If you’ve been watching the crypto scene or even following trends among your favourite artists, you’ve probably heard the term ‘non-fungible tokens’ (‘NFTs’ for short). NFTs are having their spot in the limelight: over $200 million has been spent on NFT artwork in just this past month alone. NFTs are taking their place in pop culture, with icons like Paris Hilton and billionaire entrepreneur Mark Cuban jumping at the chance to get in on the market for NFTs.
So what are NFTs?
NFTs are distinctive crypto assets that hold unique information, similar to a computer file. Combine that with authenticity and provenance, and you get an asset that is non-interchangeable (this is the ‘non-fungible’ part). Similar to other cryptocurrencies like bitcoin and ethererum (‘ETH’), NFTs exist on a blockchain. However, most cryptocurrencies, similar to fiat currency like GBP, are ‘fungible’, meaning that one ETH always has the same value as any other Ethereum token. NFTs differ in that they are ‘non-fungible’, so they represent a unique digital asset and always have their own valuation.
NFTs can represent digital assets like art, music, videos, items in video games, and more. While it’s possible to reproduce the underlying digital files, the NFTs that represent them are tracked on the blockchain, making it possible to prove your ownership of the asset. For example, if you have an NFT representing a piece of artwork, that NFT belongs to you until you sell it to someone else, thus transferring the ownership. This ownership transfer history is recorded on the blockchain. NFTs are revolutionary because they bring the elements of scarcity and limited-edition ownership to the digital realm. This is important because it allows buyers to prove the authenticity of a special digital collectible. Nothing is stopping people from copying the art or taking a screenshot of it and sharing it on social media, but holding the NFT proves ownership.
A Robust Market
Investor speculation and collector interest has prompted the NFT market to take off. NFT artist Beeple netted $69 million for a piece of digital art at the first digital-only art auction at Christie’s auction house. Another digital artwork by Beeple was resold on the secondary market for $6.6 million. Popular luxury fashion brand Gucci recently dropped digital-only sneakers that reach a wider fan base for a mere $11.99. As NFT and augmented reality technology grows, Gucci also has plans to link NFT fashion items with games, allowing Gen Z consumers who may not be able to afford Gucci’s physical products to wear Gucci digital products in games like Pokémon Go.
NFTs in Decentralised Finance
Investors, builders, and users are looking at how NFTs will intersect with DeFi. NFTs can be used to tokenise real world assets, such as real estate property. Platforms like RealT allow investors to directly buy property shares represented by NFTs, and then each token holder earns a portion of the property revenues. Tokenising physical assets as NFTs gives them a value in the digital world that can be traded, bought, sold, and in the future, maybe used to finance a loan in a DeFi protocol. Imagine being able to use your digital collectibles as collateral– this opens up new types of liquidity and the possibilities are endless.