The ABCs of NFTs

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The NFT segment has exploded in recent months, with one auction’s astronomical price tag surpassing the next, involving industries from music to surfing – but what are these NFTs really?

In simple terms, an NFT or ‘non-fungible token’ is what you get when you combine a digital asset with the security of cryptocurrency giving you a unique token representing a certificate of authenticity referencing the digital asset.

Basically, a one-of-a-kind ‘trading card’ that you can trade for cryptocurrency and prove ownership. That’s the non-fungible part aka non-replaceable. 

Wait, why would you need a ‘Certificate of Authenticity?

If the asset is digital, it can be pirated, it’s as easy as taking a screenshot or right-clicking on the image and pressing download. Now, everyone has access to that piece of digital work and can claim that their one is the original. That’s where the need for authentication comes into play.

Because these tokens are non-fungible, each token is unique; meaning they can’t be replaced or exchanged with one another, unlike fungible assets. For example, fiat money is considered fungible as two different $100 bills are identical in market value.

How do you know if it’s authentic?

The ownership of an NFT is recorded on the blockchain, a digital ledger. So when you buy an NFT, that transaction is recorded on the blockchain, establishing and enforcing the ownership of that asset. Even if someone was to create a copy of the work, it will not be transacted on the blockchain or hold the same value as the original. 

‘We get multiple versions of the Mona Lisa, but there is only one original’

How to buy an NFT?

Many different platforms sell NFTs and the process of buying will vary based on what the platform sells. Many of these platforms use cryptocurrencies and you’re going to need a digital wallet. OpenSea is one of the most famous marketplaces for simplicity and low cost where anyone can create an account and start mining NFTs.

 

What makes an NFT valuable?


There are two ways of looking at this: From the perspective of the artist and the investor.

When it comes to the artist an NFT provides them the means to monetize their creations. They no longer have to rely on galleries and auction houses to sell their art. Instead, an artist can sell it directly to the consumer as an NFT and get royalties on the resale of their work.

In the perspective of the investor, the value is created in terms of functional value i.e. what can I use this for, or hedonic value i.e. how much do I like this. When talking about the functional value the main focus is the asset that the NFT represents, this varies depending on its utility, creator, ownership history, and future value. There is also a large aspect of speculation about future value appreciation that is luring investors in.

Hedonic value pertains more towards the concept of buying the NFT as a collectible, meaning what does it represent. Take Sir Tim Berners-Lee’s source code for the original worldwide web that sold for $5.5 million. The code itself is no longer that valuable but it represents the history of the modern-day internet. This particularly appeals to collectors.

The value created by NFTs

Earlier we mentioned that artists can get royalties on resales of their work. This is one of the unique aspects of NFTs that you don’t find in other offline markets for art and collectibles. Creators of NFTs can set up a fee, say 5 to 10%, that they then will receive each time their work is resold.

This is one of the main reasons why NFTs are so popular among content creators as it allows them to earn from secondary markets.

That’s not all. NFTs create a medium for tokenization which in turn can be leveraged to create liquid markets for otherwise illiquid assets. For example, commercial properties can be fractionalized allowing investors to buy small pieces that would otherwise not be possible.

Can anything be made into an NFT?

Technically yes. An NFT can be created for almost any digital asset which holds monetary or collectible values in form of art or culture. This can be a piece of digital art, music, tweets, pieces of code, or real estate.

Yes, even real estate. Mars House created by Krista Kim was dubbed the first digital house in the world and was sold for $500,000So when it comes to what can be an NFT, the only limit is your imagination.

What’s new in the market?

As digital assets become more mainstream, we see different companies and individuals jumping on the bandwagon with new creative ideas. For example, Gary Vaynerchuk’s Veefriends, a collection of 10255 tokens with an embedded ticket to VeeCon. Here the concept of a simple NFT is transformed into a multi-day superconference centered around entrepreneurship, marketing, and community building.

Another interesting concept is M2Bio Sciences’ M2BioBoard. This is Africa’s first 100% biodegradable surfboard and explores the concept of creating sustainably manufactured surfboards for surfers who enjoy riding clean-green waves. The unique digital art decorating each of the 10 surfboards is auctioned, while the successful bidder will also become the owner of the one-of-a-kind physical product. 

The dawning space of Non-Fungible Tokens is already filled with creativity and innovation and one can only imagine what the future will bring. One thing is safe to say; that the NFTs will have a profound impact on our future digital lives.

 

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