Understanding NFTs: digital collectibles explained
The cryptocurrency space has returned to mainstream consciousness in 2021, and not only because of Bitcoin’s recent ascent. Blockchain technology has seen a new wave of interest thanks to the explosion of NFTs, introducing many to the endless possibilities of smart contracts on Ethereum. The hype reached a climax in March when the digital artist Beeple sold a tokenized piece of his artwork for $69.34 million at Christie’s. The historic sale made him the world’s third most valuable auctioned living artist. Excitement has also returned to the space following a market-wide crash in May, leading some to suggest that crypto has entered its first “JPEG summer”. But NFTs have also drawn some scepticism, with many raising questions over the environmental impact and inherent value. In this piece, we’ll break down everything you need to know about the technology to draw your own conclusions.
NFT stands for “non-fungible token”. That means that each token is not interchangeable.
If you have an asset like ETH or DAI, you can exchange it for another and still end up with the same token.
Much like physical trading cards, every NFT differs from the next (multiple editions of the same NFT can be minted, though the data stored on the blockchain would not be the same).
NFTs mostly run on Ethereum today, and they usually take the ERC-721 token standard.
As the data associated with NFTs gets recorded immutably on the blockchain, they offer provable scarcity and ownership of an asset. Since breaking out in recent months, NFTs have caught on across various mediums.
NFTs first gained popularity in the digital art world. As digital art can easily be saved and replicated, they’ve offered many artists a way of monetising their work for the first time.
Notable early NFT projects include CryptoPunks, a series of 10,000 algorithmically generated “Punks” that take the form of 24x24 pixel art. CryptoPunks were given away for free in 2017, but have since become extremely sought after; their current floor price is 40 ETH, around $112,000 at today’s prices.
Aside from the Punks, arguably the biggest star of the digital art revolution is Beeple. In March 2021, his “Everydays: The First 5,000 Days” NFT, a piece created from 5,000 individual images created over the course of 13 years, went on sale at the world-famous Christie’s auction house. The final $69.34 million price put Beeple in the art history books and stunned the crypto and art world alike. The story was also reported in mainstream media worldwide.
Among the countless digital art projects that have adopted NFTs, generative art projects like Autoglyphs (a series by CryptoPunks creators LarvaLabs) and Art Blocks have also proven popular.
The NFT boom has also helped many newer artists such as FEWOCiOUS find an audience and earn a living through their work. The 18 year old artist became the youngest artist to host a collection at Christie’s earlier this year; the collection was themed on his gender transition.
As a result of this year’s NFT boom, many newer artists have found an audience. Due to the speculative nature of the market, some have suggested that the space is in a bubble. But as Sotheby’s prepares to follow Christie’s lead in hosting a collection by NFT artist Pak, there’s little doubt that the crypto art space is starting to catch the attention of the traditional art world.
As NFTs have blown up this year, musicians have been some of the technology’s most recognisable flag bearers. Eminem, Grimes and Aphex Twin all minted their first NFTs in 2021, hinting at the disruptive potential the space could cause in the music industry.
Aphex Twin and Grimes both released exclusive music with their drops, while the electronic artist 3LAU broke records when he earned $11.7 million by tokenizing his “Ultraviolet” album.
NFTs could be revolutionary for the music industry, which has suffered from a broken model since the growth of the Internet. In the traditional music world, artists only receive a small cut from each sale or stream of their work.
But when an artist mints an NFT, they can sell their work directly to a fan and get paid instantly. As NFTs are smart contracts, they can also be programmed so that they receive a cut if the piece ever gets resold.
This is a potential game-changer for music rights, royalties and even the album format itself. If an artist can earn directly from selling their work in tokenized form, they may not see any need to release their work on streaming platforms like Spotify. Royalty distribution bodies and record labels could also become redundant.
One project exploring the way royalties can be paid to their owner is EulerBeats, and there’ll doubtless be many more that surface over the coming years. The music industry has only scratched the surface of what’s possible with NFTs.
So far we’ve discussed NFTs that can be owned and enjoyed for their creative merit. But NFTs can also have utility beyond art alone.
Popular NFT-based games include Axie Infinity, Gods Unchained and Decentraland. Axie Infinity is a play-to-earn game that allows players to breed pets called Axies, and it’s proven incredibly popular: it took more revenue than all of DeFi combined in July 2021. Gods Unchained lets players trade and use their NFTs to compete with one another, and Decentraland features a virtual gaming world in which NFTs form the basis of the experience.
One clear trend for the NFT gaming space has been the rate of adoption in the sports industry. Sorare has officially licensed many of the world’s best football clubs for its fantasy game, while NBA Topshot has been a huge hit with basketball fans.
As NFTs can feature different traits, they have a clear use case in replicating popular trading card games like Pokémon. Other games like Age of Rust have used NFTs to unlock prizes.
It’s likely that we’ll see many other types of experimentation in gaming in the future as NFTs grow.
One creative world that’s been relatively slow to NFTs so far is the film industry. Nonetheless, some projects are working on interesting ideas. For example, there’s Mogul Productions, a “DeFiFi” (decentralised film financing) project that’s hoping to use blockchain and NFTs to make film financing more open.
By using NFTs, a studio could sell memorable scenes from a film. But these NFTs could also have an added utility, paying out distribution rights to their owner. This may not appeal to the giants of Hollywood, but it could change everything for independent filmmakers.
Popular NFT collections, games and artists
CryptoPunks — CryptoPunks is a collection of 10,000 algorithmically generated pixel art “Punks”. Created by LarvaLabs, the Punks are regarded as one of Ethereum’s earliest NFT projects. As such, they have become incredibly sought after and inspired a wave of “avatar” NFT projects including Bored Ape Yacht Club, Cool Cats NFT, and Ghxsts.
ArtBlocks — ArtBlocks is a platform that hosts generative NFT collections that live immutably on Ethereum. When you mint a piece on ArtBlocks, you don’t know what the design will be until you’ve bought it. Popular ArtBlocks collections include Snowfro’s “Chromie Squiggle”, Dmitri Cherniak’s “Ringers”, and Tyler Hobbs’ “Fidenza”.
Beeple — Beeple has become a figurehead for the NFT movement, not least because he made headlines worldwide when his “Everydays: The First 5,000 Days” piece sold for $69.34 million at Christie’s. The US artist creates a piece from start to finish daily for his Everydays project; it’s been running since May 2007.
FEWOCiOUS — FEWOCiOUS was only 18 years old at publication time, but he’s already taken the NFT world by storm. His hypervisual work bursts with kaleidoscopic colours, taking inspiration from the likes of Basquiat and Barbara Kruger.
Sorare — Sorare is an NFT-based fantasy football game. Players can trade NFT player cards and compete with a full team in tournaments to win NFTs and cash prizes paid in ETH. Many of the world’s biggest football clubs have joined the game.
NBA Top Shot — NBA Top Shot allows basketball fans to bid on official “moments” from the NBA basketball league. “Moments” include slam dunks and other memorable excerpts of matches, and they live on the Flow blockchain.
Decentraland — Decentraland is a virtual reality world where players can own their own plots of land represented in NFT form and interact with other players. It’s become part of what’s been dubbed “the metaverse” and is controlled by a DAO.
Axie Infinity — Axie Infinity is arguably the leading NFT-based game of today. It lets players breed digital NFT pets called Axies and trade plots of virtual land. It also features a play-to-earn model, rewarding loyal players with tokens. This has made the game a big hit in the Philippines, where payouts from the game can top the average national salary. Axie Infinity has exploded in popularity in 2021 and earns more revenue than all of DeFi combined at the time of writing.
Gods Unchained — Gods Unchained is a digital collectible card game that pays players when they beat their opponents. It’s similar to card game classics like Magic: The Gathering, but as the cards are tokenized, players have true ownership over in-game items.
How do you get NFTs?
Though NFTs can be exchanged directly between creators and buyers, they’re most frequently traded on NFT-specific marketplaces. Popular examples include:
Nifty Gateway — features collections from many established digital artists. Regularly hosts drops from major names, including celebrities and musicians.
Rarible — widely used by independent digital artists, allows anyone to list their own collections.
Open Sea — described as “the largest NFT marketplace”, it features NFT domain names, virtual worlds, trading cards, and more.
Super Rare — another popular marketplace focussed on the digital art space
NFTs have faced a lot of criticism.
Many have pointed to the environmental impact of Proof-of-Work blockchains, which currently includes Ethereum. However, once the network moves to a Proof-of-Stake mechanism, the blockchain’s carbon footprint should see a significant decrease (Ethereum recently published a report estimating Proof-of-Stake would make the blockchain 99.95% more efficient). There’s also an argument that NFTs empower creators to earn from their work, when they may otherwise have to engage with carbon-intensive activities like touring.
Another popular narrative surrounding NFTs is the “tokenized .jpeg” argument. Many detractors say that NFTs are pointless since digital art can easily be saved and replicated. They also argue that NFTs lack utility.
But the biggest criticism of NFTs may be towards the space’s market dynamics. The NFT market is highly speculative, which has led some pieces to fetch wild valuations that are unaffordable to most. For now, it’s meant that NFTs are seen as a game for the rich.
So, where are NFTs headed next?
Tokenizing digital collectibles could turbocharge what’s become known as “the creator economy”, empowering anyone with an Internet connection in the same way platforms like YouTube and TikTok have. It’s clear that NFTs are already starting to empower creators today, and we’ve not even touched on other innovations like tokenized tweets, NFTs indexes, or collateralised NFTs.
It’s also worth remembering that NFTs can prove authenticity of an asset, which could transform entire industries from luxury clothing to event ticketing.
The truth is that NFTs could one day encompass more than we can imagine today, and while many sceptics have some reservations, it’s hard to deny the disruptive potential of the technology.
The recent burst of innovation in the space suggests that NFTs are just getting started. And now that they’ve hit the mainstream, it’s unlikely that the movement will disappear anytime soon. In the world we’re heading towards, everything could be tokenized. And non-fungible assets will be a key catalyst for the change.
Sign up to Monolith here.