Image source: Unsplash
If you possess a creative spark and a willingness to learn, there has never been a better time to onboard a trend. But first, you need to understand it fully in order to take advantage of it.
What are NFTs?
In three words, NFTs are digitised cultural artifacts. While not as monumental and historic as Rosetta Stone, NFTs still immortalise pieces of culture. More precisely, they inscribe different mediums of pop culture onto blockchains.
From a technical standpoint, the acronym reveals the blockchain origin — Non-Fungible Token. You already know what fungible tokens are — cryptocurrencies like Bitcoin (BTC). Tokens and cryptocurrency are interchangeable terms, just like fungibility itself. When a currency is fungible, it means it is divisible and interchangeable without changing value.
If you were to use diamonds as a currency, you would condemn yourself to eyeballing their value because of their unique and indivisible properties. In contrast, USD bills and Bitcoin are fungible units of exchange.
- Fiat currency such as USD is divisible up to 2 decimal points ($0.01 — one cent).
- Cryptocurrency such as Bitcoin is divisible up to 8 decimal points (0.00000001 BTC or one Satoshi)
This is why currencies exist as fungible. Be they blockchain-based or issued by central banks, they introduce precision when a value of something has to be accounted for in a consistent manner. Now that you understand the concept of fungibility, it is easy to understand what Non-Fungible Tokens (NFTs) are.
Like other non-fungible goods — diamonds, real-estate, collectibles, artworks — NFTs are their digitised counterparts built on blockchains. The most prominent blockchain hosting the vast majority of NFTs is Ethereum (ETH). Keep in mind that not all blockchains are developed equally.
Creating NFTs on Bitcoin’s blockchain wouldn’t have been possible because it is not a programmable blockchain like Ethereum. This allows Ethereum to generate smart contracts — executable code that stores NFTs — image/video/audio/text — as a traceable and incorruptible asset. The Ethereum blockchain also runs most NFT marketplaces.
Source: Statista, the global market capitalization of NFTs in millions of USD.
NFT marketplaces are decentralised apps (dApps) powered by smart contracts, ranging from games and virtual banking to gambling and decentralised exchanges (DEXes).
How to Start Selling And Buying NFTs
As you can see from the above graph, since 2019, the trading volume of NFTs has more than doubled. Much of this explosive growth is owed to Uniswap, which pioneered the first popular decentralised exchange.
DEXes use liquidity providers and automated market makers to eliminate undue influence and costs of mediation. This made it more cost-effective and convenient to swap tokens in the DeFi ecosystem. In turn, such growth spurred other dApps — NFT marketplaces.
Source: TradingView, Rarible (RARI) NFT marketplace largely in-sync with Uniswap (UNI) DEX.
As a result of being decentralised, NFT marketplaces have drastically lower transaction fees per sale compared to traditional auction houses. The latter can charge you between 15% and 20% per sale, while almost all NFT marketplaces charge 2.5% per sale. If you want to start your digital collectibles journey, here are the top NFT marketplaces to visit:
- OpenSea – has a customizable online storefront for your NFTs. The largest NFT marketplace with over $262 million in trading volume.
- Rarible – one of the rare NFT marketplaces with its own governance token RARI. You gain RARI by engaging in NFT trades, limited to 25 million tokens. This makes it a deflationary token just like Bitcoin, implying growth of value over time.
- CryptoSlam – very useful NFT marketplace aggregator that gives you an overview of all NFTs across all platforms, neatly arranged into specific types and sales. However, it runs on the WAX blockchain with its own tokenomics.
If you are looking for something special and classy, SuperRare is the NFT marketplace to go to. It has an application process and social network for digital artists. Unfortunately, this exclusivity will cost you higher fees — 15% for the first sale, 3% per sale subsequently.
To start trading in NFTs, either buying or selling, the process is effectively the same on all NFT marketplaces:
- Make sure to have a crypto wallet ready such as MetaMask. To learn how to connect your Trezor or Ledger Hardware Waller to Metamask visit here. When topped up with ETH to pay for gas fees, this will allow you to directly connect the wallet when you visit any NFT marketplace. You will see this option in the upper right corner.
- If you want to buy an NFT, browse through the site’s filter search function.
- If you want to sell an NFT, first, you have to decide if it will be in multiple copies or unique. After which, upload the media file, fill out its name, description, and set optional royalties (you get a cut every time that NFT is resold).
Once you’ve finalized your NFT info and set a price for it, you are done! This process is also called NFT minting. It will then reside on the Ethereum blockchain within a smart contract. Its origin and ownership will be traceable, and it will serve as a certificate of authentication.
Three Forces Driving NFT Value
As you can see, it is effortless to create an NFT or buy one. But the question is, why would anyone buy it from you, or why would you want to buy one? What would give them value? Just like physical collectibles and artworks, NFTs are highly speculative assets. Here are some of the ways in which they gain value.
NFTs as Cultural Artifacts
So far, renowned digital artist Mike Winkelmann, aka Beeple, has topped all the NFT charts in terms of sales. Beeple’s EVERYDAYS: THE FIRST 5000 DAYS NFT combined over 5000 images into one, accrued with his Twitter hashtag called #everydays. It sold for a staggering price tag of just over $69 million on Christie’s auction house. This was the first NFT not sold on a decentralised NFT marketplace.
Beeple’s EVERYDAYS: THE FIRST 5000 DAYS NFT that sold for $69 million.
However, it is important to note what preceded this astronomic sale. It turns out, Beeple was a heavy Trump critic prior to the US presidential elections. His Crossroads NFT, portraying the former President as a monstrous orange clown, eventually resold for $6.6 million.
By onboarding the anti-Trump train, Beeple leveraged his hundreds of thousands of Twitter followers to gain notoriety on top of his training as a CGI artist, previously employed by corps like Samsung and Apple. All of these factors had to conspire to make Beeple the world’s wealthiest artist.
Likewise, the founder of the world’s largest social network Twitter, Jack Dorsey, didn’t even have to sell art. His cultural significance was sufficient enough for him to sell the first-ever NFT for $2.9 million.
The first tweet tweeted by Jack Dorsey, minted as NFT and sold for $2.9 million.
Immortalising and monetizing cultural moments in the form of NFTs can even come as sex tapes. One is being recently resold for 150,000 ETH, representing a value of over $258 million. Although, it is unlikely it will ever reach this ask because the participants have drastically lighter cultural heft.
NFTs as Gamification of DeFi Tokenomics
NFTs can be embedded into gamification systems that serve as income sources. Two such blockchain games, Cometh and Axie Infinity, demonstrate this. In Cometh, the player takes the role of an astronomer — which is a collectible NFT — to be used for mining tokens, represented as asteroids. Players are incentivised to collect these NFT starships across races, as each ship has a different mining-efficiency.
NFTs as Astrominer starships from the DeFi game Cometh.io
Of course, these tokens can ultimately be exchanged for fiat money. Similarly, Axie Infinity has built an entire virtual ecosystem of land plots and fantastical creatures called Axies. One of such virtual real estates sold for a whooping $1.5 million.
Additionally, Axie’s in-game asset for playing, Small Love Potion (SLP), is earned by just playing the game and can also be swapped for real money. This combination of NFTs and tokenomics makes for an excellent opportunity for developers to remove gray and black markets present in traditional games such as Roblox and Fortnite.
NFTs as Funding Blocks
Indie developers are always looking for engaging funding models to materialise their virtual worlds. Bear Games had raised $100,000 in NFTs for their game BEAR NAVY Vs. Pirates (BVP), similar in DeFi tokenomics as Cometh.
The NFT-based funds will also go to “Games and Gain”, the studio’s decentralised gaming platform for future projects. From this example, we can see that NFTs can become a viable vehicle for crowdfunding a variety of projects with NFT as stakes instead of stock shares.
Where Are NFTs Going?
NFTs have presented digital artists, developers, and cultural influences with a brand-new venue to gain income. In turn, they have created a secondary market on top of decentralised finance (DeFi). Moreover, NFTs function as authenticators of ownership, by being minted and sold directly by creators.
Therefore, each NFT is infused with the creator’s reputation and cultural significance. As you may have noticed, this is exactly the mechanism that gave traditional artworks their value of centuries past. Considering that much of our lives involve the digital space, it seems like that NFT trading volume will continue to expand.
However, every initial craze comes with the potential of being overly inflated. This happened with the dot-com bubble, housing bubble, and the ICO bubble. Whether the NFT bubble will burst or slightly level down, doesn’t change the fact that, just like cryptocurrencies, they will become the indelible cogs of the blockchain ecosystem.