An Introduction to NFTs

The future of NFTs

We really are only scratching the surface of the potential of NFTs. It is only a matter of time before we see them emerging in new areas of our lives.

Right now, it might be in the collectables, digital artwork, and gaming space, but this innovation is set to soar over the next decade with more brands and media powerhouses turning their attention towards digital assets.

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The digital world's new frontier

From the ‘metaverse’ to web3, Blockchain and crypto, we are racing towards a new frontier of the digital world. One where the lines between our physical and digital lives will be even more blurred than they are already. Right now, everyone’s talking about NFTs, and for good reason too: the space is booming.

After capturing mainstream attention in February 2021 when a piece of video art by an artist known as Beeple sold for a huge £6.6 million, NFTs have been causing quite the buzz amongst forward-thinking consumers and investors alike.

But what exactly are NFTs?

Are they really going to change the future, and most importantly, how do we get in on the action?

What is an NFT?

NFT stands for ‘non-fungible token‘. Everything in our economy is either fungible or non-fungible.
If an asset is fungible, it’s replaceable by another identical item. Physical money and cryptocurrencies are fungible. This means they can be traded or exchanged for one another. They are equal in value – one bitcoin is always equal to another bitcoin; one pound is always equal to another pound.

NFTs are different. Each one has a digital signature that makes it impossible for NFTs to be exchanged for one another. Each NFT is unique or ‘one-of-a-kind’ and cannot be interchanged. You can buy and sell NFTs on digital marketplaces using crypto.

NFTs can be a representation of something (a work of art, a game, a collectible, a piece of music, a photograph or video) or it can be an original creation that exists only in digital form. Almost anything can be made into an NFT. Use cases predominantly are in the digital collectibles, music and art space currently, but there is huge potential for them to expand into other areas in due course and become the bedrock of the digital economy.

An NFT allows the buyer to get exclusive ownership rights. It contains built-in authentication which makes it easy to verify ownership and transfer tokens between owners. NFTs are registered on a Blockchain, which is a distributed public ledger that records transactions. Specifically, NFTs are usually held on the Ethereum Blockchain, although other blockchains support them as well. This gives the NFT a unique digital watermark that certifies the ownership of the NFT – it gives the digital asset the stamp of authenticity.

What is a Blockchain?

In short, a Blockchain is a digital database that records transactions from networks all over the world. It’s a decentralised system, governed by the people who interact with it.

It’s best known for its crucial role in cryptocurrency systems. It maintains a secure and decentralised record of transactions. The innovation with a Blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.

Blockchains are also immutable. This means that data, once entered into the Blockchain, is irreversible. They are permanently recorded and viewable to anyone.

Did you know?

Most NFTs are stored on a Blockchain called Ethereum. This Blockchain is powered by 33TWH of electricity – the same amount required to power the whole of Serbia.

What is Web3?

The internet has evolved a lot over the years. Its applications today are almost unrecognisable from its early days. The evolution of the web is often divided into three stages: Web 1.0, Web 2.0 and Web 3.0.

  • WEB3
    Decentralisation is at the core of Web3. With the rise of technologies such as distributed ledgers and blockchain storage, data is becoming increasingly decentralised. This is helping to create a transparent and secure environment, surpassing Web2s centralisation, surveillance and exploitative advertising.
  • WEB2
    You can think of Web2 as the interactive and social web where you don’t have to be a developer in the creation process. In this stage, everyone can participate – we are all able to create our own content and upload it to a website, not just read information.
  • WEB1
    Web1 was the first version of the web, taking us from approximately 1991 to 2004. Participants were consumers of content while creators were typically developers who built the websites. During this era, content was consumed through static websites.
 
What does the term ‘decentralised’ mean?

This type of decentralised infrastructure will displace centralized tech giants and allow individuals to rightfully own their data. With web3, users will be able to connect to an internet where they can own and be properly compensated for their data and time, eclipsing an unjust web where the tech giants are the only ones that own and profit from it. NFTs are closely linked to the Web3 vision. They’re both powered by the Blockchain and will be core parts of the new digital world.

Are NFTs worth it? What’s their value?

Many people may wonder how tokens on the internet could be worth any money at all – let alone the enormous $69 million that Beeple’s ‘Everydays: The First 5000 Days’ sold for at Christie’s Auction House in March 2021. Especially given that many of them just represent ownership of a digital artwork that you could, in principle, download a copy of it for no cost at all.

They are modern-day status symbols

As we continue to live more and more of our lives online, digital assets look to become the future of how we display our wealth and status. They derive their value from scarcity, collectability, and authenticity, granting their holders the social prestige of holding a highly sought after “one-of-a-kind” asset.

NFTs can create real world value

It is possible to equip NFTs with additional features that enable them to provide further value over time, or even provide direct utility to their holders. NFTs can provide their holders with access to exclusive spaces, communities, and events in both the digital and real world. They can function almost like membership cards or tickets, giving their holders access to events, merchandise, and exclusive discounts. All of this gives NFT holders value over and above simply ownership.

 

They can offer utility to their owners

Sometimes, creator teams grant additional tokens to their NFT holders to expand the product ecosystem, so investors can reap benefits beyond the original token. This is known as airdropping, and they can be worth a substantial amount. For example, in August 2021, the Bored Ape Yacht Club gifted their NFT holders a completely free NFT from this new collection, the Mutant Ape Yacht Club, which is worth over $15,000 currently.

They have personal value

Like any physical collectible or artwork, NFTs are worth as much as the buyer values them. They are a new creative medium and allow buyers to engage with specific communities that mean something to them.

 

Understanding the risks

The market for NFTs might be booming, but they are still a high-risk asset. for all the benefits and hype that surround them, it is important to understand the risks they pose too.

Illiquidity

Liquidity, the ease of exchanging an asset for cash, is a major consideration when buying an asset. NFTs are relatively illiquid – every seller needs to find a buyer who is willing to pay a certain price for a one-of-a-kind item. This can put collectors in a difficult position if they spend a lot on an NFT and then the market starts to tank.

Value

A lot of NFTs don’t have an intrinsic value and buying an NFT only transfers the ownership of the asset, not its copyright. This means that the artwork can still be copied and used by anyone.

Volatility

Due to the speculative nature of NFTs, the market suffers from massive volatility. There are few mechanisms in place to help people price the assets. The huge million-dollar-sales of some assets only adds to the volatility of the market. Some people think this wild market is creating a bubble and leaving investors vulnerable to a market crash.

Ownership

While an NFT lives on a Blockchain, the asset it refers to is typically stored separately. This means that if the party that issued the NFTs goes out of business, the buyer could be left with a token that points to files that no longer exist.

Fraud

While Blockchain technology offers some degree of protection for investors, various types of fraud are still prevalent. Anybody can mint an NFT out of a file that doesn’t belong to them and sell it on to unsuspecting buyers. As well as that, the practice of artificially blowing up the price of an asset by opening multiple accounts and trading with themselves is very common with NFTs.

Hidden Fees

There are several hidden fees that a new investor or creator might be unaware of. Some of the fees are so astronomically high that the fees itself can often add up to a lot more than the price of the NFT. Sites charge a ‘gas’ fee (the charge for the energy consumed to complete the transaction) for every sale on top of the fee for selling and buying. The account conversion fees and fluctuations in the price of the cryptocurrency used should also be taken into consideration.

NFT alternative use cases

As we get closer to realising the Web 3.0 vision, NFTs will play a leading role in revolutionising huge areas of our lives. NFTs can:

  • Represent proof of ownership
  • Manage licensing
  • Provide social status
  • Grant exclusive access
  • Certify authenticity

 

This means that anywhere where provable ownership records and automated financial transactions are important is up for grabs. 

Photography

NFTs have the power to solve the problem of licensing and copyright infringement in photography. A photographer could mint a new NFT for each user that licenses a particular photo. The user would then be able to prove that they own the license by simply signing a transaction using their wallet.

Music

NFTs could bring back collectability to music. Artists and record companies could issue an NFT for each copy of an album, allowing the user to stream the album as well as access lyrics, images and other media that would not be available on subscription or advertising-based platforms.

 

Real Estate

Transferring ownership of property is extremely complicated and costly today. With NFTs, a homeowner could issue a token for their property and this token could be transferred to a buyer to complete the sale. This would take out the need for a middleman in the buying process, saving both sides a great deal of money.

 

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