It seems like everyone is changing their online profile pictures to pixelated digital humans, apes, and all sorts of digital art. Unless you’ve been living under a rock, you’d also know that Twitter and Reddit are allowing for NFT profile pictures. And do we even have to mention the many celebrities who have bought or launched NFTs?
All this just shows that it’s true - the NFT revolution is underway.
Non-Fungible Token… Put Simply
What is Fungibility?
Fungibility is the ability of an asset to be interchangeable with another asset of the same kind. For example, money is fungible. A fifty-dollar note in your wallet is worth $50, the same as a fifty-dollar note in your friend’s wallet, which is also worth $50. Using these notes, your friend or you can purchase the same goods and services.
In contrast, assets like diamonds or trading cards are non-fungible. Imagine being told that your 5 carat diamond is worth the same as a 1 carat diamond; or that your extremely rare trading card is worth the same as a common one. You wouldn’t agree; these assets vary in terms of rarity, colors, sizes and grades and cannot be interchangeable with one another. Thus, each non-fungible asset is unique and cannot be replaced by something else.
Non-fungible tokens
NFTs are like diamonds and trading cards - non-fungible. No two NFTs are identical to each other, even if they come from the same collection or game. Hence, they cannot be directly exchanged with one another.
Most NFTs are built on the Ethereum blockchain using one of two Ethereum token standards, ERC-721 or ERC-1155. Token standards are what they sound like - standards used for creating and issuing smart contracts on the blockchain. Smart contracts store NFT data and each NFT is attached to a digital signature. This does two things:
- NFT ownership is immutable and collectors actually own their NFTs
- Historical ownership data is stored on the blockchain and can be validated or traced back to the original creator
NFTs can be digital assets of any sort - art, collectible cards, virtual fashion, digital real estate and so much more.
The Value of NFTs, You Ask?
Profiting from trading
Similar to crypto, NFTs can be traded on the secondary market for a profit after minting.
Recently, one CryptoPunk #5822 from NFT collection CryptoPunks sold for a whopping $24M. The collection itself has generated $2B in secondary trading volume to date. Granted; most of us aren’t billionaires, but this should show you that there is a clear supply and demand for NFTs. Top NFT collections often sell for exorbitant amounts. If you are one of the lucky ones to have entered the space early, you may even have profited already.
CryptoPunk #5822 on OpenSea
This does not mean that newer collections cannot help you earn a profit. Today, many celebrities are launching their own NFTs. If you believe in their star power and buy in early, you could potentially profit from their legion of fans in the secondary market. Collections with unique value propositions - such as being women-focused - or collections with strong storytelling and lore have also seen their floor prices go up after launch.
Further reading: NFT Trends and Collections You Must Know
Selling digital art and more
For artists, NFT technology is a godsend. Emerging artists finally have a global platform to showcase and sell their artworks, and open up new doorways of opportunities.
One of the most popular NFT collections, World of Women (WoW), was launched by digital artist and illustrator Yam Karkai. The collection has generated over $120M in trading volume since launch and members of the community include Hollywood actress Reese Witherspoon. Earlier this year, Karkai also signed with talent manager Guy Oseary, joining top collection Bored Ape Yacht Club (BAYC). This signing would help both WoW and BAYC broaden their offerings and “explore opportunities in film, television, music, gaming and consumer products.”
Image credit: World of Women
NFT-exclusive perks
Companies have also been incentivizing NFT buyers by introducing perks associated with the NFTs.
Take fashion sportswear brand Adidas for example. Their NFT collection offers buyers access into an exclusive club where they would be able to purchase special merchandise to be used in the metaverse. The corresponding physical products will also be made available for purchase. This year, Adidas will develop metaverse virtual land experiences that are co-created with its community.
NFTs and the metaverse
We are seeing a digital transition to the metaverse today and NFTs are leading the way.
Already, investors and commercial brands are launching NFTs and grabbing up digital real estate in hopes of securing a spot in the metaverse. For example, in August last year, Gucci released a digital version of the Gucci Dionysus bag on Roblox - its selling price later surpassed the physical bag’s selling price. Gucci also recently acquired land in The Sandbox, where it is revamping Gucci Vault, its experiential online store. It is highly likely that players can purchase Gucci clothing in future to dress up their virtual avatars.
Entertainment company Warner Music also recently purchased land plots in The Sandbox. The companies announced that the public can look forward to virtual concerts from Warner Music artists in the future.
Further reading: The age of digital reality: What is the Metaverse?
Snapshot: What’s Next For NFTs?
Hear, Hear: Audiovisual NFTs
The vast majority of NFTs are digital art and game collectibles. But increasingly, audiovisual NFTs are making their way into the space.
Cascade8, the tech branch of French media group Logical Pictures, recently announced their plans to launch audiovisual NFTs based on films and TV series. This could range from a line of dialogue to a costume worn by a character or even a spaceship that can also be piloted in the metaverse.
NFTs in more physical auctions
In February 2021, prominent auction house Christie’s offered the first-ever digital art NFT auction by digital artist Beeple. One NFT sold for $69.3M, positioning Beeple “among the top three most valuable living artists,” according to the auction house. Rival auction house Sotheby’s followed suit - offering a NFT auction by digital artist Pak which fetched a total of $16.8M.
Once an exclusive space reserved for physical, long-standing artworks, auction houses have pivoted to include new blood. That said, as the age of the metaverse inches closer, traditional auction houses will undoubtedly transition to virtual auction houses. Christie’s has already collaborated with OpenSea to curate their first ever on-chain NFT auction.
NFTs in more industries
NFTs are not limited to fashion or game collectibles. As digital assets, they can serve a purpose in any industry, even in the alcohol industry for example.
BlockBar, a NFT platform for rare spirits, allows consumers to purchase NFTs directly from luxury liquor brand owners. Each NFT corresponds to a physical bottle and serves as verification of ownership. To have the bottle shipped to them, consumers simply have to burn the NFT. Otherwise, the bottle will be stored and insured by BlockBar. The NFTs can also be traded on BlockBar’s marketplace or gifted.
Image credit: BlockBar
The Dark Side of NFTs?
NFTs have introduced new ways of ownership and interaction, but we have to talk about their risks too. In particular, we should be informed about expensive gas fees, wash trading, harm to the environment and the idea that NFTs may be overhyped.
Firstly, NFTs can be expensive. Disregarding the price of the NFT itself, Ethereum gas fees can be shockingly high due to the blockchain’s inability to handle large amounts of transactions efficiently. If you’re unlucky, your NFT may need to increase more than 50% in price just to cover the associated gas fees.
Secondly, a recent Chainalysis report looked at 262 addresses from 2021 and found that profitable NFT wash traders have profited close to $8.9M! Wash trading happens to inflate the value of the NFT and sell it to unsuspecting traders at a higher price. For us retail investors, we can take steps to protect ourselves - look at the NFT’s on-chain historical data and owners, and refer to the collection’s floor price for a better gauge of value. Aside from harming retail investors, wash trading can create an unfair marketplace and inhibit growth of the NFT ecosystem.
Thirdly, with the bulk of NFTs residing on Ethereum, NFT transactions require a network of computers that consume large amounts of energy. In fact, environmental concerns are why Ethereum is shifting from a proof-of-work blockchain to a proof-of-stake one, which is more energy-efficient. Companies have made attempts to reduce environmental harm by purchasing carbon offsets. But when you consider how many NFT transactions are happening every day, more can be done to mitigate the potential harm to the environment.
Lastly, some may argue that NFTs are simply ponzi schemes. Existing investors profit only when new investors enter the market. Many NFTs also have no real fundamental value aside from being a digital collectible in demand - and this demand can easily fade once hype has died down. But to be fair, NFTs are seeing increasing utility like providing exclusive perks and for use in the metaverse.
Buying your first NFT
If you’re sufficiently intrigued and still want to buy your first NFT, here are some simple steps to get started. We will use OpenSea, arguably the most popular NFT marketplace, as an example.
- Obtain a crypto wallet like Metamusk which can interact with the Ethereum blockchain. OpenSea is built on Ethereum and uses ETH for NFT transactions.
- Transfer ETH into your wallet.
- Head to the OpenSea website and connect your wallet.
- Browse OpenSea for an NFT you want to purchase.
- When you are ready to make a purchase, you can either purchase the NFT at a fixed price, or make a bid. Make sure you have sufficient ETH in your wallet to account for gas fees.
- After a successful transaction, the amount will be deducted from your wallet and ownership of the NFT will be transferred to your wallet.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
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Risk Reminder: Crypto trading carries a risk. All trading activities are done at your discretion and at your own risk. The information here should not be regarded as financial or investment advice from ApolloX. ApolloX will not be liable for any loss that might arise from your use of any financial product.
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