and collectables on the blockchain (Article 13):
The main theme around NFTs may be ambiguity, since NFTs is a concept and as a topic are still somewhat unclear and fuzzy to many people outside of dedicated circles. It does not help that many helpful details are often left out in mainstream discourse about NFTs. Probably the only fact about NFTs that many people are aware of is their name; Non-Fungible Tokens (NFTs).
--
NFTs are a type of crypto-tokens. What differentiates them from all other tokens is the uniqueness of each NFT. To clarify: you can think of crypto-tokens (or cryptocurrencies) as a form of money, with each of them kind of looking the same: BTC is often thought of as the gold of the blockchain, and just like real gold, where two bars are not distinguishable from one another in appearance or value, so are two BTCs. The same applies to two USDT, blockchain’s decentralised counterpart to the US-dollar: because again, just like in real-life, two one dollar-bills are identical. The case is different for NFTs, which are more akin to artworks; and they can be as different in appearance as the Da Vinci’s Mona Lisa, an antique treasure such as those that belonged to Tutankhamun, or even Duchamp’s post-modern sculpture The Fountain. What differentiates NFTs from traditional art pieces is that NFTs exist on the blockchain.
NFTs are a representation of digital collectables, most frequently works of digital art or in-game items that are used in video games. NFTs can also represent the ownership of physical assets; an NFT that represents the ownership of 1-ton tungsten cube is one example. NFTs can also be used as tokens of membership within certain clubs. At present, the ‘Bored Ape Yacht Club’ or BAYC is the most popular NFT project and its members all own NFTs in the form of digital avatars which give their owners certain additional perks with this exclusive club.
NFTs characteristics are best explained if one contrasts them with cryptocurrencies:
- Fungibility: NFTs are non-fungible, which is another term for uniqueness. While BTC tokens are indistinguishable from one another, NFTs are unique. If we exchange two one-dollar bills or 2 bitcoins, we both maintain the same value. But if I trade my 100-year-old valuable stamp collection with your 5-year-old collection, I will be losing a lot of value.
- Divisibility: NFTs are indivisible. Crypto-tokens are divisible into smaller units; a bitcoin can be divided into 100 million Satoshis, but NFTs have only 1 denomination; a 1-full unit.
- Intrinsicality: cryptocurrencies are intrinsic while NFTs are extrinsic. This means that cryptocurrencies are their own entity and they hold value by themselves. On the other hand, NFTs are merely a representation or a statement of ownership to a collectable that has value.
Intrinsicality may require some further explanation, so here is a simple example to further illustrate the concept: Jack Dorsey, the founder and former CEO of Twitter, auctioned the first tweet ever sent on the platform in the form of an NFT for millions of dollars. However, everyone is still able to see the tweet and retweet it if they want, since the buyer of the NFT does not actually ‘hold’ the tweet in their crypto-wallet, they merely have a token that demonstrates their ownership of that tweet. This is what is meant when it is said that NFT do not have an intrinsic value, which separates them from cryptocurrencies that once you own one token, you ‘possess’ it and its value in your wallet.
Since the immense hype around NFTs has already introduced them to many in a superficial manner, we will dig deeper than just explaining what they are. For this, we will perform a simple demo that will help us understand NFTs better.
As a first step, we will access Etherscan, which is where all Ethereum transactions are recorded, including NFT transfers. The majority of NFTs are on the Ethereum blockchain, however, other blockchains, like BSC, Polygon and Cardano, also support NFTs.
On Etherscan, select “Tokens”. In the drop-down menu that opens, “View ERC721 Transfers” can be selected, which is where the NFT transaction can be viewed. Ethereum has well-defined standards for the coins that can exist on its blockchain. Standards are a set of rules that blockchain developers have to follow so the tokens they create are compatible with the blockchain. ERC20 is the standard for fungible (regular) tokens, like Ether, while ERC721 is the standard for NFTs. A more recent standard is ERC1155, which allows tokens to be either fungible or NFTs.
After clicking, a list of all NFT transfers that happened on Ethereum blockchain will appear. Select any NFT you want to check by clicking ‘View NFT.’
The NFT info page will open, where you will find the following information:
- Owner: This is the wallet address of the owner.
- Contract address: the address of the smart contract behind the NFT.
- NFT creator: behind the name is the wallet address of the creator which was used to create this NFT
- Classification: This tells you whether the NFT is stored on-chain (on the blockchain) or stored off-chain.
- Token ID: A number of NFT creators create several unique NFTs for the same project, so they give each NFT an ID to distinguish between them.
- Token standard: we can see that the chosen NFT above uses the ERC721 standard.
- Marketplaces: A list of the NFT marketplaces where this NFT can be traded.
Click on the contract address to see the smart contract page.
On the left you can see how many ETH are in this smart contract as well as a list of transactions at the bottom. To the right, you can find a link to the “Tracker” page; click it.
On this page you can find how many unique NFTs were created with this smart contract and how many wallets hold at least one of those NFTs: you are shown the holders count, how many transfers have happened with these NFTs, as well as a link to the official website of the project.
From this demo you can see that NFTs are distinct from other cryptocurrencies in that they have their own standard, however, just like other coins and tokens, they are still traded using crypto-wallets, which means their transactions are trackable. One can track a certain project and inspect its smart contract as they desire.
However, the most important property of an NFT is their classification. In the example shown above, the NFT is off-chain, which means that it is stored outside the blockchain. To explain how this makes sense, think of an animation NFT as an example. Such NFTs give the ownership of certain animations, where these animations are large in size. If the creator tries to store the animation on the blockchain it will be impossible as it will break many blockchains size requirements. So, what is done is that they store this animation on a “centralized” website or domain and include a link to it in the NFT description. This link and other information regarding the NFT are the NFT metadata.
The hype around NFTs can be attributed to:
- High profile individuals are supporting NFTs, as we saw in our example with the tweet-NFT by Twitter’s CEO.
- NFTs provide digital artists with a direct way of selling their work.
- Cryptocurrencies currently experience a similar craze, and in NFTs, crypto investors found another asset with which to diversify their portfolios.
- Currently almost everything is on the internet, with activities, including museums, having digital twins that users may frequent without having to leave the comfort of their own home.
- NFTs provide undisputed rights to in-game collectables, and if one keeps in mind that the size of the gaming industry is surpassing the size of the movie and music industry combined, one can only imagine the levels of activity on NFT marketplaces like Opensea and Rarible, with numerous of gamers rushing to buy and trade the most sought-after items and character-skins.
- Two of the biggest auction houses, Christie’s and Sotheby’s, now auction NFTs, which gives additional mainstream credibility and fame to the digital tokens. The trade can be quite a profitable endeavour: a digital artist going by the name “Beeple” sold one of his pieces as an NFT at Christie’s for almost $70 million.
While it may seem to some that NFTs made a very sudden appearance in 2020/2021, they have been around for much longer: even as early as 2013, first experiments with NFTs appeared online. They gained some popularity during the 2017 cryptocurrency craze, and by the end of the very same year, Opensea, the biggest NFT marketplace, opened its (virtual) doors to users. Now, many other marketplaces can be found on other blockchains and other applications. There was another soar in the popularity of NFTs during the global COVID-pandemic, when most people shifted to working from home and had to spend many hours a day online. As of now, it seems that NFTs are here to stay — at least for a little longer. In January 2022, NFTs worth $5 Billion were traded on opensea, which means that at present, the total sales volume of NFTs has crossed the $20 Billion-threshold. It is expected that the spread of the metaverse (which will be covered in a later article) will further increase interest in NFTs.
Most NFTs can be found on the Ethereum blockchain, and the scene is dominated by gaming NFTs. However, all sorts of NFTs are growing in popularity, and now celebrities, corporations and even fundraising organisations are starting to use NFTs, so it is fair to say that NFTs are going mainstream and are getting more and more recognition among the general public.
However, since NFTs are based on smart contracts, they suffer from the same drawbacks as the latter. Another downside of NFTs is that the creator of the smart contract controls it even after the NFT is sold, so all consecutive owners of an NFT don’t get full “admin” rights to it. Most importantly, the biggest advantage of blockchains — their immutability — is the biggest drawback for NFTs. As mentioned earlier, an NFT contains a link to the location where the valuable asset is stored. If the website or cloud-service where the asset is stored is changed/moved, the NFT now essentially functions solely as a ‘dead link’: instead of a shiny NFT, all the user will see is a 404-error message.
