NFT Tokens — The Future or a Fleeting Trend

People buy these tokens for hundreds of thousands of dollars. Here’s why.

NFT, or Non-Fungible Tokens are a new type of digital asset that are emerging on the crypto market and are gradually bridging the gap between the digital and physical worlds.

Privilege is the coin of the modern world, where the ability to obtain something unique becomes a sought-after endeavor that is considered to guarantee a special status and highlighting of identity for the holder. The world of art is the best illustration of privilege, where the possession of a unique work of art created by a famous artist or artisan makes the owner an object of fascination, envy, desire, and competition. Given the existence of only one unit of a unique item, the law of scarcity automatically applies to it, adding value to said item and thus increasing its price in terms of intrinsic value that can be translated into financial terms.

But it is not only the world of artwork and diamonds that can be considered affected by the law of scarcity and the influence of privilege. The crypto market is encroaching onto every market in existence and the physical world of products and items has not been left untouched. A new type of token is slowly gaining popularity and is being offered as a real-world guarantee of acquisition of unique goods and as proof of their ownership.

The new tokens being developed for these purposes are called Non-Fungible Tokens, or NFT. Most operate on the Ethereum blockchain and possess the technical details necessary to prove ownership of an object. The gradual tokenization of real assets, such as unique items in video games, allows NFTs, as a class of assets, to be tied to any object or asset that can be a painting, a real estate asset, music, any kind of digital artwork, in-game characters and much more. By relying on the unique information recorded in their underlying smart contracts, NFTs can confirm the authenticity of the items in question and act as value carriers for both the owners of the assets and their sellers.

What Are NFT Tokens

Non-Fungible Tokens, in essence, are a type of commodity or asset presented in digital form. A tangible example that can be taken as an illustration is a specialized token representing an electronic plane ticket that will be unique for each passenger. Such a virtual ticket will contain all the necessary and relevant data of the purchasing passenger, such as their full name, destination, date and time of departure and arrival, passport data and more. The same procedure can be applied to any type of product and the token tied to it as its digital right of ownership and asset that can be exchanged and redeemed for the physical product or service.

The journey of NFTs into circulation started in January of 2017, when the infamous HOMERPEPE meme was first tokenized on the Counterparty channel and sold off for a paltry $500. A year passed and NFTs received their second coming in January of 2018, when the first ever Rare Pepes live auction took place and the aforementioned meme was resold for an astonishing $38,500 in PepeCash tokens.

The possibility of creating NFTs arose thanks to the development and publication of the so-called colored coins that allowed the tokenization of any assets based on the Bitcoin blockchain. But the first true NFTs appeared within the CryptoKitties game, giving users the opportunity to independently create unique tokens by combining two NFTs to create a third unique one. Cryptokitties saw a boom in NFTs as users rushed to create unique cats with abilities and characteristics and started trading them for ETH and other cryptocurrencies using gaming mechanics.

On the technical side, NFT tokens operate mainly on the Ethereum blockchain and are divided into main types:

• ERC-721 standard NFTs are unique tokens that exist in a single copy, and are not interchangeable. The prototype of such a token in real life can be any unique work of art, such as the Mona Lisa by Da Vinci, or a statue by Michelangelo;
• ERC-1155 standard NFTs are partially fungible tokens that may have several identical copies in existence. For example, several copies of the Mona Lisa, or rare cars of the same model that were released in a limited edition;
• ERC-988 standard NFTs are composite tokens that validate their holder’s ownership of other tokens. A possible analogy in the case of such tokens is an agreement on opening a deposit box in a bank, allowing the storage of valuable goods. In essence, such tokens act as access keys to unique assets.

The biggest advantage that NFT tokens offer is that they allow the developers of software to solve the problem of ensuring the ownership of digital objects and intellectual property to them. An example for illustration purposes can be found in the video game industry, when a player buys a new weapon for a character and wants to be certain that the new attribute will remain with them forever in unaltered form.

In modern games, their developers have the means to make adjustments to in-game items, change, replace, freeze, disable and even withdraw such items. However, if an in-game item was tokenized in NFT format, the player can be certain that their ownership has been confirmed and the item will remain theirs and the underlying blockchain technology with immutable records will enforce their ownership and rights to the items in question.

Why The Hype?

The interest of the crypto community towards Cryptokitties stimulated the development of a growing number of video games that allowed for the tokenization of assets. The first platforms for trading unique digital items thus appeared and in 2019, the turnover of the NFT token market amounted to more than $150 million with total capitalization increasing to $210 million. According to CoinGecko, the capitalization of the NFT market has exceeded all forecasts for the year 2020 and reached a mark of over $550 million.

The rise in the price of Bitcoin in 2020 had a positive impact on the prospects for the NFT market as many representatives of the manufacturing sector started attributing the leading cryptocurrency’s value storing potential with that of unique items. Multiple projects started to emerge that offered users the ability to acquire any kind of items, such as the Decentraland project that offers its users the chance to acquire virtual land plots. In fact, virtual real estate accounts to almost half of the entire NFT market.

The hype around NFT can be largely attributed to the unique characteristics of such assets and the rising interest in cryptocurrencies in light of the devaluation of national currencies in many countries around the world. In light of the depreciation of traditional assets, users are starting to migrate into the virtual space in hopes of investing in digital assets that can appreciate over time, or at least retain the value invested in them. Bitcoin is a perfect example of the migration of traditional investors into digital industries, and as Bitcoin draws most of the crypto market along with it, NFTs are following suit.

Why Artists Need NFT

Artists have started turning to NFT tokens recently as a means of ensuring that their artwork gets paid for. The logic is present in the case of using NFTs as a means of guaranteeing rewards for music, games and other types of works or art in an online environment that is rife with piracy and infringement of authors’ rights.

The trend of artists is noticeable as in December 2020, the volume of trade of NFT tokens tied to artwork reached a record of $8.2 million, as stated by the CryptoArt.io analytics platform. Some artists are making considerable amounts of funds on NFTs in light of the restrictions placed by the coronavirus pandemic, which has made visiting museums and other art display exhibitions impossible.

Some of the more prominent artists now using NFTs are the Beeple digital artists from Charleston, who sold $528,000 worth of crypto art in 2020 in under five minutes, Blake Kathryn, Giant Swan and others.

Prospects? Or Fad?

NFT tokens make it possible to apply blockchain technologies to completely new industries and, apart from the entertainment industry, collectible tokens can be used to digitize property rights to land, real estate, concert tickets, any kinds of documents, and even confirm people’s right to vote in elections.

NFT tokens allow private individuals to simplify the management of personal assets and conduct operations without intermediaries when transferring ownership of any asset. They make the transfer of such rights much faster and less costly with the added ability to add unique data to tokens that allows creating digital masterpieces and even entirely new directions in digital art.

On the technological side, NFTs can be used as digital passports not only for works of art, but for any kind of asset that requires proof of ownership. That, in itself, makes NFTs applicable in the long term as a verification technology, regardless of crypto market dynamics.

Still, the main field of application of such tokens is the gaming industry, as the ability to create tokens allows for full ownership of digital assets like characters in a game or special items. And while the main purpose of NFTs is the role of collectibles, the value of such tokens depends only on how much their holder is willing to pay for them, essentially confirming the scarcity principle.

Judging by publicly available statistics, the NFT market is fragmented according to the following segments:

• 41% — gaming industry;
• 29% — collectibles;
• 13% — real estate;
• 7% — collectible card games;
• 6% — domain names;
• 4% — art.

Large companies are also using the capabilities of NFTs. For example, Samsung, which has been engaged in the creation of a specialized cryptocurrency wallet for NFT payments. Formula 1 is also in the lead as it signed an exclusive agreement with Animoca Brands — a game developer — to create a game based on blockchain — F1 Delta Time, in which users can confirm ownership of various cars and other in-game items using NFTs. Nike has also entered the market and tokenized their sneaker collection using NFTs that holders can sell or exchange for real pairs of shoes.

The most popular NFT gaming projects to date are Aavegotchi, Enjin, Decentraland, My Crypto Heroes, Gods Unchained and others. As for platforms, Opensea.io allows users to buy and sell any kind of NFTs with the assets being divided into categories, such as Art, Domain Names, Virtual Worlds, Trading Cards, Collections, Sports and Utility. The Virtual Worlds section, for example, allows users to purchase digital land plots with the prices for some plots already standing on par with real world assets.

Rarible is another platform that offers artists to create and sell artwork and digital art for tokens backed by blockchain technologies. The platform already has over 20,000 creators and enjoys high levels of popularity.

Conclusion

Given the trend of digitization that is rapidly taking over markets across various sectors of the economy, it is logical to conclude that NFTs will continue to find support as the adoption of cryptocurrencies progresses and the market develops.

Originally published at https://blog.mercuryo.io.