If we can (sort of) understand NFTs, so can you.
Over the past year, interest in non-fungible tokens (NFTs) has grown significantly, with a trading volume of hundreds of million dollars monthly. Against this backdrop, the American rock band, Kings of Leon, as the first in history, has scheduled the release of their eighth studio album, “When You See Yourself” in the form of an NFT, according to Rolling Stone.
NFTs are in the mainstream of focus
Seeing such enormous attention around it, you’re probably asking yourself: “Is it just another tulip mania, or what is so special about NFTs that people are willing to invest millions in it? After all, we have already had a revolution with Bitcoin, haven’t we?” We did our research and the results surprised us, so we thought it would be worthwhile sharing them with you.
NFTs didn’t appear out of nowhere
The beginning of NFTs, as we know them today, is a relatively recent development. The first NFTs were created on the Ethereum blockchain in 2017, which we will get into later in this article. There is, however, a longer story behind all that.
A few years after the introduction of the first widely used cryptocurrency — Bitcoin — developers started exploring blockchain technologies and came up with so-called colored coins, which were meant to add value to Bitcoin at the time. The idea was to use the Bitcoin blockchain for assets like digital collectibles. So, each following year, this concept has grown in popularity, which, together with a possibility to make money off of it, led to the creation of special platforms that allowed users to generate their tradable currencies.
How do NFTs work?
NFTs are unique digital certificates stored in the blockchain. It is a way to showcase anything that is unique as an Ethereum-based asset and gives exclusive ownership rights. Non-fungible tokens cannot be divided or replaced. It is possible to secure rights to a unique object — a work of art, real estate, or an artefact in a computer game.
Let’s go over some basic concepts to understand them better. Every record on the blockchain is called a token. In an open blockchain, all tokens are like coins of the same monetary denomination. They are equal and fungible. A good way to think about it is cryptocurrency money. For example, one Bitcoin can be easily replaced with another, and nothing will change.
Now, let’s look at the NFT. This technology works differently. A non-fungible token is a digital token that cannot be replaced with another token without changing the value and essence of the object.
Like cryptocurrency, NFTs are created on the blockchain, which acts as a database for recording all transactions. The blockchain guarantees the authenticity of non-fungible tokens. Thanks to this, any user can check the origin and history of a specific NFT through the blockchain.
In short, when we buy an NFT token, we are essentially purchasing a certificate for the object. The object itself is being kept on eternal storage (called IPFS) and doesn’t move anywhere after the transaction, whereas the certificate is a line of code confirming the ownership of the token (the token owner is the owner of the original digital copy). Imagine a piece of art that is being stored in the Louvre. The general public can see it in a catalog or come to an exhibition. This piece of art, however, belongs to someone, and it can be sold at an auction. The same can be said about NFTs. They are sold in online marketplaces like OpenSea or others. NFT creators put them on those platforms and wait for offers.
Why have NFTs become so popular?
The parabolic rise of NFTs is an interesting phenomenon. People have different reasons to create, buy or sell an NFT, and there is no ultimate answer as to why NFTs have become so popular. One reason for this could be because it is being used as a new generation of art. During the last year, quite an unusual approach was used to promote this idea. The first composition to be turned into an NFT was a piece of art in black and white by artist Banksy — a 2007 stencil titled Morons (White). Blockchain company Injective Protocol bought it, burned it, and created an NFT token; a virtual asset tied to a “digital image of an art object.” This has been criticized by some but Injective Protocol called it “an expression of art.”
The first creators to bring out an NFT collection, like CryptoPunks, MoonCatRescue, CryptoKitties, or Bored Apes Yacht Club received a lot of fame and credit for being founders of the movement. They also succeeded in building large communities of fans that are excited to have rare NFTs from limited stocks. There are only 10,000 CryptoPunks NFTs ever created, so whoever possesses one is in the exclusive fan club. In the beginning, they were even given away for free, and today, they are worth millions of dollars.
But originality or rarity doesn’t really explain why exactly in January 2021 the world has seen an explosion in NFT popularity. Just like any economic shock, it was rather the overlap of many events from the digital and real world. Also, an ongoing pandemic and an enormous amount of time being spent online have also created a need for some new form of digital interaction.
In the end, it’s not just about the NFT itself. Users of Twitter, Discord or other social media platforms are forming wonderful digital spaces where they can exchange thoughts, ideas, and emotions. Although it’s impossible to replicate the real-life experience of being physically present somewhere (with others), we can strive to make it more real, more true. Today, like never before, people need such spaces, and NFT communities have the potential to give that opportunity.
The future of NFTs
NFT technology is being used in many domains today, such as gaming, art, and others. But it looks like the potential of blockchain technology is growing beyond what is known by a conventional way of using digital certificates. Many digital companies are already exploring how to use non-fungible tokens for identification, certification, and ticketing, granting fractional ownership of both digital and physical items.
When it comes to crypto art, the NFT is likely to have (and already has) some impact on the formats of creating and distributing content. NFT holders can show them in digital museum spaces, on Instagram, or NFT galleries that are now opening all over the world; in fact, these are spaces with large screens where crypto art is shown. Digital art fashion, such as the creation of digital clothing and footwear, is already becoming a leading global trend. NFTs also facilitated purely digital communities like Metaverses. These universes already have their own life. It’s kind of a new medium for creativity and can be compared to the period when photographers were switching from analog film cameras to digital.
We can’t predict what’s more in store for NFTs, but we certainly have embraced ourselves for what it has to offer now. If they will be the future, it’s worth spreading some happiness and positivity through it. Meanwhile, let the world paint the future for NFTs while we enjoy the communities.
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