By purchasing an NFT token, such as the James LeBron clip that recently appeared on the NBA Top Shot, the user does not receive print rights to the clip, or possibly a physical copy of it. He owns only a few traces of the code, which shows that he is the owner of the only digital asset. The purchase was worth $ 208,000 and is considered a very valuable investment by the current owner of the video. Let’s consider the main trends of non-fungible tokens and possible scenarios for their development in 2022.
An NFT is a digital object - some computer code and data that conveys ownership of something. The property can be online, for example, virtual real estate in some kind of digital world or special equipment in a video game. It could be something real: real estate, a painting, or a place at the concert. On the other hand, NFT can be a kind of hybrid, for example, the right to decide who can rent a room in a cooperative living space.
NFTs have attracted the attention of technology buyers (Mark Cuban), high-profile artists (Christie's), and large firms (Nike). And everyone, from Lindsay Lohan to rock band Kings of Leon, is flooding the market with expensive digital creations of their own.
However, what is NFT? What makes them so useful? And what will possibly hold up in the long term for this digital property? Let's outline this phenomenon in general terms.
The token is called non-fungible because it cannot be replaced with a similar one - unlike the same banknote or digital coin, which are issued in millions within the same denomination and can be equivalently substituted for each other. A baseball card, Ronaldo's first ball, a vintage car, or a piece of land in central London - all are one-of-a-kind and can be transferred to the NFT.
A non-fungible token can be bought and sold for any currency. In fact, the owner of such an NFT can ask for any amount and in any currency, including digital.
By purchasing a digitalized real work of art, for example, "Mona Lisa", the user does not receive the right to own the real painting, only a unique digital asset.
Thus, NFT is not really a work of art. This is a piece of code in the digital chain (blockchain) that affects the location of the artwork - usually on some server. It should be noted, however, that since non-fungible tokens are not digital currencies, they cannot actually be mined. They can be created by digitizing any goods or things, but the very concept of NFT mining does not exist.
Like any technology, NFTs can provide more efficient ways of doing business. For example, they work with a crypto technology called blockchain. It is a distributed ledger of digital records that does not necessarily require a central system to run. Transactions can potentially be faster and easier.
In addition, the blockchain also keeps a record of all NFT-related transactions and the properties it represents. For example, when selling works of art, this could mean the origin of something going back to the creator. The chain can also contain a list of all users who have ever owned this token.
NFTs can also include so-called smart contracts or encoded elements that can automatically perform actions under certain conditions. The concept represents an automated and self-contained set of rules that cannot be ignored or skipped.
In the past, the legitimacy of the digital property was even more difficult to verify due to the fact that the Internet is simply overflowing with copies. NFT supporters say blockchain know-how like NFT solves these problems. By publishing a fragment on the blockchain, an artist creates an immutable, verifiable public file of its authenticity.
Let’s consider, for example, CryptoPunks, one of the many first NFTs created again in 2017. Only 10 thousand crypto-punks were minted, each of which was a simple character with a set of distinctive features. For any punk, you can view the full history of transactions in the past, including rates, offers, gross sales, and ownership data. At the same time, the price has steadily increased every year and with each new user.
The fact that someone spent $ 1.5 million for a piece of code designating him as the owner of a pixelized monkey in a hat seems to defy any rationality about traditional market behavior.
It may seem that NFTs came out of nowhere, but this is an innovation that has been worked on for several years.
2017: NFTs first gained widespread public attention with CryptoKitties, a project in which clients breed and sell digital cats.
2018: The emergence of a mini-hype led to investments led by venture capital, and platforms for buying, promoting, and minting NFTs have been created such as SuperRare, OpenSea, Rarible and Nifty Gateway.
2019: Such huge manufacturers as Formula 1 and Nike entered the market.
2020: NFT market tripled to $ 250 million.
During the first few months of 2021, we could see the NFT explosion. Only in February, the top ten NFT collectibles marked an overall 400% increase in sales from the previous month, accounting for nearly $400 million in gross sales.
Much of this NFT market behavior can be attributed to at least one platform launch: NBA Prime Shot from Dapper Labs launched in October 2020 with support from the basketball league.
On Prime Shot, buyers can buy digital packs that contain NFTs called "moments" - short video clips of NBA highlights such as a commemorative dunk. Caty Tedman, Head of Partnerships, Advertising, and Marketing at Dapper Labs, says the platform now has 511,000 registered customers and over $ 301 million in gross sales in just 5 months of operation.
Advisors say the rapid growth of NFTs like Prime Shot is explained quite simply by accompanying events in the world and the cryptocurrency society.
COVID-19 has made us more digital. People who work from home find extra time to interact in digital domains, so they find themselves more open to digital goods and suppliers.
The rise in the popularity of cryptocurrency has provoked curiosity for a different type of digital property.
Large companies (for example, the auction house Christie's) have secured the trust and status of the NFT by participating in the auction.
Irreplaceable items usually thrive in times of financial shocks. When a traditional currency is on the verge of collapse, attention always shifts to other exclusive values.
Gradually people realize that they do not need cash, but more valuable things - real estate, art, etc. Moreover, many understand that they can create these values themselves.
The principles that determine the value and development trends of NFT in the future are extremely simple.
Authenticity. Collectibles have all sorts of authentication mechanisms, and none of them can provide one hundred percent guarantees (even famous art appraisers have been tricked by fakes). On the contrary, the originality of the NFT is fixated on the blockchain.
Limited quantity. Many NFTs are unique or limited. For example, only 10 thousand crypto punks were launched. Of these, only 24 are "monkeys". And digital physical art is one of a kind.
Transmission capability. The token can be resold to almost anyone around the world, which means it has a wider range of potential consumers.
Immutability. NFT code and metadata cannot be changed, which makes it persistent.
Usefulness. Some NFTs can perform specific functions, generate income, or be exchanged for physical property.
Many NFT collectors see the future of tokens in higher integration of the "real world". In the digital world of Decentraland, Decentral Games is creating a digital online casino where people can play poker tournaments. Buying (and selling) NFT items – for example, a $ 1,000 digital jacket - will get you a seat at certain high roller tables.
After a series of high-profile sales of NFTs from well-established artists, the market is flooded with an abundance of less-known art. Some critics believe NFT is just a hype-driven whim, much like the 2017 ICO bubble. Others say that the large influx of consumers and sellers will eventually diminish, and only truly unusual, interesting NFTs will retain their value.
One of the potential applications is intellectual property (IP) law, which regulates ideas such as patents and trademarks. There could be “a potential conflict between a pre-existing paper contract and the NFT,” says Intellectual Property Officer Catlan McCurdy. The main thing is that this happens without real disputes, according to the scenario permitted by the court or current laws.
When it comes to smart contracts, often all that is available is ready-to-run computer code. Without source code or an accurate description of the rules, it is impossible to verify what a smart contract can do. Even having the source code to check the rules, many people trying to build an NFT without programming skills to understand what they are reading. When reselling, conditions can become burdensome.
What translation costs are included in the smart contract? This varies everywhere. Sometimes it is 10%. But sometimes the price tag rises up to 50%. Without knowing the rules, you can bear losses. Certain types of investments in securities can only be allowed for so-called accredited investors. It is unlikely that a smart contract will have access to data that will show if the investor is indeed accredited.
The history of new technologies is rich in mistakes and even disasters. However, over time, things get better and become ubiquitous.
The NFT market is more efficient and liquid than the traditional one. It is built around digital art marketplaces, and in terms of fees, it is well below the 5% or even 10% fees that are paid to traditional art brokers. Experts like Rarible or aggregators like Opensea have counted tens of thousands of unique wallet connections per week.
The first cryptocurrency HODLers turned into millionaires in the last five years of impressive growth in the sector. This crypto-rich generation is mostly made up of risk-loving young people who love to experiment and can afford it. In fact, despite extreme price volatility, research has shown that the public is becoming increasingly loyal to the widespread adoption of cryptocurrencies. Their risk appetite empowers cryptoeconomics possibilities.
While there are already several extremely promising technology applications in the luxury and gaming industry that should gradually mature over the next three years, some argue that the NFT craze will be short-lived, especially in the arts sector.
The audience there is definitely different from that of the traditional markets. But perhaps the NFT craze will be short-lived, but more importantly, it could make a big shift in where the digital economy is heading.