What Are NFTs and How Do They Work?

What Are NFTs and How Do They Work?

Non-fungible tokens (NFT) are digital assets that represent a wide range of unique tangible and intangible items, from collectible sports cards to virtual real estate and even digital sneakers. One of the main benefits of owning a digital collectible versus a physical collectible like a Pokemon card or rare minted coin is that each NFT contains distinguishing information that makes it both distinct from any other NFT and easily verifiable. This makes the creation and circulation of fake collectibles pointless because each item can be traced back to the original issuer. Unlike regular cryptocurrencies, NFTs cannot be directly exchanged with one another. This is because no two NFTs are identical – even those that exist on the same platform, game or in the same collection. Think of them as festival tickets. Each ticket contains specific information including the purchaser’s name, the date of the event and the venue. This data makes it impossible for festival tickets to be traded with one another. The vast majority of NFT tokens were built using one of two Ethereum token standards (ERC-721 and ERC-1155) – blueprints created by Ethereum that enable software developers to easily deploy NFTs and ensure they’re compatible with the broader ecosystem, including exchanges and wallet services like MetaMask and MyEtherWallet. Eos, Neo and Tron have also released their own NFT token standards to encourage developers to build and host NFTs on their blockchain networks.

Other key characteristics of NFTs include:

Non-interoperable: A CryptoPunk cannot be used as a character on the CryptoKitties game or vice versa. This goes for collectibles such as trading cards, too; a Blockchain Heroes card cannot be played in the Gods Unchained trading-card game.

A CryptoPunk cannot be used as a character on the CryptoKitties game or vice versa. This goes for collectibles such as trading cards, too; a Blockchain Heroes card cannot be played in the Gods Unchained trading-card game. Indivisible: NFTs cannot be divided into smaller denominations like bitcoin satoshis. They exist exclusively as a whole item.

NFTs cannot be divided into smaller denominations like bitcoin satoshis. They exist exclusively as a whole item. Indestructible: Because all NFT data is stored on the blockchain via smart contracts, each token cannot be destroyed, removed or replicated. Ownership of these tokens is also immutable, which means gamers and collectors actually possess their NFTs, not the companies that create them. This contrasts with buying things like music from the iTunes store where users don’t actually own what they’re buying, they just purchase the license to listen to the music.

Because all NFT data is stored on the blockchain via smart contracts, each token cannot be destroyed, removed or replicated. Ownership of these tokens is also immutable, which means gamers and collectors actually possess their NFTs, not the companies that create them. This contrasts with buying things like music from the iTunes store where users don’t actually own what they’re buying, they just purchase the license to listen to the music. Verifiable: Another benefit of storing historical ownership data on the blockchain is that items such as digital artwork can be traced back to the original creator, which allows pieces to be authenticated without the need for third-party verification.

Why they’re important

NFTs have become hugely popular with crypto users and companies alike because of the way they revolutionized the gaming and collectibles space. From 2019 to 2020, the market capitalization of the NFT space rose 50% from $210 million to $315 million, with over $167.7 million worth of NFTs purchased up until January 2021.

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Thanks to the advent of blockchain technology, gamers and collectors can become the immutable owners of in-game items and other unique assets as well as make money from them. In some cases, players have the ability to create and monetize structures like casinos and theme parks in virtual worlds, such as The Sandbox and Decentraland. They can also sell individual digitals items they accrue during gameplay such as costumes, avatars and in-game currency on a secondary market.

For artists, being able to sell artwork in digital form directly to a global audience of buyers without using an auction house or gallery allows them to keep a significantly greater portion of the profits they make from sales. Royalties can also be programmed into digital artwork so that the creator receives a percentage of sale profits each time their artwork is sold to a new owner.

William Shatner, best known as Captain Kirk from “Star Trek,” ventured into digital collectibles in 2020 and issued 90,000 digital cards on the WAX blockchain showcasing various images of himself. Each card was initially sold for approximately $1 and now provides Shatner with passive royalty income every time one is resold.

Why do they have value?

Like all assets, supply and demand are the key market drivers for price. Due to the scarce nature of NFTs and the high demand for them from gamers, collectors and investors, people are often prepared to pay a lot of money for them.

Some NFTs also have the potential to make their owners a lot of money. For instance, one gamer on the Decentraland virtual land platform decided to purchase 64 lots and combine them into a single estate. Dubbed “The Secrets of Satoshis Tea Garden,” it sold for $80,000 purely because of its desirable location and road access. Another investor parted with $222,000 to purchase a segment of a digital Monaco racing track in the F1 Delta Time game. The NFT representing the piece of digital track allows the owner to receive 5% dividends from all races that take place on it, including entry ticket fees.

What are the most expensive NFTs?

Dragon the CryptoKitty continues to be one of the most expensive NFTs in the space, valued at 600 ETH.

The one-of-a-kind “1-1-1” race car from F1 Delta Time sold for 415.9 ETH in May 2019.

Alien #2089 sold for 605 ETH in January 2021. This NFT is part of the CryptoPunk collection, the first NFTs ever created. Overall, there are 10,000 different CryptoPunks and only nine Alien CryptoPunks.

NFTs: a new disruptor in the art market?

In October last year, Christie’s included a work by Robert Alice in its post-war and contemporary art sale. Although looking rather like a vinyl LP, the circular gold leaf and acrylic on canvas piece, up close, consists of over a quarter of a million digits of code, with 32 gold-encrusted ones hidden among them. The 2019 work, called Block 21 (42.36433° N, -71.26189° E) leapfrogged its $12,000 to $18,000 estimate to sell for $131,250, and was accompanied by a NFT (Non-Fungible Token), a digital version that automatically resets itself to the time zone of the owner’s location. This was the first time a major auction house had sold one of these digital tokens.

Meanwhile, the artist, writer, dealer and art-world gadfly Kenny Schachter has also been producing NFTs, recently offering three digital works on the Nifty platform. One is his take on Donald Trump’s defeat: titled That’s All Folks, it is a digital work based on the end title of a Looney Tunes film. Schachter offered an edition of five for $500 each, all sold, and they have since been traded a number of times; one had received a bid of $1,111 at the time of writing. On each resale Schachter receives a small commission. “All the art I make is digital, in the form of videos or images—now I’m chomping at the bit to sell more works this way,” Schachter says. “I am convinced that the field will mushroom in the coming two or three years.”

NFTs for dummies

So, what are NFTs? Are they the future of the art market, as some have claimed? Or just another here-today, gone-tomorrow speculative phenomenon?

The “fungible” in Non-Fungible Token describes something that is identical to something else. So one gram of gold or a GlaxoSmithKline share, for example, is the same as any other.

When you buy an NFT, you are buying a token and the work of art linked to it. The transaction is registered on the blockchain, a decentralised database. The work can be unique (as in the Alice piece), or in editions (as in the Schachter ones) but each token is unique to that work. The purchase of the NFT, registered on the blockchain, provides a permanent record of that purchase and provides proof of ownership.

You can display it on your computer or TV, print it out, or resell it. While anyone can print out or display an image from the internet, that image does not belong to them and they cannot trade it, so NFTs protect the artist’s authorship and make a secondary market possible.

Payment is generally made in cryptocurrency; no doubt stimulated by the boom in cryptocurrencies, the market for NFTs is growing: in December 2020, nearly $9m worth of NFT-based art was sold, according to the cryptocurrency news website Be[in]Crypto, more than three times the value of sales the previous month.

“Balls deep” in cute kittens

Those from a more traditional art background will be horrified by most of the “art” offered as NFTs. Garish, jaggedly drawn faces, cartoonish figures, cute kittens… the images are often derived from video games, comics or fantasy movies. “Like something on the back of a van,” Schachter says, but he notes that NFT “art” is attracting an entirely new audience of buyers.

The artists themselves are hardly traditional—Beeple, for instance, one of the best-selling NFT artists, introduces a “drop” (a flash sale when new works are released) with a statement that starts: “hahahah, ok so we’re going balls deep on this motherfucker…”

Meanwhile, other players in the digital field are getting interested. Verisart, for instance, which registers art and its provenance and ownership on the blockchain, is providing certificates for NFTs, with the work’s image and details, current owner key, URL, secure QR code and a unique blockchain address. “The growth in the NFT market has been phenomenal and we’re delighted to have verified some of the leading artists in this emerging new art market,” says Verisart’s chief executive and founder Robert Norton.

So, is this just a flash in the pan or a more permanent arrival on the art market? Neither the low value of the market—probably little over $13.6m in total, hardly massive—nor the quality of art offered indicate it will threaten the traditional trade any time soon. But as Norton points out, street art was initially disregarded—and now a Banksy print could set you back over a million.

An NFT Was Sold For Nearly USD 129,900 Profit

Hashmasks. Source: A screenshot, thehashmasks.com

A single non-fungible token (NFT) was flipped for a profit of c. USD 129,870 in less than four days.

The Cryptoverse is abuzz over a couple of pieces of art sold and bought recently for a substantial amount of money. The pieces are a part of a Hashmasks collection of 16,384 portraits by over 70 artists, the sale of which has ended.

The sale started with the first batch of artworks being sold for ETH 0.1 (c. USD 130) on January 28. Each following tranche increased in price with the last one costing ETH 100 a piece.

Collector Westcoastbill owns a piece called ‘Trump’ - bought for nearly ETH 100 on January 31, translating to USD 130,000, which means that the seller who acquired it for just ETH 0.1 earned major profit: roughly 99,900%. Westcoastbill holds a number of other items as well in their collection.

Hashmask #1 just sold for ~100 ETH on OpenSea.

That’s 130$ into 130000$ in 3 days👑

Dayum. — ChopChop (@0xChop) January 31, 2021

Meanwhile, another artwork was said to have been sold for ETH 100 on January 31, making this person massive profit. But this specific piece called ‘Denver’ is owned by ‘15396C’ and no bids are recorded as of yet.

Someone paid $130k for this … 🤡 pic.twitter.com/XaITxptbtR — CryptOrca (@CryptOrca) February 2, 2021

These art pieces reportedly come with implicit and explicit rarity: the former stemming from the fact that this is art, inviting consumers to project their interpretation of value into the artwork, as the website says, while the former is produced by various characteristics the artists included in a piece, with each detail being more or less common or rare: “The smart contracts allow you to assign a name to your Hashmask giving you the ability to add your unique stroke to the canvas.”

“Above all, the control over the rarest of all traits – the name – is given to the full extent to the consumer,” the site adds. By holding the artwork, users accumulate the Name Changing Token (NCT) on a daily basis, which allows them to choose a name for their portrait on the Ethereum (ETH) blockchain.

Meanwhile, the Cryptoverse is also showing off pieces from their collections, discussing their rarity.

Apparently, in fact, it’s 24/16,384 in rarity.

Gold Skin -1.08%

Indian Mask - 5.35%

Golden Robot - 1.08%

Golden Toilet Paper - 0.36% — ฿ully (@BullyEsq) February 2, 2021

__

yo what are these symbols above the head of my dude pic.twitter.com/VHKjWRGjcf — KING CO฿IE 🌙 (@CryptoCobain) February 2, 2021

And these recent discussions seem to have awoken curiosity in others too.

It’s a Crypto Kittie for your face. — Forever Learning (@LiftinAndCrypto) February 2, 2021

Learn more:

Non-Fungible 2021: Prepare Your NFTs For DeFi, Staking, and Sharing

‘Traditional’ Art vs. Crypto Art: How to Value It