What Are NFTs, Non-Fungible Tokens & How Do They Work?

What Are NFTs, Non-Fungible Tokens & How Do They Work? Digital Art

Non-fungible Tokens (NFTs) or digital art have skyrocketed in popularity over the past few months.

In the simplest terms, an NFT is a record of who owns a unique piece of digital content. Any piece of digital content can be minted into an NFT be it songs, photographs, and works of digital art. Even things such as tweets, memes, published articles, and podcasts can be minted.

When someone “mints” an NFT, they create a file that lives on the blockchain. This means it cannot be copied and pasted, edited, deleted, or otherwise manipulated. An NFT is non-fungible because it is not interchangeable. Each NFT is distinct and has a unique ID. They can’t be exchanged with one another for equal value or broken down into smaller values like most currencies.

Non-Fungible Tokens Operate On Ethereum

As opposed to Bitcoin, NFTs operate on Ethereum. In order to buy an NFT, you must first buy Ether, then you can shop for NFTs on different platforms.

These tokens are not new, having been around since 2015, but are enjoying a recent boom thanks to a number of factors. The normalization of cryptocurrency is a major one as are the advances in blockchain technology.

Additionally, the massive rise in cryptocurrencies as a whole plays a role, as does the fact that people are spending much more time indoors thanks to the ongoing global pandemic. Then there are the age-old factors like fandom, royalty economics, and the laws of scarcity.

The business has been unbelievable lately. Singer Grimes sold her digital collection ‘WarNymph’ for $5.8 million in under 20 minutes. Meanwhile, online personality Logan Paul made more than $5 million selling NFTs in just a two-day span.

Arguably the most popular of all platforms is NBA Top Shot. Created by Dapper Labs, the service lets users buy and sell short clips showing match highlights from top basketball players. Having partnered with the NBA itself, the platform has attracted nearly $150 million in sales in the last seven days.

When you buy an NFT, you gain ownership of the content in question. However, it can still travel freely across the internet, be viewed, listened to, or saved by anyone who wants to do so. But the more a file is shared and seen online, the more cultural value it accrues.

When you buy a non-fungible token through an online platform, known as a primary market transaction, the platform takes a percentage cut, and the creator takes the rest of the revenue. If you then sell that NFT to a new buyer, known as a secondary transaction, you receive 90% of that revenue, but the original creator also gets a cut, generally 10%. 

SuperRare co-founder Jonathan Perkins spoke to this dynamic. “Artists are literally waking up to an email that says, ‘You just got $10,000 because this collector sold your artwork to another collector.’”

L’atelier COO Nadya Ivanova compares digital art assets to a better version of an MP3 file. “It’s allowing content creators to actually own the property rights for what they create, which allows them to profit from it in different ways which they can’t do with physical art,” she said in a CNBC interview. Ivanova added that crypto art is the strongest growing subsection of the digital collectibles market.

NFT Transactions Have Quadrupled

Last year the number of NFT transactions quadrupled to $250 million. Additionally, the number of digital wallets trading them almost doubled to over 222,000.

“We’re seeing a new generation of traders within the NFT market; people who are digitally native looking for digital native asset classes outside of established asset markets,” Ivanova noted. “These are people who have amassed reputation and wealth and want to invest it in purely virtual assets like NFTs.”

NFTs are a natural extension of the creator economy and the emerging world of fan economics that powers a number of platforms. When artists mint a non-fungible token, they are giving their fans a way to express their affinity for their work.

But unlike a traditional memento, you give them an untold number of future opportunities to make money down the road. In addition to putting money directly in their pocket, of course.

There do remain some concerns about NFTs however. The rise itself reminds some investors of the initial coin offering bubble in 2017. Then, multiple start-ups issued new digital tokens to raise money, but barely any ICO projects exist today. There are some parallels between the two such as celebrity involvement.

There are also environmental concerns as the process of minting an NFT is very energy-intensive. Most Ethereum is minted using a proof-of-work system, which has a significantly larger carbon footprint than the alternative proof-of-stake system.

Other concerns for non-fungible tokens include accessibility, as baseline prices tend to start around $100. Platforms have also struggled to enforce copyright infringement policies.

NFTs Are Not Going Anywhere

But despite all of this, the firms behind NFTs believe they aren’t going anywhere. “NFTs are here to stay,” Caty Tedman, head of partnerships at Dapper Labs.

Larva Labs co-founder Matt Hall also expressed his belief. “What NFTs offer is a formalization of digital ownership, and a way for that ownership to be permanent beyond the life of anyone company, game or platform.”

NFTs, What Are NFTs, Non-Fungible Tokens & How Do They Work?

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