2021 marked the year where NFTs (non-fungible tokens) not only entered the global mainstream but dominated the conversation. We have all read a headline or had a conversation over the last year and a half about the concept of NFTs. A total of $41 billion was spent on NFTs throughout 2021 - this comes close to the global art market - the digital art world is catching up. In March of 2021, the world was taken by storm when a collage by artist Beeple sold for $69.3m at Christie’s - the first NFT sale at an auction house. So, it is important for us to ask - what are NFTs? Why do we need them? Trace back their history and look at the present, understand the challenges and illustrate what the future of NFTs might look like.
What are NFTs? A non-fungible token is a block-chained based programmable deed of ownership to an asset - this could be a piece of art, collectibles or real estate. This allows digital assets to have only one legal owner and are secured through the Ethereum network (there are other networks for NFTs)- no one can modify the record of ownership or copy/paste a new NFT. The deed is a way to make someone the sole proprietor of the asset with the full rights to sell, transfer ownership - secured through a private key signature. The NFT itself might not contain the asset but is a record of ownership with the location of the digital asset. NFTs are based on the same blockchain technology but unlike cryptocurrencies they are non-fungible.
Ok but wait - what does non-fungible even mean? Fungibility is an economic term and refers to the idea that a good and a commodity whose individual parts can be easily interchangeable and is indistinguishable from another part. Ok let's simplify, a one dollar bill is fungible -. so if you exchange a $1 bill with a friend - you will both continue to have the same spending power. However, in our everyday world there are plenty of other items that are non-fungible - things that have unique qualities that cannot simply be exchanged for the same item. So let’s say - you and your friends wanted to trade houses - although both are property they do not necessarily have the same value. As kids, we all had trading cards or sticker packs but some cards or stickers are rarer than others - so you cannot easily trade them one for one.
Why do we need NFTs?
The problem that exists on the internet today is that as things become more digital - there is a necessity to replicate the properties of physical items to signify their scarcity, uniqueness and the ability to prove ownership. The internet is a place where everything can be copied - any digital file can be duplicated and each copy is identical - this was key to make information readily available all over the internet. However, this makes the internet limiting or damaging to individuals or industries - like artists who are in the business of non-fungible goods..
Ok so you are thinking - why can't I just copy the JPEG of an artist's work? How do NFTs stop me copying any file I like and using it? Well, it cannot stop people copying it - that is true. It is best to think of it as a proof of ownership or certificate of authenticity. Let’s say, you are in the Louvre Museum looking at the Mona Lisa - a priceless piece of art - you could probably find a forgery or a copy but the certificate of authenticity is what distinguishes it and gives it value. As the world moves more into the digital world - the concept of owning a digital file will become crucial to the future - giving items scarcity and uniqueness in the internet world.
Past and Present of NFTs
The concept can trace its origin to Bitcoin pioneer Hal Finny in 1993 who mentioned the idea of “Crypto Trading Cards” highlighting their ability to provide scarcity, ownership and provenance - today these are the building blocks of NFTS. This conversation actually came to life around trading cards that were popular -Pokemon cards. It took almost 20 years for the idea to resurface and in 2012 - the concept was reintroduced again but the bitcoin network had limitations that never really allowed it to take off. 2015 was the year the first real NFT was introduced - Etheria, the first true NFT based on virtual land. In 2017, two little known NFT projects back then - now household names launched - CryptoKitties and CryptoPunks. 2019 and 2020 saw interest in Crypto slowly increase as the covid-inspired bull-market of crypto took over the world’s mainstream attention.
2021 was the year of NFTs. NFT trading soared to $17 billion for the year growing from $41 million back in 2018 with an unbelievable 21,000% from 2020 just a year prior. Just to highlight the growth even further - if you had invested $1000 in BTC in 2017 - that value today would be around 165,00 - a 16x return, on the other hand NFTs grew around 125,000x during that time - a $1000 investment would have returned $252 million.
The Types of NFTs
There are a few different types of NFTs - collectibles, gaming, art, metaverse, sports and utility. Ok let's break down each of those. 1) Collectibles are limited sets of items or cards - they are valuable due to their scarcity and desirability. 2) Gaming NFTs are usually in reference to assets within a game and have a use-case within the game’s virtual world. 3) In Art, the NFTs signify ownership to a particular piece of art, music or videos, while offering royalties to artists on future sales. This allows fans to support upcoming artists and have an active role in the community. 4) In the metaverse, a virtual-reality space in which users can interact with a computer-generated environment and other users, NFTs allow you to own digital assets. 5) Sports, NFTs encourage fan engagement and allow fans to earn rewards and influence decisions in their favorite sports teams. They can come in the form of collectibles (the old school trading card model) or tokens that represent a form of fan ownership.
Finally, the use case for utility - a major component that is less talked about than the above. An NFT will take the concept of ownership in the physical world and attribute it to the digital world where it is sorely lacking. There are so many practical uses here - from governance rights, ownership rights or licensing. They signify ownership and transfer in the digital world where there are realy problems with copy and paste culture. Our words, lyrics, art and ideas are all in desperate need of ownership and governance in the digital world - not just our collectibles.
NFTS are reinventing the concept of ownership
It is important to note that an NFT is not necessarily housing the actual owned item but could just point to a location where that item is stored. The forms of ownership can vary and provide unique opportunities for individuals built on blockchain technology. Active ownership in NFTs is whereby marketplaces connect a buyer and a seller to exchange a digital asset - OpenSea is one of those marketplaces. NFTs provide a revolutionary type of digital ownership that could open a realm of possibilities in the future - fractional ownership. Fractional ownership allows people to own NFTs partially and allows people to invest in digital assets they cannot afford just alone. Finally, passive ownership is a concept we are all used to on the stock market - investors can buy into funds that expose them to a diversified portfolio of NFTs that can lower risk and allow you to leave the decision making to experts.
What are the challenges for NFT growth
Every new technology brings challenges and we work to adapt to these challenges to best mitigate the risks and enhance the benefits. The first issue is regulation - as of yet there is no single regulatory framework that governs this new technology - are they going to be considered intellectual property right, commodities or securities. Essentially - NFTs can have all these properties - so they still need to be classified and this will be a very interesting challenge as this industry grows year on year.
Taxation remains ambiguous but will also be an exciting chapter as this industry continues to blossom in the long-term. It is still early days and these are all questions being wrestled as we understand more about the role NFTs will play more and more in our futures. Different jurisdictions still classify cryptocurrencies differently and that subjects them to different laws - NFTs are no different. These steps have not impeded the growth of crypto and they will apply to NFTs.
Future of NFTs
Now, what does the future hold? NFTs will continue to grow in different segments at varying pace but one thing is clear - this technology will slowly become a cornerstone of our digital world. As the NFTs art space is creeping close to the real art market - gaming and sports memorabilia are industries that are only going to grow from here. During COVID-19, the market revenue was $159 billion and free-to-play games generated 85% of this revenue - these games as well as the growth of free-to-play games will be a potential large revenue stream for NFTs. The growth in the art sector will continue to rise as new artists produce more work in the digital space due to accessibility and the ability to generate value from future sales of their artwork. Sports will also continue to grow as more football clubs, F1 teams and NBA merchandise continues to raise sports fan engagement. Ultimately, the utility of NFTs in providing digital ownership of assets, as well as novel concepts like fractional ownership will continue to drive more people into this space, especially young people who are building this future.
The total video game industry market revenue was estimated to be $159 billion in 2020 according to Newzoo data reported by WePC.126 Of this revenue, 85% is generated from free-to-play games through ingame purchases. The play-to-earn economy and gamebased NFTs are a rapidly growing segment, which purports to be the evolution of game monetization.
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