5. June 2023 By Kevin Pahlke
Non-fungible tokens (NFTs)
What are NFTs and how do they work?
NFTs are digital collectibles based on blockchain technology. Unlike cryptocurrencies, which are fungible and can be exchanged, NFTs are characterised by the fact that they are unique and cannot be exchanged. They can be seen as digital certificates or title deeds for digital works of art, music, videos, virtual real estate or other digital assets.
An NFT is created by creating a digital asset such as a work of art or a music file in a digital format. This digital asset is then stored on the blockchain and given a unique identifier called a token. This token is unique and represents the digital asset to which it relates.
The concept of NFTs enables artists and other creators of digital artwork to monetise their works and sell them as collectibles. Here are two examples:
- One example of a successful NFT project is CryptoKitties, a game where players can collect and trade digital cats. Each cat has a unique design and is stored as an NFT on the Ethereum blockchain. The game became so popular that it clogged Ethereum network traffic and led to a high demand for NFTs.
- Another example of a successful NFT project is the digital artwork Everydays: The First 5000 Days by artist Beeple. The piece was sold as an NFT at Christie’s auction house for over $69 million. The NFT represents the digital artwork that is uniquely and immutably stored on the Ethereum blockchain.
NFTs are also used in virtual worlds and games. In the virtual world Decentraland, users can buy and sell virtual real estate stored as NFTs on the Ethereum blockchain. These virtual properties can then be used to host virtual events and exhibitions.
In summary, NFTs offer a new way to monetise digital artwork and sell them as collectibles. Using blockchain technology ensures the uniqueness and immutability of NFTs and creates a new ecosystem for digital assets.
To understand how NFTs work and how they are stored on a blockchain, let us take a look at the following example:
Suppose an artist wants to create a piece of digital art and sell it as an NFT. They do this by creating a digital image file and generating a unique digital token representing ownership of that piece. This token is then stored on the blockchain.
In order to sell the artwork as an NFT, the artist must list it on an NFT marketplace platform such as OpenSea or Nifty Gateway. These platforms allow them to set the price and sell the NFT token to someone who wants to buy it. Once the buyer has purchased the NFT token, the artwork is automatically transferred to them and ownership of the artwork is stored in their digital wallet.
Unlike cryptocurrencies, such as Bitcoin, where each coin is equivalent, each NFT token has a unique identity and represents a unique piece of art or collectible.
The artwork remains stored on the blockchain and can be verified by anyone on the blockchain. The NFT marketplace platforms provide a user interface that allows people to view, search and buy NFTs easily. The owner of the NFT token can list the artwork on an NFT marketplace platform at any time to sell or trade it.
In summary, NFTs are unique digital tokens that represent ownership of digital artwork or collectibles on a blockchain. Each NFT token is unique and cannot be duplicated or exchanged. The artwork remains stored on the blockchain and can be verified by anyone on the blockchain. The NFT marketplace platforms provide a user interface that allows people to view, search and buy NFTs easily.
Why have NFTs become so popular?
NFTs offer a variety of benefits for artists, collectors and investors, for example.
Artists can use NFTs to monetise their works in a way that allows them to retain complete control over them and increase their value over time. NFTs enable artists to track the purchase, sale and trade of their works and automatically receive a share of the proceeds each time the piece is resold. NFTs also enable artists to create unique, limited editions and special editions of pieces that increase their value and appeal to collectors.
Collectors can use NFTs to collect and own artwork and other digital assets in a way that is both secure and transparent. NFTs offer a way to prove that a piece of art is authentic and genuine, as each NFT is uniquely linked to a piece of digital art. This makes it easy for enthusiastic collectors to organise and display their collections.
For example, a collector may acquire an NFT artwork and keep it in their digital collection, which they can then present on their personal website or on special platforms. Visitors to the site or platform can view the collection and verify the authenticity and ownership of the artwork.
Investors can also use NFTs as an investment vehicle to benefit from the artwork increasing in value. NFTs allow them to invest directly in a work of art and receive a share of future sales. They also allow artwork to be traded on a global platform, enabling investors to invest in pieces made by artists from around the world.
For example, investors can purchase an NFT artwork and sell it on an auction platform once the value of the work increases. If the piece is resold at a higher price at a later date, the investor receives a share of the proceeds.
The sometimes high sales prices of NFTs can be attributed to a combination of factors. The uniqueness and scarcity of NFTs, their high profile and speculation on their future value have led to more and more people being willing to spend large amounts of money on them.
How can NFTs be used?
NFTs have gained popularity in recent years not only for artworks and collectibles, but also as an investment opportunity. CryptoPunks are an example of this.
CryptoPunks are a series of 10,000 unique pixel artworks created on the Ethereum blockchain in 2017 by development studio Larva Labs. Each CryptoPunk has its own unique appearance and characteristics such as gender, hairstyle and accessories. Some of these punks have very rare characteristics that make them sought-after collector’s items.
In 2021, several CryptoPunks were sold at auction for millions of dollars. For example, a CryptoPunk called Alien sold for over $7.5 million. Another CryptoPunk called CryptoPunk#3100 was sold for $1.5 million.
These high selling prices are due to the limited availability of CryptoPunks and the growing demand for them. Since there are only 10,000 CryptoPunks, their supply will never be increased. At the same time, the demand for them is increasing due to their unique nature and collector’s value.
For investors, NFTs such as CryptoPunks offer an interesting way to diversify their portfolio and benefit from the growing demand for unique digital collectibles. However, it is important to note that the NFT market can be very volatile and prices can fluctuate greatly.
In summary, NFTs offer investors a new and exciting opportunity to immerse themselves in the digital world and diversify their portfolios. However, it is important to thoroughly research the project and the market before buying an NFT and to be aware that NFTs do not offer a guaranteed return.
What are the risks and challenges of using NFTs?
As with any new technology, there are risks and challenges to consider when using NFTs as an investment opportunity. Here are some of the most important points:
- Volatility of the market: The NFT market is still new and unexplored, which means that the price of NFTs can be highly volatile. The value of an NFT depends on a number of factors, including the popularity of the artist, the uniqueness of the work and the demand in the market. Investors should be aware that the value of their NFT can fluctuate significantly.
- Counterfeiting and fraud: One of the biggest challenges in using NFTs is the fact that they are digital. This means that it is relatively easy for fraudsters to create and market fake NFTs. Investors should therefore be careful and ensure that they only buy NFTs from reputable sources.
- Technical issues: Using NFTs requires an understanding of cryptocurrencies and blockchain technology. If you are not familiar with these technologies, it can be difficult to buy, sell and store NFTs. It is also possible that there will be technical issues with blockchain technology in the future that could affect the value of NFTs.
- Regulation: The regulation of NFTs is currently a grey area. There are no clear rules or regulations governing the buying and selling of NFTs. This can lead to uncertainty among investors who may be reluctant to invest in NFTs until there are clear rules.
- Long-term price development: Although some NFTs are currently being sold at high prices, there is no guarantee that these prices will remain stable or increase in the long term. Investors should be aware that the value of their NFTs may decline in the future.
NFTs are an exciting new trend in the digital world and offer a multitude of possibilities. Although there are some risks and challenges, using NFTs can be a rewarding experience. It is important to carefully consider whether NFTs are the right choice before investing in or using them.
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