NFTs
Breaking down non-fungible tokens
What are non-fungible tokens?
Non-fungible tokens (NFTs) are unique digital assets created on blockchain platforms. Different than fungible tokens which are digital assets built so that each individual token is equivalent to the next. Bitcoin is fungible as one bitcoin is equal to all of the bitcoins. Fiat money is fungible as $10 is equal to 10x $1 bills. Non-fungible means that the token is representative of a specific good with distinct characteristics and qualities which can range from a broad category — digital collectibles, gaming items, intellectual property licenses, digital art, real estate, insurance. The list is endless.
Why are they important?
It almost seems obvious. We have so many unique items in the analog and the digital world, and now they can be tracked, traded and valued on a blockchain. Human beings like their things. We’ve always invented things that are unique and ring true for niche audiences — think Beanie Babies, Pokemon Cards and Tamagotchis. We create works of art that are purely subjective — think Mark Rothko’s abstract use of rich fields of color compared to Leonardo da Vinci’s famed Mona Lisa. Both paintings are drastically different, but worth millions.
Gaming
With blockchain technology, we’re just taking human creativity to a new level by adding exchange efficiencies and programming distinct characteristics and value directly into the token itself. An easy example is video gaming skins — think of a special sword or an avatar’s clothing. Companies like Enjin & Wax are focused on creating decentralized NFTs for gaming and decentralized marketplaces for trading these NFTs. Right now, when I play video game like Call of Duty or Fortnite there’s specific badges, weapons or clothing that can be earned through challenges or purchased directly. When gamers own or use these items, they currently don’t own anything of value outside of that particular game and they don’t even own the asset. The revenue went to the game developer and distribution platform, there’s no structure declaring it’s uniqueness or scarcity and the item essentially doesn’t exist outside of that particular game. It’s completely different with blockchain and NFTs. When a gamer purchases a digital asset, it is in their sole possession and the value is paid to the previous owner. The digital asset will be represented on a decentralized public ledger tracking it’s price and ownership on the open market.
Enjin NFT Marketplace
Digital Art
Digital Art is new and an upcoming trend with a range of possibilities from static images, animations, to video, to tokenizing existing masterpieces and putting them on the blockchain. For example, the art dealer Sotheby’s could tokenize their Basquait piece (below) and rather than sell it to one buyer in their New York sale, they could sell shares of that particular painting on the open market to multiple buyers, similar to an IPO. A company called Masterworks is currently doing something similar to this, but not on the blockchain.
Basquait
A project called CryptoPunks is creating unique NFT characters on Ethereum. They created 10k characters which were all claimed for free and now they are being traded with an actual price tag and total sales of $2.68M. Ark Gallery, a DAO (decentralized autonomous organization) for CryptoPunks allows people to crowdfund a punk token, owning a fraction of that token and then vote on whether to sell it or not. Very similar to a Masterworks, but completely decentralized.
CryptoPunks
One blockchain company that is focused on digital art and the digital art marketplace is SuperRare. Here you can connect your digital wallet, view specific artists and pieces along with their owners and collect these NFTs. Some of the highest priced NFTs are on sale for hundreds of thousands of dollars.
SuperRare Marketplace
What’s happening now with NFTs?
The NFT space is heating up and could be the next big use case for digital assets following the DeFi explosion. Currently the NFT market is seeing $200k+ in total 24 hr volume, so still small, but when compare it to the rise in DeFi, the leading exchange Uniswap was doing ~$150k in daily volume back in Jan’18 and in Sept’20 did ~$1B in volume.
Uniswap Analytics
We’re also seeing an increase an innovation within the space adding new features such as staking NFTs in order to mint and gain access to new exclusive NFTs and staking NFTs in DeFi. For example, yield farming protocol yearn.finance (YFI) is using NFTs for creating unique insurance policies for specific insurers and conditions, with yinsure.finance.
These are unique digital assets that can be priced by supply and demand. As the space becomes more popular and more liquid, NFTs will be used as collateral for borrowing and lending, especially as more real world assets are tokenized like one’s own home. Crypto analytics company, Messari listed the NFT sector categories below.
Messari NFT Sectors
VP Final Thoughts
This is one of my favorite applications for cryptocurrency and is one of the fastest growing categories within blockchain. While many think its just a fad, I wouldn’t sleep on this technology. There are big players with large backers doing incredibly innovative things with NFTs. One of my favorite projects is Decentraland. Decentraland is a virtual world built on Ethereum that has it’s own currency, MANA where users can buy digital real estate and build digital infrastructure. For example, users are building virtual galleries where they can display their digital art and virtual auditoriums where people can meet and hold virtual conferences with their avatars. Digital Currency Group is a large investor in Decentraland and their currency MANA is currently trading at $.08 with a market cap of $110M.
Keep in mind, all of this innovation is happening on Ethereum. Ethereum is trading 73% off it’s all-time highs at $357.
Decentraland
Always exciting times ahead in crypto.
Cheers,
Verks
**This is not financial advice. Investing in bitcoin and cryptocurrency is extremely risky. Please do your own research. The ideas and news presented in this newsletter are my personal opinions and meant for informational and entertainment purposes only.
