What are NFTs and are they here to stay?
When Twitter founder Jack Dorsey sold the world’s first tweet for $2.9 million earlier this month, it made the news around the world instantly. The question was posed: can you buy a tweet? And it seems you can, with non-fungible tokens (NFTs) making it possible. But what exactly are NFTs and why do people pay millions for them? Here’s everything you need to know.
What are NFTs?
A non-fungible token (NFT) is a data unit in a blockchain, mainly Ethereum, that represents a digital file such as a meme, song, photograph or tweet. Ethereum is a cryptocurrency like bitcoin, but its blockchain supports these NFTs, and other blockchains can implement their own versions of NFTs.
Although NFTs are tracked and managed on a blockchain, in contrast to fungible tokens (exchangeable data units, like bitcoin), an NFT is completely unique; so whereas bitcoin is traded for bitcoin, the ‘non fungible’ aspect of NFTs means they are not interchangeable.
Purchasing an NFT serves as a digital title deed or proof of ownership, which has driven much of the hype that people can now purchase, own, collect and sell digital assets, despite the files being shared and copied freely across the internet every day. In this sense, it has been likened to the process of art buying, in that although many copies of an artwork may exist, only one person can own the original.
Why the hype?
The first NFTs were launched in 2015 and one of the earliest successes was the launch of CryptoKitties, a game that operated on Ethereum’s blockchain network. Each CryptoKitty had a unique NFT and users could buy, sell and breed them. The game’s popularity flooded the Ethereum network in late 2017, causing it to reach an all-time high number of transactions. By March 2018, CryptoKitties had gained more than 1.5 million users who generated more than $40 million in transactions.
More recently, NFTs have regained momentum as a result of numerous high profile and high value sales. In February, the Nyan Cat gif sold for more than $500,000. Shortly after, musician Grimes sold some digital art for more than $6m, followed by Twitter founder Jack Dorsey selling the first ever tweet for $2.9m.
The first digital-only art auction, hosted by Christie’s, set a new NFT record earlier this month, after Beeple’s digital artwork sold for $69m. It is within this space that experts see the future of NFTs, using blockchain as the basis of (digital) art trading. This makes sense for multiple reasons: authenticity; democratisation, and zeitgeist.
The value of an artwork depends on a number of factors such as authenticity, age, and the number of owners. Especially with digital art, artists often have the problem of proving the authenticity of their asset. Currently, an artist can upload their artwork to a blog, social media platform or website, but that does not prove ownership.
By using NFTs, artists can upload their art and add the authenticity details directly to the tamper-proof blockchain. Because everything is recorded, the asset can be traced back to its owner and the first date it was published. This also serves as an advantage for art dealers, because proof of authenticity was previously extremely difficult without an art expert, and extremely expensive with one.
In addition to the challenge of authenticity, platforms such as KnownOrigin, which make it possible to present digital works of art and collectibles as NFTs, also help to solve the problem of high entry barriers by making the art world more accessible. To some extent it democratises digital art trading, with no special relationships or contacts required to buy and sell. Even those who can’t or don’t want to spend millions can find digital art on the internet for a smaller budget.
NFTs perfectly represent the era’s zeitgeist. Although the first NFTs existed in 2015, the hype that has developed over the past few months is no coincidence. With digital transformation taking huge leaps forward as a result of the COVID-19 pandemic, forcing people online more than ever, NFTs are almost a logical consequence.
The future of NFTs
Although momentum doesn’t seem to be slowing just yet, there are concerns around the long term environmental impact of creating (known as ‘minting’) NFTs. They use the same blockchain technology as energy-hungry cryptocurrencies, which consume a lot of electricity and generate a significant amount of greenhouse gases.
With climate protection another reflection of the era’s zeitgeist, some artists have decided not to offer their work as NFTs. If no action is taken, this view has the potential to stunt growth, although Ethereum has previously shared its intention to reduce energy consumption by 99%.
But with the right changes made to make NFTs more sustainable, there are lots of interesting opportunities for brands to get on board. Nike has already patented a method by which the authenticity of trainers can be checked by NFT, titled CryptoKicks. Other fashion and entertainment brands are also showing interest, as while artist collaborations and collectibles are nothing new to those brands, NFTs open up a whole new way of co-creating.
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