NFT was declared one of 2021’s words of the year, which is unsurprising given the exponential growth the industry experienced last year. In 2021, NFT tradings spiked 21,000% to more than $17 billion. This year, the industry shows no signs of slowing down. Millions of NFTs are flooding the space and more money is being traded than before. In fact, between 15 March and 15 April 2022, over $73 million in NFT sales were recorded on the Ethereum blockchain.
With the Web3 movement gaining momentum in the mainstream thanks to the rise in popularity of the metaverse, blockchain and cryptocurrencies, and digital art as NFTs, it is clear that these new technologies are shaping our future in real-time.
But what exactly are NFTs and how are they touted to be the basis of every aspect of ownership in the metaverse future? Before we dive into what NFTs are, we must first understand the difference between blockchain coins and tokens.
- Blockchain coins vs token
- What is an NFT?
- The history of NFTs
- Types of NFTs
- Other NFT use cases
- Current NFT landscape
- The problem with NFTs
- What’s next?
Blockchain coins vs tokens
Most people are familiar with blockchain technology thanks to the rise in popularity of cryptocurrencies such as Bitcoin. But there are two types of digital items that are used in blockchains, coins and tokens, and it’s important to understand the distinction between them.
A crypto coin (commonly known as cryptocurrency) is the native coin of a certain blockchain and is a form of digital currency. For example, ETH is the coin from the Ethereum blockchain. They can only be used for transactions within their native blockchain. Coins from blockchains based on proof-of-work can be ‘mined’ — a process of earning coins by contributing to the network.
A crypto token is a wider definition of any digital unit of value that lives on the blockchain. Under this definition, a coin is a type of token (a payment token in this case). There are different types of tokens, including:
- Payment tokens
- Utility tokens
- Security tokens
- Non-fungible tokens (NFTs)
- And many more…
What is an NFT?
A non-fungible token (NFT) is a unique and non-interchangeable unit of data stored on a digital ledger, in this case, a blockchain. Currently, they can represent a digital asset such as photos, videos, music, 3D models, gaming items, text, or any kind of digital file that the token is linked to. In the future, NFTs may well evolve to represent various other types of non-digital assets such as real estate, contracts or certificates that will still have a digital component to prove ownership.
It is important to understand the concept of fungibility.
- Fungible items are assets that are equal in commercial value, have identical properties, and are interchangeable (e.g. dollar bills, cryptocurrencies, common shares). They can be interchanged because they are worth the same and there’s no uniqueness to them.
- Non-fungible items have unique characteristics and are not interchangeable. We consider things such as collectables, one-of-a-kind art pieces and items with sentimental value as non-fungible.
NFTs can work as a public record of digital ownership, similar to what a certificate of authenticity does in real life. In this case, such ownership is visible in the blockchain, which acts as a transparent record of all transactions.
Logically, this invention has been used to enable a new era of collectables and art in their digital form. We can trust that there is really just one unique owner of a certain digital asset, even if people download that asset and use it around the web.
Many NFTs go beyond the digital realm and offer the owner certain benefits in real-life, or 1:1 real-life representations of the art purchased. However, some also lean more towards their uses in digital platforms, such as a user being able to display their NFTs in different metaverses or use them in video games and other digital environments.
The history of NFTs
Although NFTs were thrust into the mainstream in 2021, their origins actually trace back to 2012 with the release of a paper detailing the concept of Coloured Coins. Issued on the Bitcoin blockchain, Coloured Coins aimed to represent and manage real-world assets while being used to authenticate ownership through a marker embedded into them indicating their use.
Due to the limitations of Bitcoin, the Coloured Coins concept was never realised. However, it laid the foundation for the future of NFTs.
In 2014, digital artist Kevin McCoy minted the world’s first-ever NFT. The one-of-a-kind digital art piece sold for over $1.4 million at a Sotheby’s auction. In the years following the release of McCoy’s art piece, much experimentation with platforms built on top of Bitcoin’s blockchain took place, most notably Counterparty (which allowed users to create digital assets), Spells of Genisis (which allowed users to create digital game assets), and then Rare Pepes NFTs which birthed the meme NFTs.
In 2017, NFTs moved to the Ethereum blockchain: a move which birthed the new age of NFTs that we know today. The Ethereum blockchain created a new set of token standards (a subsidiary to the smart contract) that allowed developers to create their own tokens. This move resulted in the creation of many successful NFT projects, most notably CryptoPunks and Cryptokitties.
CryptoPunks is a generative (pixel) art project that creates digital art pieces different from each other and is limited to 10,000 pieces. CryptoPunk #9998 sold for $530 million in December 2021, making it the highest-selling NFT ever. This showed how lucrative NFT digital art can be.
All 10,000 CryptoPunks pieces were randomly generated by an algorithm based on a set of traits defined by its creators. Larva Labs, the creators of CryptoPunks, was the first to successfully execute the concept of releasing a limited collection of pixel art avatars which people could use as profile pictures (PFPs) as their digital identity in digital spaces.
They even created their own marketplace to allow the trading of CryptoPunks assets, meaning they didn’t need a third-party player like OpenSea. Interestingly, the first CryptoPunks were given out for free in 2017 when they were first ‘minted’. Back then, the process of buying tokens and dealing with smart contracts wasn’t as smooth as it is now, but they set the benchmark early for how the industry operates today.
Additionally, in 2017-2018, CryptoKitties — a blockchain-based virtual game that allows users to adopt, breed, and trade virtual cats — was the first example of how successful blockchain-based games can be. After the game went viral (predominantly due to clogging Ethereum’s blockchain), it went on to attract 1.5 million users and witnessed over $40 million worth of transactions on its platform.
Between 2018 and 2020, the NFT gaming landscape took shape with the advent of the metaverse and the evolving NFT game space. Decentraland was the first decentralised Ethereum-based VR platform that allowed users to build, explore, play, socialise, and collect/sell items in its metaverse. Since then, many platforms and games have followed suit that allowing developers to tokenise in-game items on Ethereum that can be backed by real-work value, such as Enjin Coin (ENJ) and Axie Infinity (AXS).
2021 witnessed the explosion of NFTs into the mainstream, largely due to the headline-grabbing auction sales of digital art pieces, such as Cryptopunk and the Bored Ape Yacht Club. Added to this, Facebook’s rebranding into Meta incited much interest and investment globally and soon other blockchains such as Flow, Solana, Cordano and Tezos (to name a few) have released their own version of NFTs.
Types of NFTs
Although NFTs are commonly associated with digital art, there are a number of other types available.
- Digital art
As the most popular type of NFT available, digital art NFTs are soaring in popularity and market size. The sale of NFT art pieces continues to rise as more creators and DAOs are getting involved in the space.
- Video game assets
The likes of Axie Infinity and CrypotKitties gave rise to the popularity of video game NFTs. Certain games allow users to buy, sell, trade, and utilise NFTs within the game. Cross-platform integrations allow for users and brands to extend their reach while making the buying/selling of NFTs among players easier. Video game NFTs became popular thanks to the play-to-earn (P2E) model where a few top players earn passive income from gaming.
- Virtual real estate
NFTs as virtual real estate is becoming a popular and lucrative trend. The Sandbox metaverse has become popular with a slew of celebrities and companies purchasing virtual land to build experiences or just own digital real estate. Recently, HSBC purchased NFT land in The Sandbox metaverse, joining other high profile signings including Warner Music, Snoop Dogg, Adidas and Ubisoft games.
Recording artists are now able to re-release their music on NFT marketplaces. Fans can also purchase portions of the album and enjoy profit shares when the album is released via traditional channels. Popular American rock group Kings of Leon was the first band ever to release and sell their latest album as multiple NFTs in March 2021.
There is a recent rise in NFT-powered production companies breaking the mould in Hollywood. NFTs and DAOs are allowing decentralised production companies to fundraise their next projects with their communities in the driving seat. Not only are movies being funded by NFTs, but some are also based on popular NFTs.
- Digital collectables
NFT collectables are just like any other real-world collectable but just in digital form Pokemon cards or vintage mint condition toys but in digital form. NBA Top Shot is to this day one of the best-executed examples in the collectables category. It’s a platform that allows users to buy and trade ‘epic’ moments from NBA matches, with officially licensed footage.
Other NFT use cases
As you can see above, NFTs do not exist solely to buy and sell digital art. The concept is being used across multiple industries that rely on transparency and traceability.
Here are some other popular use cases for NFT:
- Product authenticity – NFTs are able to store vital information about a product, such as authentication of ownership, that can be used to add value (product’s rarity or fair trade status).
- Supply chain – Goods can be given NFTs as identifiers that house all the relevant information that can not be altered. This helps companies track their products from manufacturing to shipping and delivery.
- Real estate – NFTs can store vital information like land transfers, deed transfers, proof of ownership and even track the value of land over time. Smart contracts ensure trust and efficiency between sellers and buyers, facilitate automated payments, and store sensitive payment data safely.
- Voting – NFTs can enable virtual authentication and identification, meaning anyone can vote remotely and authentically. We may see a significant rise in the number of votes globally when all the bureaucratic and administrative red tape is removed in favour of efficient and transparent blockchain technology.
- Medical records and identification – NFTs can ensure that all of a patient’s medical records are safely stored in one place so patients can access their medical history from anywhere in the world, allowing ease of access to medical facilities from anywhere at any time.
- Intellectual property – With NFTs, inventors and creators can store their IP as an NFT in the blockchain that is timestamped, making the patent or idea permanently fixed in time to ensure authenticity.
- Ticketing – Traditional tickets are being replaced by NFT tickets that are assigned to a unique ID that users use to gain entry or to use a product/service. Users will only need one token ID that will be used for all ticketing, meaning no more lost parking passes or winning lottery tickets.
Current NFT landscape
In 2021, approximately $44.2 billion worth of cryptocurrency was sent to ERC-721 and ERC-1155 contracts, the smart contracts on the Ethereum blockchain associated with NFTs. Although slight saturation of the market is currently being experienced due to the proliferation of millions of new NFTs, 2022 is already shaping up to be yet another year of industry growth.
One of the latest NFT collections making headlines was Moonbirds, digital owls that have sold for over $500 million (as of May 2022). The Moonbird NFT collection launched in mid-April 2022 and quickly sold out in a fixed-price drop. The success of the launch was largely due to the team behind the collection, Proof Collective — a group of 1000 high-profile NFT collectors and entrepreneurs.
The notable takeaway from the launch was Proof Collective’s reasoning behind the NFT collection: it wasn’t to sell art, it was used as a crowd-funding operation to create a new media business. The massive success of the Moonbird NFT collection has set the benchmark for how Decentralised Autonomous Organisations (DAOs) are able to access funding for new ventures supported entirely by their communities.
With this, Moonbirds almost doubled the number of sales received by popular NFT juggernauts Mutant Ape Yacht Club ($206 million) and Bored Ape Yacht Club ($181 million). But this only if we don’t count their recent land sale which also raised over $300 million with their Otherside project.
The Yuga Labs land sale was the latest event that had the NFT excited and shocked at the same time. Being the largest NFT mint ever, Yuga Labs managed to sell 55,000 plots of virtual land for their future metaverse: Otherside. The sale was so big that it clogged the Ethereum network, crashed Etherscan and pushed gas prices up to more than 2 ETH. This meant that buyers had to pay an extra $6,000 to process the transaction on top of the $6,000 price tag of the land itself.
Historically the most successful NFT remains Axie Infinity with over $4 billion in all-time sales. Other NFTs that are in the billion-dollar all-time sales group are CryptoPunks ($2.2 billion), Bored Ape Yacht Club ($1.8 billion), Mutant Ape Yacht Club ($1.3 billion), and Art Blocks ($1.2 billion).
The problem with NFTs
Despite the numerous benefits NFTs and blockchain technology boast, there are a few drawbacks at this stage. A 2-hour long video essay published on YouTube detailing the problem with NFTs has received over 7.3 million views in just 3 months. The video points out the foundational issues in the NFT and cryptocurrency scene, labelling NFTs “worthless assets” people use to “sell to other fools for more money”.
The video details the volatility of cryptocurrencies that makes actual day-to-day use of them extremely difficult, and the proliferation of speculators driving up the value of select NFTs (in turn, boosting the value of cryptocurrency).
The NFT misnomer
NFTs are heralded by most as an unalterable digital ledger of ownership of a digital asset. But what if that were only partly true?
When people buy an NFT they are not actually buying the actual asset, they are merely buying a link to it. Anil Dash, who together with James McCoy created the world’s first NFT at the Seven and Seven hackathon event in New York City, explains why NFTs you purchase are not the real digital asset, per se.
The prototype the duo created couldn’t store the actual digital artwork in a blockchain due to the technical size limitations of this technology. Rather than trying to shove the entire artwork into the blockchain, they decided to just include the web address of the asset to be used as a reference to the artwork elsewhere.
We took that shortcut because we were running out of time. Seven years later, all of today’s popular NFT platforms still use the same shortcut.
In addition to this, NFTs still rely on the company you purchased them from to remain in business in order to verify the artwork or asset. This means that because most NFTs are hinged by a company reliant on pre-blockchain internet, if their website vanishes due to a domain renewal mixup, the artwork is gone forever.
But there is some confusion around the interoperability of NFTs across metaverses. There are bold claims that all NFTs can work across other metaverses but this currently isn’t the case. Some NFTs can already interoperate across platforms, like images, but when it comes to 3D assets, things get complex.
A lot of development goes into 3D assets and some game developers use different elements, meaning that currently, it is very difficult for complex digital assets to interoperate across metaverses. Also, there are IP implications around these assets which cause issues with interoperability.
Wash trading is a type of money laundering act that sees an asset being sold and then purchased within a very short time period. The result of which influences the price and trading activity of the asset, effectively manipulating the market to make the asset’s price or liquidity appear far greater.
Despite wash trading in the crypto space being prohibited, the decentralised and anonymous nature of cryptocurrencies makes it incredibly difficult to find culprits.
Earlier this year, the fast-rising NFT marketplace (and strongest contender to OpenSeas), LooksRare, has reportedly generated over $8.3 billion in wash trades. Users on the marketplace buy and sell NFTs between wallets they own in order to manipulate the trading market.
What’s next for NFTs?
The future of NFTs is difficult to predict at this stage as the technology and adoption are still in relative infancy, making it volatile for the time being.
But the impact NFTs have had in a relatively short period of time is an indication of how rapidly our future can be shaped thanks to progressive technologies. As the world moves into the Web3, blockchain-powered era, we will no doubt begin to adopt these technologies into our everyday lives.
Goldman Sachs plans to explore the tokenisation of real assets as it invests more in the crypto space. As we have seen the rise of real-world assets like real estate being bought and sold as NFTs in the metaverse.
Meta-owned Instagram is also planning to bring NFTs to its millions of users, effectively boosting the NFT market into overdrive. The platform aims to simplify the process of buying and selling NFTs that will legitimise the NFT market and create a groundswell of investment.
NFTs in particular will change the way many, if not most, global industries operate. For instance, we see that the future of NFTs could provide artists and content creators with complete ownership of their works. In an ideal scenario, there will no longer be a need for traditional representatives, publishing agents and distribution channels to handle creative assets. Creators will have full autonomy in the publication, distribution, and sale of their works.
Naturally, this will completely revolutionise the music, film, art, and content creation industries in the form of ultimate democratisation. This will also encourage many more budding creatives to produce and publish their own content, leading to a proliferation of creativity never quite seen before.
However, at this stage, NFT marketplaces like OpenSea are still required to mediate transactions and provide security as most people don’t have the technical know-how to check if the smart contracts they use are in their best interest. With the decentralised nature of blockchain technology providing anonymity, we still have some way to go to ensure all users are able to utilise the space safely.
An NFT and blockchain-shaped future
Together with the Web3 movement, metaverse, and DAOs, NFTs will play a major role in creating a decentralised and autonomous digital future that will quantum leap beyond everything that has come before. Blockchain technology is the binding agent for these revolutionary technologies and its unalterable proof of ownership of assets is a game-changer.
NFTs and blockchain technology provide the average person with access to ownership of the new Web3 digital future, a claim-stake in our digital and physical future society.
The core concept behind the decentralised Web3 movement is community. The NFT community is growing rapidly, as are the metaverse and blockchain communities. But these communities share the same goals and will inevitably completely converge into one decentralised, truly democratic digital society.