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What Are NFTs, and Why Are Some So Valuable?

As if cryptocurrencies weren’t confusing enough, Non-Fungible Tokens (NFTs) are another blockchain native asset class causing people’s heads to spin.

While only a fifth of American adults is actually familiar with NFTs, their staggering growth deserves world renown. OpenSea – a popular NFT marketplace – saw over $1 billion in trading volume throughout August. Moreover, the entire space has amassed $500 million in trading volume daily at the time.

Most notable are the prices people are paying for some of these digital items. One NFT of a plain, unremarkable rock sold for 45 ETH this summer, worth about $134 240 at the time. Even more impressively, a rare alien ‘cryptopunk’ NFT was sold for 605 ETH ($762 000) in January. This, too, was nothing more than artwork generated by an algorithm.

So what are NFTs, exactly? More importantly, why are some people willing to pay astronomical prices to acquire them?

What Are Non-Fungible Tokens (NFTs)?

An item is “fungible” when other identical items can easily replace it. Also, this goes by the term of “mutual interchangeability.”

Hence, a non-fungible token is an entirely unique digital token without replica. Like cryptocurrencies, these tokens take advantage of distributed blockchain networks and consensus mechanisms to ensure fair play. Thousands of computers regularly and independently verify network transactions to make sure none are fraudulent.

For a cryptocurrency like Bitcoin, this means ensuring the coin’s legitimacy by creating artificial, guaranteed monetary scarcity. But what if the same technology could be useful to generate rare digital items besides money?

NFTs are one of the first alternative use-cases for blockchain. Using development-friendly blockchains like Ethereum and Cardano, people can mint tokens with various forms of data into them. These can include music, videos, gifs, and most frequently, digital artwork.

The previously mentioned rock NFT is one such example. Specifically, that NFT was merely ETHRock #21 – part of an entire collection of other similar-looking jpeg files. Many developers minted these jpegs on the Ethereum blockchain as ERC20 tokens, creating new NFT “art.”

What Are NFTs Good For?

In truth, there is often little interesting to say about even the most valuable NFTs to date. Firstly, most people create NFT collections using AI software to generate thousands of pictures with only slight visual variations. Therefore, the personal and “artistic” element of this “art” is mostly over.

Secondly, they don’t actually have any “real-world” use cases. Even the Ether Rock collection’s own website admits that its NFTs are effectively pointless:

“These virtual rocks serve NO PURPOSE beyond being able to be brought and sold and giving you a strong sense of pride in being an owner of 1 of the only 100 rocks in the game :)” – EtherRock.com.

Indeed, there’s only one difference between “NFT art” and a jpeg image found online: certified scarcity. Though each image is replicable, the blockchain metadata for the tokens to which these images are attached is not. Therefore, using Ethereum’s public blockchain, people can verify these images’ official and authentic owners.

An innovative new concept was created with that, which has now morphed into a massive emerging industry: Digital collectibles.

Selling Non-Fungible Tokens

Sometimes, an item’s scarcity alone is enough reason for people to value it. In fact, NFTs don’t need actual use-cases for people to pay millions of dollars to obtain them.

Physical Collectibles

This is a well-established fact in the world of physical collectibles and artwork alike. A Saudi Royal family bought Leonardo Da Vinci’s painting Salvator Mundi for $450 million in May 2017. One of Babe Ruth’s – an American baseball icon – jerseys sold for $5.64 million at a 2019 American auction. Logan Paul even purchased a first edition Pokémon card for $150 thousand in July of 2020.

What makes these items valuable is not their utility but their irreplaceability and cultural significance combined. Add in some raw price speculation (which is ever common in crypto), and NFTs can see unfathomable valuations.

Digital Collectibles

Celebrities, brands, and athletes appear to be the first groups taking advantage of the NFT boom. Soccer legend Lionel Messi launched his own NFT collection back in August, featuring the artwork of himself. Furthermore, the National Basketball Association has a dedicated NFT marketplace for exclusive, iconic NBA moments recorded as short videos. Other sports organizations, including racing and football teams, have also gotten involved. As sports have always been a space for collectibles and memorabilia, NFTs merge well with the industry.

Recently, Madonna’s talent manager also signed on a pre-established NFT collection called “The Bored Ape Yacht Club.” Bored Ape NFTs have sold millions of dollars in 2021, but the manager wishes to bring them to a broader sphere – likely using celebrity support.

Even art galleries are taking advantage. The State Hermitage Museum began selling NFT versions of famous physical artwork they owned on Binance in August. Their bids started at $10 thousand and included works by Da Vinci and Van Goh.

Overall, famous cultural figures and institutions are using their clout to create subjectively valuable memorabilia in digitized form. With this, NFTs are opening all new possibilities for the worlds of art, music, and collecting.

Conclusion

NFTs utilize blockchain technology to create verifiably scarce digital items. This doesn’t make them any more effective or valuable in the real world than any other image or data file. However, it adds an element of authenticity to items in the virtual world. Through this, specific tokens can receive priceless cultural value, which causes their price to soar astronomically.

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The world has only scratched the surface of the full array of possibilities unlocked by NFTs. So far, it would seem that visual artists are using them to monetize their careers. The rest is really up to us – the users.

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