You’ve heard of Bitcoin, and probably Ethereum. But what are non-fungible tokens, or NFTs, which people like Gary Vaynerchuk, Chamath and Mark Cuban are so besotted with?
Here’s an explainer, with help from two guides to the NFT world: The art and technology writer Jason Bailey, who also makes art as Artnome; and Priyanka Desai who is vice president of operations at OpenLaw, a research organization that helps set up and run new types of blockchain-specific funding vehicles that collect NFTs.
What’s an NFT anyway?
The key word in NFT is fungibility. Whereas Bitcoin is fungible, meaning each unit of bitcoin is interchangeable with another, NFTs do not have this property. Instead, NFTs are unique digital tokens.
NFTs are really just a type of computer program that runs on a blockchain. Some NFTs are programmed as items in a game, giving them certain properties that players can use. An example of this is CryptoKitties, where players collect different NFTs, representing digital cats, which they ‘breed’ with one another to create cats with new properties.
Other NFTs are more like digital art, and they’re linked to a specific image or sound file. They might also have certain rules programmed into them that allow the artist to collect a cut of future sales of the work, much like a royalty.
Many blockchains have their own NFTs. Some popular blockchains for NFTs are Ethereum, which hosts CryptoKitties and top crypto artists like Beeple; Flow, which hosts the NBA Top Shot collectible game; and Wax, which hosts crypto versions of Topps cards.
How does it work?
Generally, an artist uses a platform to “mint,” or create, an NFT. In theory, anyone can mint an NFT, but you’d need to write your own code.
The newly minted NFT usually doesn’t contain the graphic file or other data that make up an artwork. That data is usually stored somewhere else, off-chain. It could be stored on a centralized server.
An increasingly common option is to store the artwork on something called the Interplanetary File System (IPFS), a peer-to-peer network that replicates a file across many machines, acting as a form of decentralized storage, says Bailey, the artist and critic. The NFT will contain a unique signature that points to that file’s location on IPFS.
The Non-Fungible Token Bible is a good resource to go deeper on the tech.
Why do NFTs have value?
Why shouldn’t they? NFT investors like Mark Cuban say you should think of them as forms of digital property.
Just as fine wines, paintings or rare trading cards can hold value, so should their digital versions. But instead of physical scarcity, crypto tokens have digital scarcity. That’s why, according to Cuban, “blockchain driven assets have now legitimately become stores of value.”
Priyanka Desai, of OpenLaw, agrees with Cuban’s take. Digital property is important when we increasingly spend our lives online. She puts it this way: “The whole psychological nature of feeling that your taste and general outlook is signaled through a digital property. Whether that be audio or [crypto] collectibles or anything else — it's flexing wealth or taste. It's not dissimilar to how people behave in the real world.”
Finally, Bailey offers an analogy to the art world: “Art has no [inherent financial] value. A Rothko painting might be worth $40 million one minute and is worthless the next if an authenticator says, hey that’s not by Mark Rothko. Nothing changes about that painting. Art’s value comes from the social agreement that it’s from this artist. When you buy [NFTs], what you are buying is a token, and the artwork is what that token looks like.”
Who’s Buying These Things?
Lots of big names from the tech world. There’s Mark Cuban, who’s gotten deep in the weeds and is now collecting generative audio-art NFTs called Eulerbeats (“the most genius idea ever”); billionaire investor Chamath Palihapitiya who says he’s building a “sizable collection” of tokens; and wine merchant turned tech investor Gary Vaynerchuk who seems to tweet almost exclusively about NFTs these days.
What Are NFTs Going For?
Lots of money. The street artist Beeple sold a collection of his works for $3.5 million in December. Now Christie’s is auctioning one of his pieces in a first for the storied auction house.
The pixelated portraits known as CryptoPunks are changing hands for $1.6 million or so, while a digital cat shooting a rainbow from its posterior went for half a million.
According to data site NonFungible.com and L’Atelier, a unit of BNP Paribas, NFT sales hit $250 million in 2020, an increase of some 300% from a year earlier.
Types of NFTs
The three biggest categories for NFTs are tokens used in games; artwork and items used in “metaverses” or virtual worlds, according to data from NonFungible.com. NFT sales are pretty evenly split among them at about 25% of the market each. Sports and other collectibles make up the remainder.
NFTs can be bought on a variety of platforms. Some of these platforms lend themselves to certain types of tokens.
According to Desai:
- Nifty Gateway, the marketplace backed by the Winklevoss twins, is a “bridge for newbies” because they can wire dollars to their accounts there.
- Rarible and Opensea have “wide swaths” of NFTs, everything from collectibles to digital land.
- Foundation and Zora are “more curated” with a focus on getting “edgy and interesting” artists into NFTs.
- Superrare is “the OG” as far as crypto curated platforms go. Cryptoartists selling works for lots of coins today got their start here.
Displaying Your NFTs
After spending so much money on a unique digital object how do you show it off? You can show off your crypto art by hanging them on your wall with an Infinite Objects Video Print, Desai says.
You can also use a crypto wallet that’s designed to display your collection, like Rainbow.me. Platforms like Showtime let collectors show off their works in an Instagram-like format.
If you want to get really fancy, you can build an entire museum or gallery in a metaverse like Decentraland or Cryptovoxels and show off there. “A lot of this art might just end up living virtually,” Desai says.
Lastly, because NFTs are cryptoassets, there’s an increasing array of financial tools that let you borrow against them, fractionalize them, delegate them to a decentralized fund, or just sell them to anyone you like — which is more than you can say for a painting hanging on your wall.
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