What are NFTs?

NFTs are unique cryptographic tokens that point to digital files such as JPEGs, GIFs, videos, or songs. If you own an NFT, you own a piece of the digital universe.

What are NFTs?

An NFT, or non-fungible token, is a unique digital file that lives on a blockchain.

Or, a little more accurately, NFTs are unique cryptographic hashes embedded in a blockchain, known as tokens, that assign and prove ownership of a digital asset.

Most people associate NFTs with images (JPEGs), but they can also be GIFs, videos, songs, or any other data that can be stored as a digital file.

NFTs can also point to ownership of a physical object. Representing real-world assets (RWA) and shares of real-world assets with NFTs is known as tokenization.  

Each NFT is unique. Even if two NFTs look exactly the same, each underlying digital asset is the only one with its specific attributes.

Purpose of NFTs

The purpose of NFTs is to prove you own a digital asset.

With NFTs, the ownership and authenticity of a digital asset is recorded on a blockchain, which is a public ledger that is decentralized and tamper-proof.

This makes it possible for NFTs to have value, and for owners to be able to both prove their ownership and to transfer ownership to others.

NFTs enable new business models for creators and artists. They make it possible to sell digital creations directly to buyers, rather than relying on intermediaries.

This allows for greater control over pricing, distribution, and copyright, and opens up new opportunities for creators to profit off of their digital artwork.

Tokenization of real-world assets (RWA)

If you buy a car, or a house, or a famous artwork (and who doesn’t have a Picasso in the hallway), its ownership is usually denoted with a piece of paper, like a deed or certificate of ownership.

However, instead of a legal document, it’s possible to represent ownership of a real-world asset with a token, which is basically an NFT that corresponds to a physical object (car, house, painting, etc.). This allows you to transfer ownership of a house as easily as sending an NFT.

Not only that, when tokenized, ownership can be fractionalized. Say you want to give your house to your five best friends. You split up ownership into five tokens, and send one to each friend.

This lets you trade fractionalized shares of expensive objects. Maybe you can’t own a whole Picasso, but you might be able to own an NFT that denotes a 1/100,000th share in a triangle lady.

Representing ownership on-chain can offer these benefits:

  • Enables you to trade directly with your counterparty
  • Removes the cost of middlemen like lawyers, brokers, and notaries
  • Lets you transfer ownership easily and whenever you want (crypto doesn’t keep business hours)
  • Blockchain transactions are fast, immutable, and secure

Any asset, such as gold or stocks, can also be tokenized and traded on-chain.

Benefits of NFTs

Security of blockchain technology

NFTs use blockchain technology, which is decentralized and secure. This means that NFT data is recorded on a public ledger that is tamper-proof and cannot be altered or deleted.

Prove ownership

NFTs provide a way to prove ownership and authenticity of unique digital assets, such as art, music, or videos.

This is important because anything digital can easily be duplicated. NFTs provide a way to verify that a particular digital item is genuine and owned by someone.

NFTs can protect the intellectual property rights of creators and artists.

Unique

Because NFTs are unique and one-of-a-kind, they are both scarce and collectible, which makes it possible for them to accrue value.

Accessible

Artists can create NFTs from anywhere in the world, and sell their digital art to anyone. This can help bypass some of the barriers that artists might face when trying to enter the art world.

History of NFTs

Since the invention of NFTs, the NFT market has exploded, with millions of dollars being spent on everything from virtual real estate to digital art.

Here are some notable events in NFT history:

  • 2014: Kevin McCoy mints the world’s first NFT, Quantum on Namecoin.
  • March 2015: EverdreamSoft creates Spells of Genesis, the first blockchain trading card game, on Bitcoin.
  • September 2016: Rare Pepes are minted by blockchain pioneers, becoming one of the first art experiments on the blockchain.
  • June 2017: Larva Labs launches CryptoPunks, one of the earliest generative art NFT collections.
  • November 2017: Canadian studio Dapper Labs creates CryptoKitties, the first blockchain game to receive widespread media attention.
  • March 2018: Axie Infinity, one of the first blockchain games, was launched by Vietnamese studio Sky Mavis. It was based on Ethereum and featured a “play-to-earn” model, where players could earn in-game cryptocurrency by playing.
  • February 2020: Decentraland, a browser-based game created by Ari Meilich and Esteban Ordano, allowed players to buy and sell virtual plots of land and in-game items. It’s considered one of the earliest models for the metaverse.
  • October 2020: NBA Top Shot, one of the more popular NFT collections, was launched. It allowed sports fans to own a piece of their favorite sport through NFTs created from video clips of key moments.
  • November 2020: Art Blocks was launched, streamlining the creation of generative art. It uses generative scripts to create unique works of computer-generated art.
  • April 2021: Bored Ape Yacht Club, a popular PFP NFT, was created by Yuga Labs. The collection features 10,000 unique NFTs and received massive critical acclaim.
  • January 2022: Height of NFT mania. $17.2 billion was traded on the NFT market.
  • September 2022: NFT market down 97% from its heights.
  • July 2023: Sales of NFTs dropped 49% from January to July 2023.

Trading volume is down, fewer new participants are entering the NFT market, and NFTs seem to have lost their luster. Was it all a bubble? Or is this just another crypto winter? Stay tuned for the next bull market to see if NFTs make a comeback or go the way of the ICO…