The emerging cryptocurrency markets will open up a new world of economic and technological possibilities that we could have never imagined before. This goes far beyond currency though, this technology has the power to change how we do everything.
People get a very limited view of what can be achieved through blockchain and smart contracts because price speculation dominates most mainstream media coverage of the industry. This is understandable considering that the first “killer app” to come out of this industry was Bitcoin, which is often compared to digital gold, but the space has grown significantly in the past decade, and a variety of new uses and applications are being dreamed up every day.
One of these new ideas taking the world by storm is NFTs, or Non-Fungible tokens. You may have heard about these things on the news, alongside headlines showing high dollar figures brought in by the celebrities and obscure artists. There is a ton of development happening in this space, and it’s a lot to wrap your mind around, so we have prepared an introduction to get you up to speed on the basics and some of the most important players involved.
What is an NFT?
An NFT is a digital representation of a scarce good, in the same way that a cryptocurrency is a representation of a scarce good. However, cryptocurrencies are fungible, which means that in the case of Bitcoin, for example, one Bitcoin or Satoshi is identical to all of the other Bitcoins or Satoshis in the circulating supply. NFTs are not fungible, which means that each unit is unique in price and content, but there is still a detailed record of ownership on the blockchain.
The first use-case for NFTs has been digital art and other cyberspace collectables, which is counter intuitive considering that art and collectables have always been seen as something that you can hold and touch in the physical world, but the same can be said about money, and here we stand with a $2 trillion cryptocurrency market.
The history of NFTs
NFTs may have finally gone viral just recently, but they are actually not a new development in the crypto space. The first attempt to create NFTs on the blockchain goes back to the early days of Bitcoin, with a project called “Colored Coins” that sought to denominate specific fractions of a Bitcoin into a non-fungible asset. The team, which included Ethereum founder Vitalik Buterin, was not able to achieve their goal because the Bitcoin blockchain was not built to be programmed, which is actually something that its users and developers prefer. In the years that followed, the Colored Coins team went off to build their own projects on other blockchains in hopes of creating more interoperability so things like NFTs could be possible. For Vitalik Buterin, this effort inspired an even bigger idea, a “world computer” or full purpose blockchain that could be entirely programmable for an infinite number of use-cases. As many of you may know, this is the idea that eventually became Ethereum.
“CryptoPunks” were the first major NFT project to be developed on the Ethereum blockchain, leading to the creation of the ERC721 standard, which was used for the minting of all future NFTs on Ethereum. The CryptoPunk NFTs created the standard, which is why they fetch such high prices, sometimes in the millions, even though they are just 8-Bit representations of the cypherpunk pioneers of cryptography.
CryptoPunks had an immediate cult following in the crypto community, but it was a project called CryptoKitties that took the NFT phenomenon mainstream for the first time. CryptoKitties were unique collectible images just like CryptoPunks, but they were more aesthetically pleasing and easy to understand for the mainstream consumer.
Unfortunately, the newly constructed Ethereum blockchain was not prepared for the influx of users, and CryptoKitties clogged the network, making it very difficult, slow and expensive to use. This problem was happening across the entire industry at the time; even Bitcoin was plagued by scaling challenges at the time, which ultimately resulted in the Bitcoin Cash hard fork. This failure to deliver on the grandiose promises of the technology preceded a “crypto winter” that lasted for years. Luckily, those of us who were truly passionate about the technology got to work during the bear market, and NFTs continued to trade, as did tokens, albeit at much lower prices than before, so we were prepared when the bull market finally came back into full swing.
Dapper Labs, the company behind CryptoKitties leveraged its viral product to land major licencing deals during the bear market, and now it has captured an even larger mainstream audience with its professional sports collectables. The company’s “NBA Topshots” has completed over $230 million in transactions between their launch in October of 2020 and the most recent figures published in February of 2021. Some of their “moments” which can be described as digital trading cards in video form, have sold for as much as $200,000.
However, it is extremely important to mention that Dapper Labs has sacrificed decentralization for the sake of quicker scaling and mainstream appeal. After finding its audience too big for the Ethereum blockchain to handle, Dapper Labs went on to create its own blockchain, which is now the home of projects like NBA Top Shots. This new blockchain, called Flow, can allow for users to trade very efficiently, and they can easily use their credit card to purchase NFTs.
However, since these transactions are not happening peer-to-peer, as they would on a decentralized blockchain, Dapper Labs can freeze your funds or withhold your NFTs at any time, leaving many experts in the industry to argue whether or not these Top Shots are truly NFTs. This is not just a theoretical concern either, numerous users have already complained that their funds were frozen by the website.
The vast majority of NFT minting and trading is taking place on the Ethereum blockchain, where users can trade and withdraw their funds without permission. However, Ethereum is still working to scale, and transactions on the blockchain are typically expensive, which has priced many people out of the NFT markets until upgrades are made over the next year.
Still, despite these limitations, permissionless NFTs have given many independent artists a new way to monetize their followings, especially if that following is sizable. Michael Winkelmann, a digital artist who goes by the name Beeple, quickly became the most prominent early adopter of NFTs, despite being a relative newcomer to crypto. Beeple has a large audience that he has cultivated through 15 years of creating a different piece of art every single day, and his faithful following began bidding his NFTs for millions of dollars. He later made headlines with an NFT sold at the famous Christie’s auction for over $69 million, which was a collage featuring 5000 pieces from his “Everdays” collection.
Beeple’s payday created a rush of celebrities, artists and other creatives into the space, all hoping for a shot at financial independence, or at the very least some extra spending cash. However, the artists with the biggest followings will naturally be able to gather more attention, and thus higher prices, for their NFTs, often regardless of the quality. Having an audience that is familiar with crypto also seems to put some artists at a major advantage, because the auction platforms can be confusing and intimidating for new users. Over time, as the network scales and the barrier to entry is lowered, the opportunities for artists with smaller followings are expected to grow.
The NFT craze that we are currently seeing has been compared to the ICO boom of 2017, because there are incredibly high prices, most of which are based on speculation. ICOs may have gotten a bad reputation because the market became so saturated with get rich quick schemes in 2017, but there were many very serious and successful projects that launched from an ICO, and a similar outcome is expected with NFTs. It is unclear whether or not Beeple’s $69 million piece will actually increase in value, even the artist himself thinks that the price is indicative of a bubble. He may be right, there is a good chance that many of the pieces minted by B-list celebrities and independent artists will significantly reduce in value in the event of a bear market, but unlike most tokens, these NFTs will still hold sentimental and social value to the owner.
Government agencies also seem concerned about tax enforcement with NFTs, as they are with most other assets in the space. Last month, The Financial Action Task Force (FATF), a global anti-money laundering watchdog based in Paris, issued a statement on Decentralized Finance (DeFi) and the potential for money laundering, but NFTs were also mentioned. This group does not make laws in any jurisdictions, but their recommendations are taken very seriously by politicians all over the world, so strict enforcement of “Know Your Customer” (KYC) policies could be mandated very soon in some parts of the world. However, it is important to note that the art industry has always faced accusations of being an avenue for money laundering.
Comparing NFT Auctions
If you want to get started with minting or trading NFTs, you are going to need to familiarize yourself with a Metamask wallet, which allows you to connect to Web3 applications like NFT marketplaces and decentralized exchanges. Ethereum is the native asset of these applications, so you’re going to need some ETH as well.
- Opensea.io – OpenSea is the largest NFT platform, which aggregates auctions and listings from other sites as well as hosting its own. Requires users to convert their Ethereum into WrappedEth in a rather intimidating process.
- Niftygateway – Nifty gateway is backed by the Winklevoss Twins and hosts some of the most popular NFT drops on the market, but is seen as more centralized and requires artists to apply to be accepted.
- Makersplace.com – Makerspace is one of the few NFT marketplaces that allow for credit card purchases, allowing for people who are new to crypto to be onboarded more easily.
- Mintable.com – Mintable is one of the only marketplaces that allows artists to upload their work without paying Ethereum gas fees. However, it seems more difficult to get your work noticed there because it has less activity, even with being aggregated on sites like OpenSea.
- Rarible – Rarible has a great interface, but no key features that would appeal to independent artists. Rarible just recently launched their own token, which is trading exclusively on decentralized exchanges like Uniswap and SushiSwap.
- Super Rare – Super Rare has a great interface but now key features to set it apart from the crowd.
The Future of NFTs
Art and collectables are just the first use cases for NFTs, which will act as a proof-of-concept and a foundation for the industry to build on. Progress is already being made in connecting NFTs with real-life items for authentication and quality control purposes. Experts are predicting that NFTs could change how things like car titles, real estate and concert tickets are issued. Video game skins could soon become customizable NFTs that can be carried from game to game, and there is already a rush to buy property in virtual worlds like Decentraland.
The use-cases will continue to expand as the space grows and the innovations that will happen with NFTs and blockchain technology in the coming years will be far beyond anything we can imagine.