Digital tokens have proven to be one of the major use cases for blockchains. These tokens are easy to launch on most smart contract blockchains, are built around established standards (for example, Ethereum uses a popular standard known as ERC20), and can be used for a very wide range of purposes. When any new project launches on Ethereum, there’s a good chance it uses an ERC20 token. These tokens can be sold, air-dropped or otherwise distributed to a large number of users.
Essentially, a blockchain token proves ownership in some form. That might be a share in the governance for a DeFi initiative, like UNI, COMP or MKR tokens. It might represent a physical or digital asset like gold (DGD) or Bitcoin (WBTC). It could be a real-world asset like real estate or shares. It could even be a right to a future token – a kind of placeholder that will be swapped for another asset, perhaps when a new blockchain is launched.
In all of these examples, tokens are typically minted in large quantities. They can be transferred and traded freely, are highly divisible, and are fungible: any single token is treated exactly the same as any other. (One WBTC token, for example, is worth the same as another, can be divided into 100 million Satoshis, and there can be up to 21 million WBTC.)
But what happens if you want a unique token that represents a single item, like a piece of artwork? That’s where NFTs come in.
How do NFTs work?
Fungibility is a core feature of money, and all regular blockchain tokens. Every $10 bill is treated the same way – one $10 bill is no more or less valuable than another. They are completely interchangeable. Similarly, all TIME tokens are the same. Their ownership is handled by the standard ERC20 contract. When TIME was created, a supply of 710,113 was specified.
But it’s equally possible to create a token with a very limited supply – perhaps 100 tokens, or even a supply of precisely one. Moreover, it’s possible to create that token to be indivisible. While you can send someone 0.01 or 0.00000001 TIME, you can’t send someone a fraction of your new token. You can only send a whole number of tokens.
Such a token is known as a ‘Non-Fungible Token’, or NFT. NFTs are typically unique, or very limited in supply, and they cannot be divided. On Ethereum, NFTs are handled by the ERC721 token contract.
Why are NFTs so important?
NFTs are important because they can be used to designate ownership, just like regular blockchain tokens. But the difference is that, as unique tokens, they can be used to prove ownership of unique items, whether those items exist in the digital or physical world.
One of the major use cases for NFTs has been digital art. An artist creates a digital image, and a hash (a unique cryptographic fingerprint) of the image is linked to a single NFT. Alternatively, a limited-edition run can be created in the same way. Because an NFT exists on the blockchain, it is impossible to forge one, and it’s always clear who created the artwork associated with it. While the original artwork can be copied by anyone, the token designating ownership cannot: the provenance or transfer history of an image is recorded permanently on the blockchain.
There are lots of other use cases for NFTs. They can be used to represent ownership of other collectibles, with the popular CryptoKitties being one of the first major examples. Valuable in-game inventory items, skins and trophies can also be represented by NFTs, making them easier and more secure to trade. In the real world, it’s possible to link all kinds of assets to non-fungible tokens, from individual properties to classic cars, paintings, and even invoices and trade receivables.
Why do NFTs have value?
NFTs have value for the same reason that a share certificate or property deed has value. The token is a means of recording ownership of something else. While the certificate (token) points to something beyond itself, that token can be traded and has value because it signifies ownership of something valuable.
Because NFTs exist on the blockchain, they offer transparency, auditability and fraud resistance that conventional paper certificates cannot. In fact, while it’s possible to forge artworks – even by the most famous artists – it is essentially impossible to forge an NFT and claim that a fake image was created by a known artist. Only the person who has the private key to the issuing account can create a legitimate NFT for that artist.
How revolutionary are NFTs?
NFTs are an absolutely revolutionary breakthrough because they enable a number of use cases that were previously impossible, or very inefficient. Some examples include:
- Enabling creators to monetise content that they otherwise could not. Imagine you’re a digital artist – or musician, or writer – in the era before blockchain. You create a work of art and publish it. But how do you prove that you’re the artist? How can you sell a piece of art that anyone can copy and distribute? And how could anyone who bought it prove they had the original? These problems are typically (and unsatisfactorily) dealt with by using centralised and expensive platforms. NFTs enable digital content to be issued by individual artists, and then sold and traded securely and transparently.
- Bringing liquidity to illiquid markets. Physical art and collectibles can be hard to sell, unless you know the right people. Art trading circles can be exclusive. Owners also have to store artwork securely and in suitable conditions. Meanwhile NFTs enable buyers and sellers to access a global market without the constraints of the physical art world.
- Investing in portfolios of art and fractional ownership. A collection of NFTs – say, 100 artworks – can be bundled together, and this bundle can then be tokenised with a standard ERC20 token. This means buyers can invest in a large number of artworks, acquiring a small fraction of each of them, and gaining exposure to a broad portfolio. This would be extremely difficult and inefficient in the real world.
Why are NFTs so hot right now?
NFTs have captured the imagination precisely because they’re so powerful. They enable digital creators to tokenise their works and for investors to access markets that were previously the preserve of the very wealthy, or very well-connected. NFTs democratise investment in art and collectibles, making the process easy and accessible enough for anyone to get involved in.
What are the most valuable NFTs?
While NFTs are still a relatively small sector of the blockchain space, they are growing in importance and value. It’s possible to buy collectible items for just a few dollars. Equally, some of the most valuable items sell for sums that would not be out of place in a major auction house.
Some of the highest-priced NFTs of recent times include:
- CryptoPunk 6965 sold for 800 ETH on 19 February 2021. This simple but extremely rare piece of digital art, which is also one of the earliest NFTs to be created, therefore changed hands for almost $1.6 million at the time. Other CryptoPunks have also sold for over $1 million.
- Nine Axie Infinity Genesis land plots sold for 888 ETH in February 2021 – an investment of $1.5 million.
- An Apex segment of the Formula 1 Grand Prix de Monaco 2020 track from F1 Delta Time (representing around 5% of the track) sold at auction for over 9 million of the company’s REVV tokens in December 2020 (around US$223,000 at the time).
- In September 2018, ‘Dragon’ – a CryptoKitties NFT – sold for 600 ETH, or $170,000 at the time.
According to NFT site Nonfungible.com, all-time NFT sales total more than $350 million. Digital art accounts for almost $100 million of that.
How can digital artists use NFTs?
There are various ways in which digital artists can use NFTs to monetise their work. Of course, simply creating an NFT for a piece of art doesn’t itself make it valuable, so if you’re an unknown artist you shouldn’t expect this to catapult you to fame. However, NFTs do give you a means of building a reputation and track record in the space.
NFTs can be used to represent ownership of one-off artworks, or limited-edition series. They can also be used to create reward tokens to reflect participation in an event or simply as a ‘thank you’ to your supporters.
There are many platforms that allow you to create and manage NFTs. Some of the leading digital art trading sites build broader functionality into their tokens. For example, smart contracts can ensure that the artist receives a proportion of revenues from future sales, not just the original sale or auction. Another platform, Async, enables users to create programmable digital art using NFTs. Other services specialise in creating certain kinds of art, or providing advanced functionality, like bundling NFTs, batch creation, or including unlockable digital content.
Where can you create and trade digital art?
There are lots of marketplaces where you can create, buy and sell digital art. Some of the leading options include:https://laborx.com/gigs/nft