What are NFTs and why are people buying them?

Introduction

Would you pay $69.3 million for a collection of 5000 images? Or $1.3 million for an image of an ape? I don't know about you, but many people are buying and selling images like these for extraordinarily high prices. The term NFT has been making headlines for a few months now and some of the biggest names in the world have been associated with trading these NFTs — but why?

In this article, we'll get into what NFT is, some foundational topics for context and also learn the reasons why people are buying them. As a bonus, we'll take a look at real-world examples of its usage at the very end.

What is an NFT?

A non-fungible token (NFT) is a unique non-interchangeable unit of data stored on the blockchain, a global digital ledger. Let's break this down a bit further.

Non-fungible means that one item is not interchangeable with or of the same value as another item. In other words, one NFT isn't equal to another NFT since each NFT is created unique. For comparison, cryptocurrency, like physical money, is fungible. This means they can be exchanged one unit for another and both will have the same value. For example, one Bitcoin is always equal in value to another Bitcoin, and similarly, one $100 bill is always equal in value to another $100 bill.

A token is an item that is being sold. Today, NFTs are popular for digital assets like images and videos, but they can even represent real-world items. NFTs can create a digital identity for any item. When selling real-world assets, they'll first need to be tokenized, in other words, represented as an NFT, so they can be listed in an NFT marketplace and be sold ahead, all the way reaping the benefits of being an NFT.

To summarize, NFTs simply represent ownership of an asset that's non-fungible in nature.

Foundational concepts

Before we get into why people are buying NFTs, I think it's important to give you a bit more context on the foundational concepts on which NFTs are built from or are associated with. If you already have this background, feel free to skip to the next section.

Blockchain

Blockchain is a form of digital ledger that puts transactions in a block which is then duplicated and distributed across the world. Before blocks are added to the blockchain, each node in the network validates the transaction and only if it's valid, it will be added and distributed. This thorough validation process results in an immutable cryptographic signature called a hash, which should be the same value if one re-runs the hashing process. If a transaction has been tampered with, the hash will differ and invalidate it. The decentralized database managed by multiple participants is known as Distributed Ledger Technology (DLT).

Web 3.0

Web 3.0 is the third generation of the World Wide Web which focuses on websites and applications that are decentralized (known as DApps, a.k.a. decentralized apps), many of which run on Ethereum Blockchain. Rather than organizations storing all this data, data is now distributed all over the internet.

For comparison, Web 2.0 saw the rise of many powerful companies like Meta (previously: Facebook), Google, Amazon, and the likes, with all their services and data centralized.

Most of the use cases for NFTs are provided in the context of these DApps, hence it's important to understand what Web 3.0 is.

Cryptocurrency

You'll most likely find an NFT priced in some sought of digital currency like ETH, Tezos, Flow or site-specific tokens like SAND or AXS. This kind of digital currency is known as cryptocurrency.

Cryptocurrency is based on blockchain technology — participating in the blockchain by validating transactions and adding a new block rewards the user with cryptocurrency. Cryptocurrency is completely digital and is not issued or governed by a central authority.

Why are people buying NFTs?

Now let's come back to why people are buying NFTs. While each person might have their own reasoning to buy an NFT, generally, these are the reasons.

Verify ownership and authenticity

In my opinion, this is the main reason. For physical assets, like artwork, it can be a tricky business to verify that the artwork is the original piece and was produced by the said artist.

Courtesy of the underlying blockchain technology, this is no longer a problem with NFTs. Each NFT has a unique hash that sits in the blockchain and its authenticity can be very easily verified. If the item has been sold multiple times, the entire purchase and sale history is recorded on the blockchain, making the entire process transparent.

For instance, if you head over to CryptoPunk #8348's OpenSea page and scroll down to the Item Activity section, you should see a complete record of transaction history including the first transaction in which it was minted. If you click on the links in the Date column, it should redirect you to a site called Etherscan, which is a blockchain explorer — meaning that you can publicly verify all transactions that happen on the blockchain.

In addition to the above, another precautionary step you can take before buying an NFT is to check the creator's social media profiles to see if they have posted about the listing. This will ensure that you are purchasing the NFT from its creator and/or current owner and they get their dues. Having said that, like with other industries, it's important to note that there are cases of fraudulent activity here as well.

Sidenote: From a creator's perspective, it's very easy to turn any digital asset into an NFT and put it up for sale on sites like OpenSea or Rarible. In fact, people are digitizing their physical creations and selling it as NFTs, too.

Removes the need for a middle-man

Unlike traditional physical artwork, buying NFTs eliminates the need for a middle-man, like an art broker who would help with negotiation, verification of authenticity, advice on its investment value and more. NFTs can be purchased directly from the seller and a certain percentage of the sale is kept by the platform.

Rarity

When purchasing an NFT, potential buyers can also see how many copies of this artwork has been created. Many NFTs out there are one-of-kind pieces, which explains such a high price for each item.

Buy, hold and sell

Just like physical artwork, people can buy an NFT today, hold it for a period of time and then resell their collectible for a higher price later, if there's a market for that. A psychology student in Australia purchased a CryptoPunk NFT in May 2020 for A $18,000 which is now worth more than A $50 million.

While there is no guarantee that an NFT will be purchased later for a higher price or will be repurchased at all, this is still a possibility. If flipping is what you're interested in, then you'd have to be very selective about what NFT you're purchasing, as something like this can be very subjective in nature.

Sidenote: When an NFT is sold on the secondary market (i.e. subsequent resales of the work), the creator of that NFT continues to get royalties on every sale.

More than just digital assets

Creators are combining a digital NFT along with additional exclusive membership benefits. This means once a person purchases an NFT from a particular creator that offers these benefits, the creators will be able to get their NFT purchase verified and claim those benefits.

For instance, Bored Ape NFTs purchased from the Bored Ape Yacht Club doubles as their Yacht Club membership card, and grants access to members-only benefits.

LinksDAO, on the other hand, is creating a modern golf & leisure club. With the help of their 9,090 NFT sales, they've made approx. $11 million. The NFTs were sold at two price tiers and each tier promised buyers certain perks, including governance rights for LinksDAO (DAO stands for decentralized autonomous organization), access to events and other prizes. NFT holders will be able to buy membership once LinksDAO buys any potential physical golf course or country club.

Showcase your collectables in the metaverse

Metaverse isn't just a buzzword or a hyped-up concept anymore — it's here and it's happening. A metaverse is a virtual world that will let people socialize, collaborate and have fun in ways beyond what we can imagine. A metaverse can have the digital equivalent of shops, concerts, houses, parks or can have completely new and imaginative things like superpowers, flying saucers, and so much more. Think Ready Player One in reality to some extent. Roblox, Minecraft, and Fortnite are at the forefront of being a metaverse platform where people don't just go to play games but also just hang out and socialize.

Once you're in a metaverse, you're represented using an avatar and depending on the context and constraints defined by the metaverse provider, you should be able to explore, buy and sell items, play games, develop connections with other avatars, and build a community. Accessing a metaverse will depend on the provider and can range from requiring virtual reality gear, augmented reality gear, or just the traditional PC or mobile devices.

A metaverse that's built on top of the Web 3.0 protocol, is based on blockchain-enabled decentralized applications that support an economy of user-owned crypto assets and data. This means that because your NFTs can be uniquely identified on the blockchain network, you should be able to showcase the NFTs you've collected in the metaverse as well.

For instance, this artist has earned over $1 million selling NFTs and spent over $125,000 on NFTs to display in his gallery called Toy Face Cafe in Cryptovoxels, a metaverse ecosystem that allows users to buy parcels of virtual land. Investors are paying millions for virtual land in the metaverse!

Gaming is a huge component in the metaverse — let's take a look at what's in for NFTs in the gaming space next.

Gaming

In 2020, globally, the gaming audience has spent approximately $54 billion on in-game purchases. In 2021, the App Store reported that 62% of its revenue is generated from game transactions.

Even though gamers are purchasing in-game items, they do not completely own them — it's the gaming company that owns these assets. Also, outside of that specific game, these purchases have no value and in most instances are not transferrable.

That's where games in the Web 3.0 space come in. Just like the metaverse, these games are based on a blockchain network which means they support user-owned crypto assets and data like NFTs and cryptocurrency. This means that by purchasing NFTs from these games, you truly own them.

CryptoKitties is a blockchain game developed by Dapper Labs — in fact, this is the first known game that ever used blockchain technology. The aim of this game is to buy, sell and collect digital cats, and play games in the KittyVerse. Here's a video showing you how to play. According to their whitepaper, CryptoKitties was aimed at making blockchain technology accessible to the average consumer by gamifying blockchain features, providing a sense of function and appeal.

On a similar note, Axie Infinity is a trading and battling game. This game allows players to collect, breed and battle creatures known as Axies which are NFTs. This game used the play-to-earn model where players could earn tokens based on their performance in the game, so much so that people in the Philippines were earning cryptocurrency during lockdown by playing this game.

The Sandbox is a virtual metaverse where players can build, own and monetize their gaming experience. The Sandbox has its own utility token (their own currency) called SAND which you can use to purchase NFTs from their marketplace. Players can also purchase LAND which is a virtual piece of real estate in The Sandbox metaverse that users can choose to monetize by either selling their own NFTs or building and monetizing games on their LANDs. Decentraland has a similar concept to The Sandbox and their utility token is MANA.

The bottom line here is that games are themselves becoming a marketplace to buy and sell NFTs and potentially even earn cryptocurrency.

Interesting use-cases of NFTs around the world

As part of my research, I've come across various use-cases of NFTs that I didn't know about and some that even surprised me. Apart from the ones linked above, here are some additional items that might interest you.

• Royal, an NFT music marketplace recently raised $55 million which allows fans to purchase music rights of their favourite artist and earn royalties on it. Music artist Nas is giving away 50% of royalties generated from music streaming platforms on his single Rare.
• Valuables by Cent allows you to buy and sell tweets as NFTs. It's up to the tweet author to accept or reject the offer, and once they've accepted the offer, this transaction is minted on the blockchain, creating a digital traceable autograph. For instance, Jack Dorsey's first tweet sold for over $2.9 million to Estavi.
• Mike Winkelmann, better known as Beeple, has sold his hybrid sculpture called Human One NFT for $29 million. This sculpture is a generative work of art — four video screens on physical frames — and Beeple plans to update the visuals of Human One fairly regularly lifelong.
• Dolce & Gabbana released their first NFT collection called the Collezione Genesi which sold for $5.7 million on the UNXD marketplace. The proud owners of these items didn't just receive the NFT but also a physical version of the item and exclusive access to Dolce & Gabbana events.
• Luxury powerhouses LVMH, Prada, and Cartier have joined forces to form a unified blockchain consortium called Aura Blockchain Consortium. The aim of this consortium is to simplify tracking and verification of luxury products, making it easier to prove authenticity & ownership of goods, thereby reducing counterfeits.
• IPwe has collaborated with IBM to build Global Patent Registry (GPR), a blockchain-based patent ecosystem. This ecosystem tokenizes patents, in other words, represents patents as NFTs, which can then allow intellectual property to be treated as business assets, making patents easier to license, sell and commercialize.
• NBA Top Shot is an ecosystem for fans to collect official NBA collectibles, built with Dapper Labs (of CryptoKitties fame) using Flow blockchain technology. Buying an item from NBA Top Shot marked as limited edition means that you're the only person in the world who owns it unless you decide to trade or sell it. NBA Top Shot has done over $750 million in sales.

That's it. Thanks for reading!