Blockchain 101: What is NFT?
Alright, let's start from the basics.
As cryptocurrencies have proved themselves to be a highly profitable investment vehicle lately, people are still in for the thrill despite their risks. With cryptocurrencies, you are able to purchase a wide range of assets, from real estate, luxury goods, everyday items, travel, and charitable donations to something called “Non-Fungible Token”, a.k.a NFT.
So…what is it exactly?
Before you read: This article is mainly based on my own observation and research, information from various sources will be used for reference but it might contain holes and shortcomings. Read at your own discretion.
1. Non-Fungible Token
According to Investopedia, Non-fungible tokens (NFTs) are digital assets that have been transformed into tokens using blockchain technology. These tokens possess unique identification codes generated through metadata using encryption methods [1].
NFTs are non-interchangeable, unlike physical money and cryptocurrencies, which are fungible. For instance, a $1 bill can be replaced by another $1 bill, the same goes for cryptocurrencies. However, a completely identical Bored Ape Yacht Club (BAYC) NFT you downloaded from Google Images wouldn’t hold the same value as the authentic one, which costs about $40,000 ~ $60,000.
NFTs are uniquely identifiable, therefore, they are often considered a method of certifying ownership and authenticity. However, the legal ownership rights concerning these digital assets remain uncertain. And the most interesting thing about NFTs is that it doesn’t require any coding to create one. People can make NFTs out of anything: artwork, music, game items, videos. That’s why most artists or musicians might feel uneasy with the fact that anyone could turn their work into an NFT and claim it is theirs.
2. The Brief History of NFTs
The Beginning
The first concept of NFTs was around in 2012-2013 with the first NFT called “Quantum” was minted in 2014 by Kevin McCoy. Some might argue that Colored Coins, which were created in 2012, might rightfully claim the title of being the first NFTs. Anyway, it wasn't until the emergence of the Ethereum blockchain in 2017 that they garnered substantial attention. Ethereum's capacity to support NFTs, facilitating their creation, storage, programming, and trading, significantly revolutionized the landscape [2].
In October 2015, the inaugural NFT project, Etheria, was introduced and showcased at DEVCON 1 in London, Ethereum's initial developer conference, three months following the Ethereum blockchain's launch. 457 available and tradable hexagonal tiles within the Etheria collection remained unsold for over five years until March 13, 2021, when a resurgence of interest in NFTs triggered a buying frenzy. They all were sold for a total of $1.4 million [3].
The Evolution
Another NFT. Spells of Genesis, which emerged in 2015 represents the first NFT trading card game, which garnered significant popularity. The Spells of Genesis NFT cards are a significant highlight in the brief history of non-fungible tokens as they introduced the fundamental foundations of NFTs: complete ownership over the in-game assets and unique authority, for example.
The design of Spells of Genesis is straightforward, with each card showcasing artwork that represents a profound achievement in the history of blockchain. Players must then collect the cards, and create their powerful decks to challenge other players [4].
And from 2017 onward, the blockchain world witnessed the rise of NFTs worldwide. Here's a timeline crafted by NFTEvening that highlights significant milestones in the evolution of NFTs:
2017 – CryptoPunks: Launched by Larva Labs, CryptoPunks consists of 10,000 uniquely generated characters, marking an early example of profile-picture NFTs gaining popularity.
2018 – CryptoKitties: A blockchain-based game allowing players to breed and trade virtual cats. People were so hyped for it that it caused congestion on the Ethereum network, however, it showcased the potential of NFTs in gaming.
2019 – Decentraland: A virtual world where land and items are NFTs, expanding the concept of digital assets into virtual real estate and immersive experiences.
2020 – Beeple’s Everydays: The sale of Beeple's digital artwork "Everydays: The First 5,000 Days" for $69 million at Christie’s brought unprecedented attention to NFTs.
2021 – Bored Ape Yacht Club (BAYC): A collection of 10,000 unique bored ape JPEGs gained massive popularity, offering ownership of digital art and membership in an exclusive club with benefits.
2022 – Art Blocks: This platform introduced generative art to the NFT space, where algorithms create unique pieces of art upon purchase.
2023 – Virtual Fashion NFTs: Luxury fashion brands began releasing NFTs, bridging the physical and digital fashion worlds and demonstrating the potential of NFTs in new industries.
As NFT is expanding its reach and has somehow been considered an investment vehicle, concerns arise.
3. How Do NFTs Work?
The process of creating an NFT, known as "minting," involves recording vital information about the creator and the item on the blockchain. This includes details such as attributes of the NFT, the blockchain network on which it will be minted, and an image or artwork representing the token. This process is facilitated by a smart contract deployed on the blockchain.
When you initiate the minting process, the smart contract interacts with the data provided, validating it against predefined rules. Once the information is verified, the smart contract generates a unique, non-fungible signature in the form of a token [5]. This token serves as confirmation that the NFT and its metadata are securely stored on the blockchain and cannot be edited.
Just imagine it like this: you wish to preserve an asset of your own creation — like a work of art — or create NFTs from your own physical artworks or photos to sell or trade. You fill in a form with some information regarding the creator, the NFT's attributes, the image representing the token, and the desired name for the NFT. When you submit this form, the “validator”, which is the smart contract, will approve the minting of your NFT and proceed to store and lock it away on the blockchain so that it stays immutable.
In return, you will receive a distinguished token that tells you where your item is hosted, either on a marketplace or a distributed file system.
So what will happen if someone buys your NFTs?
For this to happen, you need to list your NFTs on a marketplace first. There are numerous NFT Marketplaces out there for you to choose from. For instance, OpenSea - one of the world's first and largest web3 marketplace for NFTs and crypto collectibles.
When someone buys one of your NFTs, it essentially means that they are purchasing exclusive ownership of that item. Most NFT marketplaces typically present NFTs for sale in two ways: fixed-price and auction formats. Purchasing an NFT at a fixed price is instantaneous, whereas participating in an auction can span several days until its closure.
A smart contract can execute dual actions: releasing funds to the seller and transferring ownership to the buyer after verifying if the buyer meets all prerequisites, such as credit checks and a successful down payment. The transaction details will be recorded on the blockchain for easy verification [6].
4. How Do NFTs Gain Value?
Well, at its simplest level, the value of NFTs increases when someone is willing to pay more for them than the previous owner. However, not everyone is willing to pay for crap and lose money over it. In fact, the value of the NFTs depends greatly on the robustness of the community associated with the NFT or its collection, the established reputation of the artist or entity minting the NFT, and sometimes through less ethical means like wash trading. Sometimes, secondary factors such as the blockchain on which they are minted can also influence the value of NFTs.
After all, what people are truly after is “potential,” if an NFT has the potential to create more value over time, people are more likely to invest in it. But there are roughly millions of NFTs out there, thousands of them are minted every second. Then how can one tell if an NFT has “potential”?
Let’s take BAYC NFTs for example. What is so special about these apes that makes people willing enough to pay $40,000 for a generative artwork?
There are 6 key indicators to evaluate the “potential” of an NFT or a collection:
Utility: The utility of NFTs stems from their practical applications, in both physical and digital worlds. In the case of BAYC, each NFT guarantees distinctive benefits, including exclusive real-world events, merches, and member-only areas. Especially when it is endorsed by top celebrities such as Snoop Dogg, Justin Beiber, and even Eminem, everyone would love to join the Apes.
Rarity: The value of NFTs is determined by the array of their unique traits and accessories. The term "rarity" assesses how uncommon an NFT is within a collection, assigned a specific number. Within the BAYC collection, there are over 160 traits, and each ape can have four to seven trait categories. These traits include background, clothes, earrings, eyes, fur, hat, and mouth. The most expensive Bored Ape in the collection, BAYC #8817, was auctioned in October 2021 for $3.4 million on Sotheby’s Metaverse marketplace, an online platform dedicated to rare and extraordinary NFTs. BAYC #8817 boasted the Solid Gold Fur trait, making it a relatively rare variety of the NFT [7].
Community Size: Community plays a pivotal role in the success of NFTs, as it influences the number of potential users and buyers in the open market. The larger the community, the more word-of-mouth an NFT attracts. An NFT as famous as BAYC would apparently gather a lot of users, now that it is backed by celebrities.
Expanding Potential: Of course, if a collection only has 160 NFTs and no future plans to increase the number, people would not invest in it. BAYC has a clear roadmap for expanding its reach to a broader horizon with the introduction of the Mutant Ape Yacht Club (MAYC) and Bored Ape Kennel Club (BAKC).
Provenance: Even if it’s just a series of generative artwork, people would love to learn more about the team behind the collection. This might not really be a decisive factor but people are inclined to research the creator, just note that the more prominent the creator(s), the greater the likelihood that their works will be perceived as valuable on the market.
Personal Taste: A striking appearance can easily attract an outsider, but there are a few more factors to consider, such as personal connection to the artwork, the relevance of its application, or its connection to the issuing project. Undoubtedly, the most appealing aspect of BAYC is its exotic appearance.
4. Final Words?
NFTs have undeniably made a significant impact on the digital and artistic landscapes. As they continue to evolve and gain traction, the conversation around their value, potential, and impact on various industries will undoubtedly persist.
However, let’s just leave that for the time to decide if this is merely a fad or a revolutionary approach to investment and art.
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