It seems not a week goes by without some sensational story hitting news headlines about the world of cryptocurrencies and blockchains. Whether it is Tesla accepting Bitcoin as a means of payment (and committing to retain these proceeds in Bitcoin), or tweets being “sold”, blockchain technology continues to gain a lot of attention.
The latest craze in this space is that of NFTs – Non-Fungible Tokens – some of which are currently being traded online for eye-watering sums of money.
But what exactly are these NFTs that a group of tech-savvy people now owe their newfound wealth to?
An NFT is a unique token, or a piece of data, that exists on a digital ledger known as a blockchain. The idea of a blockchain has become more widely understood with the increasing popularity of cryptocurrencies, but very simply put it can be thought of as a public database distributed freely across the internet. Amongst other things, blockchains store information relating to who owns specific tokens and the related transactions around them. In the case of cryptocurrencies, these tokens are referred to as fungible – meaning one token is equivalent to another and can be interchanged with other tokens of the same type without losing value. This is akin to me being able to exchange one of my R20 paper notes for one of yours, or even two of your R10 notes. On the contrary, NFTs are blockchain-based tokens that are non-fungible and therefore unique – they cannot be mutually substituted for similar tokens.
It is this non-fungible characteristic that makes NFTs a natural fit to be the foundation of a system that represents ownership of unique items. In theory, this could apply to any item – physical or digital. But it is the world of digital assets where NFTs have really taken off this year. There is suddenly a lot of buzz around marketplaces where collectable, unique digital items can be traded.
Unlike an original Rothko painting or match-worn Muhammad Ali gloves – of which each item is a one-off unique piece – digital art, or any digital asset, in theory, can be perfectly and infinitely reproduced due to its digital nature. While there are many factors that set the market price for physical collectables, the fact that it is the only original (or a very limited) one of its kind certainly plays a big part. NFTs are therefore seen by some as a way to bring exclusivity to the world of digital assets and thus commodify these items – be it digital art, music, videos or any other digital asset. A key point to note though is that NFTs are not like owning the only copy of a physical item, but rather they are analogous to having a certificate of authenticity or owning an autographed item. Due to the nature of digital assets, infinite copies of the same thing can exist. However, an NFT gives one the ability to cryptographically verify that they own an “approved” or “autographed” version of an asset.
NFTs have been around for a few years already and first came to light in mainstream media around 2017 with the explosion of CryptoKitties – a game focused on purchasing, “breeding” and selling unique digital cats. As ridiculous as it sounds, numerous cats were traded at the time for over $100,000.00 each. However, as with many things crypto related at the moment, some would say that CryptoKitties was a fad that fizzled out, relegating NFTs back to the Twitter threads of crypto enthusiasts. But enter 2021 and the hype is back! This year has been a rocket ship for NFTs.
Dapper Labs, the company behind CryptoKitties, has found new success with the launch of NBA Top Shot – an NBA backed and licensed platform to buy, sell and collect basketball video highlights from NBA games. “Packs” of game clips, or Moments, are released similarly to physical trading cards – in limited supply and sold at random for a few dollars. The difference here is that the digital asset is sold as an NFT, giving the buyer the digital ownership of these verified video clips. To date, NBA Top Shot has generated more than $500 million in sales, mostly through public trading of these Moments. A clip of a LeBron James dunk recently set a record and sold for over $380,000.
If $380,000 for a basketball highlight (which is publicly available for anyone to watch) seems like a lot for a digital item, then the next big headline for NFTs was certain to have jaws dropping. In early March, auction house Christie’s ran their first ever digital-only art auction. A collection of digital artworks created by the artist known as Beeple was up for sale in the form of an NFT. The final moments of the auction were watched by over 22 million people and the closing sale price shattered expectations – a whopping $69.3 million. To put this figure into context, this sale now places Beeple amongst the top three most valuable living artists.
Video clips and art are not the only digital assets finding a marketplace through NFTs. A slightly quirkier one is that of individual tweets. Twitter co-founder and CEO Jack Dorsey recently auctioned off his first ever tweet for $2.9 million, with the proceeds going to charity. Even though the tweet will remain public on Twitter for all to see, the buyer has likened his new digital asset to that of the Mona Lisa!
The million (or perhaps billion) dollar question then – is the current NFT trend another bubble? It certainly could be seen to be one given the extreme money being thrown around for seemingly unusual items. But as with all new technologies, the world of NFTs will attempt to continuously improve and eliminate some of its shortcomings. We may very well see an era where practical use cases for NFTs thrive. Be it authenticating and verifying ownership of land deeds, eliminating counterfeit event tickets, or allowing artists and musicians to have more control of their own content, and thus earnings, by eliminating their industry’s middlemen.
Of course, on the other hand, high stakes trading in digital collectables might be NFTs true calling. Or it might just all fizzle out to nothing. All bets are on.