NFTs are booming. Amid all the buzz, hype, and concerns, we step back to look at the core reasons to be excited about NFTs.
- A non-fungible token, or NFT, is the tokenized representation on a blockchain of a non-fungible item—be that digital artwork, a financial instrument, property deed, or a physical item, like a designer watch. It allows the item it represents to be bought, sold, or have its authenticity verified on a public blockchain network.
- Creators are excited to engage with a new medium to share and monetize their work via NFTs, one that can encompass a broad range of digital and real-world implementations.
- For crypto evangelists NFTs represent an easy-to-understand use case for blockchain technology, presenting a new milestone for mainstream crypto adoption.
- Just like with physical collectibles, fans and enthusiasts are excited to connect with their favorite creators through an NFT; following in the footsteps of the CryptoKitties boom, others see NFTs as an opportunity for short- (or long-)term financial speculation.
What are NFTs?
Other digital assets include non-fungible tokens, or NFTs, the tokenized representation on a blockchain of a non-fungible item. A non-fungible item is an item that is unique, and is not interchangeable with another of like kind. Collectibles, antiques, homes, and fine art are all examples of non-fungible items, as their value depends on the eye of the beholder—or, if you prefer, as “one man’s trash is another man’s treasure.”
An NFT is not a non-fungible item itself, but a representation of the non-fungible item’s ownership. With an NFT, the ownership of the item is managed on a blockchain, and is tracked on the blockchain’s ledger, much like the ownership of cryptocurrency. Almost anything can be represented as an NFT, but much of the focus of current NFT technology is on their representation of art.
Purchasing a digital art NFT
The purchaser of a digital art NFT usually receives the digital piece of artwork represented as a token in a digital wallet. The purchaser is now considered the owner and has custody of the piece on the blockchain, as defined by the contract used to purchase it.
In most cases, the “token” part of the NFT points to an internet gateway run by the platform the NFT was minted on, containing a JSON metadata file packaging the digital art that was purchased. What you as the purchaser are receiving is a blockchain-based hash; the art itself does not reside on the blockchain.
As the unchangeable record of the NFT’s origination and ownership is recorded on a public blockchain, the authenticity and originality of the non-fungible item can be easily traced. Unlike most pieces of digital art, someone can own the piece instead of just looking at it. Like most works of traditional fine art, the piece may be viewed by many people, but only the purchaser holds its custody.
“Yes, anyone can download and view the image for free, but they don’t own it and they can’t gain any value from it without owning the NFT as well. As a collector you want as many people as possible to be downloading and enjoying the artworks that only you probably own because this is how the artwork gains value. Imagine if one million people around the world were featuring an artwork that only you owned on digital frames in their houses. THAT is a piece of art that has real value. Hackatao, one of Super Rare’s most successful artist duos said it best — ’Everybody sees it, only one owns it.’”
How an NFT works
- Establish the NFT’s smart contractOwnership of an NFT is usually managed by a smart contract, which allows the item to be exchanged on a blockchain network and stored in some cryptocurrency wallets, much like fungible cryptocurrencies can be exchanged and stored. The smart contract creates the rules of ownership and exchange, including the possibility to have a percent of proceeds from the sale of the NFT to be retained by the creator in perpetuity (similar to music royalties).
- Mint the NFTThe token representing the non-fungible item is issued on a blockchain via a smart contract, referred to as “minting” an NFT. Most creators — particularly those less familiar with blockchain technology — use a platform such as OpenSea, Rarible, SuperRare, or one of many more. These platforms allow creators to mint NFTs without needing the technical expertise required to manage smart contract code deployment.
- Sell the NFTMost creators sell their NFTs from the same platform where they mint it. As the unchangeable record of the NFT’s origination and ownership is recorded on a public blockchain, the authenticity and originality of the non-fungible item can be easily traced.
Most NFTs exist on the Ethereum blockchain, a popular blockchain currently transitioning from a proof of work consensus mechanism to proof of stake. Other protocols gaining traction for NFTs include Flow, a proof of stake network that hosts the wildly popular NFT project NBA Top Shot, and other proof of stake networks Polkadot, Kusama, NEAR, Cardano, and Solana.
An abridged timeline of NFTs
Developed on Bitcoin, Colored Coins were a method of managing real-world assets via the metadata of a bitcoin. Though at their core Colored Coins were fungible tokens, users’ attempts to make them represent real-world non-fungible items proved the market’s desire for non-fungibility on a blockchain. Colored Coins are considered to have laid the experimental groundwork for NFTs as the first exploration into representing the ownership of real-world objects on a blockchain.
Crypto Kitties is widely considered the first minting and sale of an NFT, digital artist Kevin McCoy and technologist Anil Dash minted Quantum as part of an experimental presentation at the Seven on Seven event in NYC. Their project, titled “monetized graphics,” was described by Dash as a “blockchain-backed means of asserting ownership over an original digital work.”
Resales of Crypto Punks remain popular today; the average resale price over the last year was 15.63 ETH (~$30,166.37 USD), though prices vary widely depending on the rarity of a punk’s attributes.
- Dapper Labs developed a Dutch auction smart contract as the price discovery tool for their marketplace, laying some of the key technical groundwork for NFT marketplaces to come.
- Users could breed the cats to be sold on a secondary market, leveraging the game’s breeding and training mechanics to flip cats for profit, creating a speculative market and proving the ability for NFTs to be used as collectibles.
- The Crypto Kitties boom proved new territory, breaking the concept of NFTs from their previously imagined use cases of collecting to supporting creators, in-game functions, or representations of physical objects, and opening them to the world of market speculation.
Interest is exploding following 2020’s boom in cryptocurrency traction. Artists such as Beeple, an early adopter of NFT technology who started his journey sharing digital art for free via Creative Commons and recently sold an NFT for the third highest price ever received by a living artist, have seen massive success as mainstream adoption of NFTs expands.
The spike in popularity has led to a new all-time high in media coverage of NFTs, along with a spate of social media mentions expressing concerns about their underlying technology.
GOOGLE SEARCH INTEREST IN THE TERM “NFT” SPIKED IN EARLY 2021 SOURCE
So why are people so excited about NFTs? Everyone has a different reason.
Interested in learning more about the history of NFTs and how they function? We recommend checking out OpenSea’s The Non-Fungible Token Bible: Everything you need to know about NFTs by Devin Finzer.
What about the environmental cost of NFT minting?
- There’s been a lot of talk lately about the environmental cost of minting NFTs. Any technological platform requires some energy expenditure to operate, but the buzz about proof of work blockchains’ high energy expenditures has many questioning whether the reasons to be excited about NFTs are worth the energy used by their underlying technologies.
- It’s hard to evaluate the environmental impact of NFT minting. The blockchains NFTs are minted on would continue to operate and consume energy if NFTs — representing a small portion of a chain’s overall energy expenditure — did not exist, and other factors to be considered include the comparative environmental impact of traditional distribution methods for non-fungible items, such as shipping CDs, mailing prints, or shipping artwork internationally.
- As Justine Calma wrote in her piece for The Verge on the climate controversy surrounding NFTs:
“Figuring out the culpability of NFTs is a little like calculating your share of emissions from a commercial plane flight, according to Joseph Pallant, founder of the nonprofit Blockchain for Climate Foundation. If you’re on the plane, you’re obviously responsible for a portion of its emissions. But if you hadn’t bought the ticket, the plane probably would have taken off with other passengers and polluted the same amount anyway.”
- Ethereum, the blockchain most commonly used for NFT minting, currently operates using proof of work validation, a traditional method of securing a blockchain that is critiqued for its high required energy expenditure. Proponents argue that Ethereum uses less than 10% of the annual energy consumed by YouTube, while critics balk that Ethereum uses as much energy annually as the nation of Panama.
- Some research has shown that proof of work networks scale to be more energy-efficient than traditional fiscal infrastructure, meaning that if all the users of traditional financial technologies switched to using Bitcoin or Ethereum instead, the sector’s overall energy consumption would decrease. Other research has shown that data on the environmental impact of proof of work blockchains is skewed by not taking miners’ use of renewable energy into account. Recent legislation such as that which recently passed in Kentucky also aims to further incentivize the shift to renewables within proof of work mining.
- Regardless, while proof of work mining is one of the oldest mechanisms behind blockchain technology, there is a growing movement to shift the industry to proof of stake validation. Proof of stake validation was developed in part as a solution to the critiques of proof of work mining, including proof of work’s high required energy expenditure.
- Ethereum is in the process of transitioning to use proof of stake validation, a transition that is expected to cut Ethereum’s energy usage by 99%.
- Experts expect Ethereum’s transition to eth2 and proof of stake validation will take place before the end of 2021. Read more in our eth2 update #012! Many of the critiques of the energy used by Ethereum-based NFTs do not take into account the fact that Ethereum’s transition to proof of stake via eth2, while spoken about for many years, is now well underway.
- The blockchain industry as a whole is migrating from the less efficient model of proof of work validation to the objectively more energy-efficient proof of stake model. We hope that the excitement around NFTs, and the concerns about their energy usage when minted on proof of work blockchains, will help to drive the sector in that direction more quickly–and that more proof of stake-based NFT minting platforms will be developed as an answer along the way.
- Those who don’t want to wait until eth2 is live for more energy efficient NFTs can mint or buy NFTs on proof of stake networks now. NFT minting and distribution platforms that operate on proof of stake networks already exist; some options include KodaDot on Polkadot, Viv3 on Flow (a protocol that is also used by one of the largest NFT platforms, NBA Top Shot), hic et nunc on Tezos, Paras on NEAR, and Solible on Solana.
Creators are excited for a new medium and market
NFTs provide a new medium for creators to share and monetize their work, one with a broad range of digital implementations including images, GIFs, audio/visual implementations, and even physical items, virtual interactions, or in-person experiences.
The creative possibilities for NFT-based art are endless. Take, for example, “Crossroad” by Beeple, which trended recently following its record-breaking resale for $6.6 million USD (a sale price eclipsed shortly thereafter by the auction of a different NFT by Beeple at Christie’s for $69M USD). Aside from its buzzworthy sale price, “Crossroad” was an innovative use of the medium; the artwork was programmed to change based on the result of the 2020 presidential election. As sold, it pictured former President Trump’s body on the ground covered in graffiti. Had the election gone differently, the artwork would have instead shown a portrait of a muscular Trump rising out of the White House in flames.
In-game NFTs, such as character skins, weapons, or accessories, offer another unique NFT-based medium for artists—particularly those with backgrounds in game art and animation. In-game NFTs can be traded on third-party marketplaces, allowing players to show uniqueness in the gamespace and allowing artists not affiliated with major game developers to create usable art and earn revenue for their work.
Physical items and experiences get the NFT treatment too .Robomed protocol engineer Trinity Montoya reflected on the ongoing experimentation with the medium during her interview on NFTs as an artistic application of blockchain:
“Limited edition NFTs that represent ownership of physical objects are pretty neat. Unisocks, the SaintFame Genesis shirt, and CryptoPunk prints with attached, sealed paper wallets all come to mind… CryptoJingles, though short-lived, were tokenized sounds that you could mix and match to create NFT songs. To my mind, this opened the door for people to explore what other non-obvious things could be represented by NFTs.”
NFTs lend themselves to limited-edition non-fungible items, which have driven some of the higher-profile recent sales of NFTs. NFTs allow for digital art, which in many ways is infinitely available, to be considered scarce, similar to traditional art. Artists can therefore take advantage of the very human attraction to rarity to turn a higher profit. Because each NFT token is unique, NFTs are more similar to an autographed item than an average physical copy of a digital product, or, in cases where multiple NFTs are minted for the same non-fungible item, more akin to a numbered print than a standard print.
NFT sales are booming. According to NFT market tracker NonFungible.com, at the time of writing, the last month of NFT sales have totaled over $222 million USD, with an average sale price of $1,245,87 USD—up dramatically from their all-time average sale price of $97.59. Many artists increasingly struggle to sell their work digitally, given the challenges marketing their work in a world that expects digital content to be free. NFTs create an opportunity for a new marketplace where creators can reach potential customers, and can serve as a dedicated forum to sell digital artwork that many felt was lacking within the art market.
As artist manager Andrew Gerler said in an interview with NBC news:
“This [NFT boom] opens up a whole new world not just for the musicians that have suffered from revenue loss in the pandemic but also their collaborators… I know concert tour visual artists who were out of work and turned to NFTs to make a living. It’s really incredible to see a new income stream for so many creators.”
For many creators, the prospect of selling NFTs also presents an opportunity to “cut out the middleman” and retain more of the revenue from the sale of their work. According to Music Business Worldwide’s data, 80% of musical artists’ streaming and album sales are retained by record labels, in comparison to the 2.5% cut taken by an NFT platform such as Mintable.
In one unique case, professional tennis player Oleksandra Oliynykova minted an NFT that gave the purchaser the right to put temporary tattoos on her arms during gameplay. This arrangement allows her to earn sponsorship income outside of the traditional system that generally only pays the top 30-60 women in the league. It is also an interesting workaround to the Association of Tennis Professionals’ rule that extra sponsor logos can be physically cut off of uniforms during gameplay.
Perhaps the most important benefit of the smart contract functionality of many NFTs for creators is that it allows artists to earn revenue from their pieces on secondary sales and royalties. NFT platforms such as Zora allow artists to set a “creator share” when minting their NFT, a percentage automatically paid to the artist for all future sales of the NFT.
“Like many people I’d heard about Cryptokittes, but going to the Rare Digital Art Festival in NYC in early 2018 really made everything click for me. Art is an approachable and tangible application for people and I heard a lot of examples detailing the benefits of putting art on the blockchain. Proof of authenticity and chain of ownership solve many problems for auction houses like Sotheby’s and Christie’s who put serious resources into verification. The ability to attach smart contracts to the sale of NFTs can allow for infinitely paying royalties, a game-changer for creatives who are traditionally only paid once, while other people profit off future resales.
One speaker, Bea Ramos, talked of working as an animation artist on shows like Teenage Mutant Ninja Turtles… Had she been able to tokenize her art it’s possible she could’ve retained ownership and received more fair compensation than her annual salary. She started dada.art to allow artists to collectively create (and share the ownership and profits of) digital art.”
With Zora, the creator share is paid out automatically via smart contract to the Ethereum address used to mint the NFT, meaning the artist does not have to track down future royalty payments as long as they maintain custody of their original address. This setup helps to assuage concerns facing other platforms that should the platform be taken offline, the ability to access these services would as well.
The crypto community is excited for mainstream adoption
For crypto evangelists, NFTs represent an evolution in mainstream understanding around blockchain technology. It’s exciting for those who have long been promoting the benefits of crypto to see family, friends, and a slew of new entrants come into the space, learning about the crypto ecosystem by interacting with NFTs.
While the users on CryptoKitties peaked at 250,000 users in 2018, just one NFT release on NBA Top Shot in February of 2021 had over 200,000 users waiting in the digital queue, each vying for a chance to purchase one of the 10,000 “premium packs” being released.
“I think it makes wider blockchain adoption much easier when you get this sort of traction in a network. I’m talking to people about cryptocurrency and about blockchain, and then they say ‘Oh, like NBA Top Shot. That’s what you’re talking about.’ Being familiar with something because you have a practical interest in it makes the conversation so much easier, even if you maybe don’t want to understand all of the underlying aspects”
A majority of NFT platforms require buyers to perform some crypto-native tasks, such as using a digital wallet, purchasing crypto on an exchange, and sending crypto to and from addresses. While some NFT platforms, such as music-focused Audius, abstract away the visible elements of blockchain tech for their users, many believe requiring users to complete those basic crypto tasks serve as an impelling force to get the mainstream community more comfortable navigating crypto tools.
Crypto enthusiasts see the broad range of potential, big-idea use cases for NFTs—pushing the potential audience far past niche collectors—as a further bullish sign for the mainstream adoption of blockchain technology. Some see the recent NFT sale of a virtual home for $500,000 USD as a harbinger for the potential to conduct real estate transactions and manage deeds via smart contracts and NFTs. Others point to headlines explaining and promoting NFTs, like the minting of a New York Times column as an NFT, as a sign of mainstream adoption of the technology.
Collectors are excited to own something exclusive
Though high-grossing sales of celebrity work have been dominating headlines throughout the recent NFT boom, average retail collectors can snag an NFT in almost any price range. Other projects are emerging to allow for collective, fractionalized ownership of NFTs, such as retail collectors buying small pieces of renowned artwork or building wealth via shared ownership of more valuable assets. The resulting paradigm is one in which NFT ownership is accessible to nearly any budget.
Collecting as a hobby has been documented as far back as 3000 BCE, and its modern appeal has not waned. The value of autographs has been rising with the value of top-traded autographs increasing by 10% annually; even the volume of baseball trading card sales are increasing. Sneaker trading, a booming trend expected to reach $6B USD in resale value by 2025, is a particularly compelling use of NFTs given the complexity of verifying authenticity in digital, peer-to-peer marketplaces.
Just like with physical collectibles, fans and enthusiasts are excited to connect with their favorite public individuals through an NFT, whether it is owning the clip of their favorite NBA player dunking on his opponent or the rights to front row seats for life to watch their favorite band perform. NFT art also provides a new, often affordable, opportunity for friends and fans to financially support their favorite digital creators.
Following in the footsteps of the CryptoKitties boom, others see NFTs as an opportunity for short (or long)-term financial speculation; the NFT platform Mintable states that NFTs are regularly re-sold for 5x their original price. The realm of collecting and re-selling items via NFT is expected to grow with the development of platforms focused on minting real-world luxury items as NFTs. After luxury watch house Vacheron Constantin announced they would be launching a solution to combat counterfeiting and ensure traceability by tracking their watches’ authenticity on the blockchain, NFT-focused blockchain company VIDT announced they would be kicking off their NFT operations by minting an NFT of a rare vintage Rolex popular among collectors.
It’s clear the wide-ranging uses of NFTs and who has access to them—regardless of location, wealth, or niche interest—sets NFTs up to be a long-term player in the market of collectors, fans, and enthusiasts. They also present an ongoing and invaluable platform for artists as well as an exciting new way for newcomers to learn how to navigate the crypto space. Want to learn more about how NFTs connect to the world of art, and developments in the ecosystem?