NFTs have taken over the digital economy by storm. People are making millions of dollars selling Digital Monkeys and Virtual Rocks. Big institutions like Nike, Gucci and Coca-Cola are also getting involved. But why are these big players getting into NFT and what is NFT all about?
Make yourself a cup of coffee and sit back while we explain what these NFTs are all about.
What exactly are these NFTs?
NFTs are a unique, non-transferable unit of data stored on the blockchain, an immutable digital ledger. These are the tokens that represent ownership of unique items such as a video, song, game item, or piece of art.
Once an NFT is created or “minted”, its code is permanently entwined in the blockchain and can be traded on a market with a digital currency (cryptocurrency): ETH, SOL, etc.
How is it different from any other cryptocurrency?
Physical cash and popular cryptocurrencies like Bitcoin and Ethereum are “fungible”. They can, in other words, be traded or exchanged with each other.
To better understand “fungible”, consider an exchange of physical cash between you and a friend
- You give your friend $1 in cash in exchange for another $1 in cash.
- Your $1 and your friend’s $1 have the same monetary value.
They both get the same products and services.
Similarly, $1BTC or $1ETH will always equal $1BTC or $1ETH and can be traded. This is known as “Fungibility”, and both cash and cryptocurrencies are “Fungible”.
However, NFTs are “non-fungible”. NFT is an abbreviation for “non-fungible token”.
Non-fungible means that it is unique and cannot be replaced by anything else. One NFT is not the same as another.
Let’s look at an example of “non-fungibility”.
Consider an iPhone. Suppose there are two of them that are the same version, size, and color.
They are currently the same and can be exchanged with each other. They are “fungible”.
Now suppose one of them has the autograph of world superstar Cristiano Ronaldo.
Will they be similar?
Obviously not. The one with Ronaldo’s signature would be unique, valuable and not interchangeable with the other iPhone.
Ronaldo’s autographed iPhone is now “Non-Expendable”.
Similarly, all NFTs are “non-fungible”, which distinguishes them from other cryptocurrencies.
What gives these NFTs value?
NFTs are the digital equivalent of physical scarcity.
Because they are limited and non-fungible (cannot be duplicated), NFTs not only create “digital scarcity” but also ensure the authenticity and verifiability of the NFT’s owner, making it a valuable collectible.
As a result, it is a desirable asset for both buyers and sellers. The creation of an NFT allows sellers to easily monetize (without the use of intermediaries such as galleries or auction houses) their digital content (products) such as digital images, animations, music, videos, etc.
NFTs aren’t just about collectibles and digital art; They can also be used to generate revenue for artists and musicians by allowing royalties (a percentage of future sales) to be paid to creators as NFTs change hands.
When you put all of this together, it’s easy to see why big brands and investors are getting involved.
How are NFTs becoming a new asset class?
The pandemic two years ago shook the world to its core. Entire industries have been destroyed and entirely new ways of working have become the norm. Government money printing has not stopped and global inflation is at an all time high.
It doesn’t take a rocket scientist to recognize that we have reached a turning point in financial history, where the current financial system and its accompanying architecture have run their course, similar to the end of the gold standard in 1971.
Evidently, in 2021, the NFT market took off. As of November 2021, the market capitalization of NFTs was worth more than $7 billion.
Analysts predict it will grow by more than $80 billion by 2025
Trading volume increased tenfold year-over-year in Q4, reaching $11.7 billion, and there were 2.7 million unique active NFT (digital storage for holding NFT) wallets at the end of the year.
Trading volume on OpenSea, the largest NFT marketplace, exceeded $30 billion in 2022. A whopping 156 percent increase in volume.
NFTs are emerging as a new way of transacting value in both the physical and digital realms, much like the rise of “fiat money” in 1971, which introduced a new way of exchanging value around the world.
If the above stats didn’t convince you, here are some of the reasons why we think NFTs are here to stay.
1) Digital property
Never before have we had the option to truly “own” digital items.
With NFTs, you can do whatever you want with your NFT: grant, revoke access to events/concerts, trade it with a friend, list it on a market and sell it, receive airdrops by keeping it for a period, etc.
Imagine if you could participate in a virtual call with the best minds in your industry to learn, network and have fun.
You can now if you own a Bored Ape NFT, which is a collection of 10,000 unique NFTs created by Yuga Labs called the Bored Ape Yacht Club, a virtual lounge reserved for its members only.
2) Metaverse and gaming ecosystem
NFTs could have a significant impact on the metaverse and the gaming ecosystem.
NFTs go well with lands, skins, and digital characters. Traditional gamers already buy skins, guns, swords, and other in-game items from the games they play.
With NFT, you can now lend, borrow, and trade in-game items, further enhancing your gaming experience.
With The Sandbox, you can now buy, sell and trade digital land.
The main function of the LANDs is to house and reproduce experiences such as games, dioramas, galleries, social centers, etc., which the owner can monetize as a source of income.
Artists can release their albums as NFTs and distribute them directly to fans without any middlemen. Fans, on the other hand, can receive exclusive content, artwork, and a way to get in touch with the artist. In February 2021, DJ and producer 3LAU sold $12 million worth of NFTs. The offers included a custom song, access to never-before-heard music, custom artwork, and new versions of existing songs.
Snoop Dogg, the world’s most famous rapper, has released a collection of songs on NFT’s OpenSea marketplace as part of a marketing strategy focused on rights and remixes.
The first new song, “High”, is available as part of “Dogg on it: Death Row Mixtape Vol. 1” Non-Fungible Token Collection – Four different audio files, each attached to an image of a Bored NFT Ape Yacht Club The first, in a 420-token edition, contains the vocal track of “High” without the instrumental track, the second, in a 500-token edition, contains only the instrumental, the third, in a 250-token edition, contains the instrumental and hook without the verses, and the fourth, in an edition of 500, contains the complete song.
These are just the tip of the iceberg. Other industries that could be affected by NFTs include real estate, voting, course certificates, and medical records.
With time and capital, the possibilities of NFTs are almost limitless and could significantly alter our daily lives.
Fair warning! Not everything is rosy…
NFTs, like any other asset class, have risks. And they are as volatile as they come.
- Only a few “blue chip” NFT collections are in limited supply and have a clear roadmap, while the rest, like any other asset class, are fraudulent and exist solely to enrich creators.
- Depending on the blockchain you choose to mint your NFT, you may have to pay some transaction fees. To transact on blockchains like Ethereum, Tezos, and Flow, a fee is required.
- Minting or buying an NFT can be very exciting; however, simply creating or purchasing an NFT does not guarantee that you will earn any money. If you are not careful, you can lose money.
You don’t have to invest in NFTs just because they are NFTs. Before buying/minting NFTs, do your own research, understand the risks and understand the value of the underlying asset. We do not recommend investing your life savings in NFTs.
Whether you like it or not, NFTs are fast becoming the digital age’s gateway to social proof. NFTs are a new way to flex both your digital self and your social proof.
Alternative assets have always been met with skepticism throughout history. However, adoption occurs when someone creates something useful and people realize that it can be invested in.
Did you know that commodity futures were created to allow farmers to set prices before the harvest?
Fast forward to now, the global derivatives market is now worth hundreds of trillions of dollars. Similarly, the most recent alternative asset class to emerge is non-fungible tokens (NFTs).
The opinions expressed above are those of the author.
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