NFTs Explained - Part 1
What is an NFT?
NFTs known as Non-Fungible Tokens are digital assets that are linked to the blockchain network like popular cryptocurrencies such as Bitcoin and Ethereum. Digital assets like cryptocurrencies are fungible, which means they can be exchanged for identical assets of the same value, which is the case with all cryptocurrencies such as Bitcoin and Ethereum. But where these cryptocurrencies are fungible tokens on the network, NFTs are non-fungible tokens.
The difference between NFTs and cryptocurrencies is that with NFTs they are unique, with no two NFTs the same. Each NFT has a unique code on the blockchain meaning they can not be exchanged or traded like cryptocurrencies. NFTs are digital assets tied to a token that is used to buy and sell digital artwork such as images, tweets, videos, GIFs, and virtual trading cards.
NFTs are a powerful vehicle to represent digital-first assets such as photos, music, and physical objects that are then converted into NFTs through digital means. NFTs are built on the Ethereum blockchain and can be used to connect artists with their audiences with simplified transactions. The digital market of NFTs in 2020 saw increased sales of $250 million as the NFT craze continues to explode this amount is sure to be overshadowed in 2021. Increased levels of interest in NFTs in 2021 have already seen some jaw-dropping sales, especially so with the Beeple NFT sale for over $69 million. This set the record for the most expensive digital artwork sold to date and featuring a collage of Beeple’s first 5,000 Days of Work.
The interest in NFTs is set to dramatically increase in 2021 with people looking to put up and own their own piece of digital art. Jack Dorsey the Twitter CEO recently sold his first Tweet for $2.9 million, Kings of Leon sold NFTs of their album cover for over $2 million, and software company Figma sold their NFT CryptoPunk #7804 for $7.5 million.
History of NFTs
For many of us, it feels like NFTs have arrived out of nowhere, but it’s fair to say NFTs do have a lifespan and there were some early signs. This lifespan traces back to 2012, so let’s take a brief look at the history of NFTs to see where this craze all started.
The Early Years (2012–2016)
The year 2012 was the starting point for all things NFT with the introduction of Colored Coins. Colored Coins were issued on the Bitcoin blockchain as small denominations of a Bitcoin and are the smallest unit of currency. These coins were used to represent assets such as coupons and digital collectibles but only represent a value if everyone agreed on their worth.
Colored Coins allowed many to understand the early potential of issuing assets on blockchains but at the time Bitcoin had many limitations. In 2014, there was the breakthrough needed with the starting of the peer-to-peer financial platform Counterparty. Counterparty was an open-source distributed internet protocol built on the Bitcoin blockchain. This opened the way for users to create and trade assets for currencies and was a game-changer.
Memes first moved on to the blockchain in 2016 with people issuing Rare Pepes by Pepe the Frog on the Counterparty platform as digital assets. Since then, numerous other projects have been built on the Counterparty platform, which includes assets like NFTs. With the prominence of Ethereum in 2017, memes began to trade on the network using a decentralized meme marketplace.
Recent Years (2017 to Date)
In 2017, Cryptopunks was introduced with 10,000 unique characters on the Ethereum blockchain where no two characters the same. These 10,000 Cryptopunks were quickly snapped up and traded online upon release by the creators. The Crypropunks project heavily inspired the NFT standard and current digital art movement craze with NFTs. Next up was the introduction of the NFT project CryptoKitties, which was a project that involved cats that are uniquely owned by the buyer 100%. At the time, the highest price paid for a CryptoKitty was $390,000, and this set the standard for all future NFT projects.
Since then, there has been an explosion in NFTs as they have become more mainstream. The sale of Beeple’s “The First 5,000 Days’ digital art for $69 million, and CryptoPunk #7804 for $7.5 million has shown how the NFT ecosystem has accelerated in 2021. There are now hundreds of projects on the network with many more in the works for the coming year.
How Do NFTs Work?
As we have discussed, NFTs are digital assets that are used to represent a wide range of unique tangible items from digital collectibles to virtual real estate. NFTs allow for owning digital collectibles that are unique as they are easily verifiable, which is a huge benefit when compared to physical collectibles such as Coins or Pokemon cards.
The crucial part here is that NFTs can be traced back to the original issuer, so fake and duplicated collectibles become useless. The value of these NFT is very speculative and is determined solely by what someone else is willing to pay for it. In order to sell something such as a Twitter tweet for a high price, it needs to be unique with the clear authority of ownership such as the Jack Dorsey NFT tweet.
Upon purchasing an NFT, as a buyer, you get the right to transfer the NFT token to a digital wallet. This NFT token is proof that your copy of the digital file is the original, just like owning an original painting. The private crypto key you have is then the proof of ownership and certification of authenticity for the digital asset. The NFT value is then determined by the pairing of the creator’s public key and the new owner’s private key.