In just a few months, NFTs – short for “Non-Fungible Tokens” – have captured the imagination of consumers, artists, technologists, sports enthusiasts, speculators, even venture capitalists.
One can hardly browse the Internet these days without stumbling upon yet another NFT story. From the multi-million-dollar sales of NFT artwork, to the involvement of celebrities like Lindsay Lohan and Mark Cuban, NFTs are bursting into the mainstream.
But what exactly is the fuss behind NFTs? To understand this newest blockchain phenomenon, one must start with the basics.
What’s In A Name?
Just about everything there is to know about NTFs can be deduced from their name. First, the “token” part is conceptually simple: NFTs are tradable digital assets that are hosted on a blockchain, much like bitcoin (BTC) or ether (ETH). Unlike cryptocurrencies, though, NFTs feature embedded digital files of an artwork, or a video, or some other digital representation that holds aesthetic or functional value to potential buyers. At this point, most NFTs exchange hands online, are stored online, are displayed online, and so on – they are a purely digital experience.
The “non-fungible” part simply means that each NFT token is its own unique digital entity that cannot be reproduced or copied. For example, if you own the NFT of LeBron James’ backwards dunk, you can take comfort in the fact that nobody else in the world can lay claim to that video – or, in more poetic words befitting of NFT enthusiasts, you "own" that moment of basketball history. (More on NBA Top Shots, a popular NFT marketplace, shortly).
NFTs’ non-fungibility is a distinguishing feature from Bitcoin and other cryptocurrencies. If you sell your bitcoin, then buy bitcoin a few minutes later, your new bitcoin is functionally the same as the bitcoin you held earlier. But if you sold your LeBron James NFT and purchased the NFT of Zion William blocking a shot, then you’re holding a new, differentiated asset.
In other words, bitcoin is "fungible" because one bitcoin will always cost as much as another bitcoin, but the LeBron James NFT and the Zion Williamson NFT will (probably) cost different amounts at various times. The LeBron NFT could go up in value, while the Williamson NFT could crash, or vice versa.
How Are NFTs Being Used?
To date, the most popular NFT use cases are those that imitate, augment, or put a modern spin on traditional forms of asset collection and trading.
For example, the previously mentioned basketball NFTs are part of the wildly popular NBA Top Shot marketplace. These NFTs memorialize highlights from professional basketball games, allowing diehard fans to ‘own’ slices of NBA history: the more memorable the moment, the more expensive the NFT. Of course, NBA Top Shots is essentially a digitized version of collectible playing cards, which for decades have attracted speculators, traders, and enthusiasts. Like traditional cards, sports-themed NFTs are scarce, giving them value by bestowing ‘clout’ on their owners.
The art world is yet another arena receiving an NFT shakeup. Last week, the popular graphic designer named Beeple sold an NFT, “Everydays: The First 5000 Days,” for $69.3 million, making it the third-most expensive work of art sold by a living artist. Lesser known artists are likewise making thousands of dollars, hawking their digital wares on the blockchain.
"NFTs are here to stay; in the near future you will place more value on a physical object sold alongside a digital object than a physical object alone,” said Ian Rogers, CXO at Ledger, a leading crypto security company. “Basic human urges are at play here -- we love to collect, we love to share, and we have an innate desire to show we are part of tribes. We lead digital lives. Collecting and sharing digitally is inevitable now that it’s technically possible."
Beyond videogames and artwork, NFT enthusiasts are pointing to a smorgasbord of other potential use cases, from property rights and events tickets to business contracts and real estate. Indeed, the idea of putting real-world things on the blockchain has long excited crypto obsessives; the NFT model may be the closest thing yet to making that a reality.
Are NFTs Here to Stay?
Plenty of pundits believe today’s NFT boom will disappear. Yet consumers around the world are increasingly buying digital-only products. That’s especially true for Millennial and Gen Z consumers, who have already spent billions of dollars on in-app products for video games, for example (such as custom clothing or gear for their in-game characters, among many other examples). To young people, NFTs seem more like a natural evolution than a speculative aberration.
Even so, there are valid concerns that NFT valuations have become artificially inflated, due to raw investor enthusiasm over a new flashy product. Just as bitcoin has proven to be a volatile asset, NFT prices are likely to swing wildly, too.
“NFT is currently a hot topic, but I’m sure the hype around it will soon die down,” said Kosala Hemachandra, CEO of MyEtherWallet (MEW), a leading wallet interface for Ethereum, the blockchain technology which many NFT marketplaces are built.
“Right now the appeal of NFT’s is the status of owning one [rather than the ownership],” says Hemachandra. “I think this current version of non-fungible tokens will continue to evolve into bigger and broader use cases. Things like real estate and proof-of-ownership of tangible property; wherever NFTs can help execute legal actions. That is when things will start to get really interesting.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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John Hyatt
John Hyatt is a freelance journalist covering financial services, market structure, stocks and IPOs, and private equity. Prior to entering journalism, John worked in public relations for clients in financial services, investment management, fintech and cryptocurrency. John is currently receiving his M.A. in business and economic reporting from NYU as a Marjorie Deane fellow.
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