A Rundown on NFTs — what is Value?
By Jacob Hellas
What are NFTs?
At the most basic level, an NFT is a package of data that is part of a blockchain, most often the Etherium blockchain, that behaves differently than crypto coins. The acronym NFT stands for non-fungible-token; non-fungible refers to its unique, and irreplaceable nature. Fiat, and typical Crypto coins are tokens that are identical, and exchangeable, therefore fungible. NFTs are packets of data that are unique, and hold additional data such as the piece of art that they’re connected to. Most NFTs are created with ERC 721 tokens, a token used to create verifiable digital ownership and scarcity, public proof of ownership on a decentralized network.
History
The first concept of NFTs December 2012 when Colored Coins were created. This was a project that was co-founded by Vitalik Beterin, the creator of Ethereum, it was ultimately unsuccessful but led to NFTs as we know them today. In 2014, Coutnerparty, a p2p finance platform on the the bitcoin network was created, they introduced a meme and trading card game, and in 2015 their platform hosted the first videogame linked assets being created. In 2016 the tech became more ubiquitous on the platform, with the hype of Rare Pepe trading taking off. After Counterparty, Cryptokitties and cryptopunks opened marketplaces for digital art, and eventually marketplaces got more sophisticated, offered more features, which is what brings us to the major players of today like Opensea, Rarebits, Mintbase, Mintable, Super Rare, etc. being created to allow anyone, even those with limited crypto knowledge to mint and trade these digital assets. Of course, one of the largest stories that catapulted awareness of the technology to the mainstream was the sale of Beeple’s NFT: everyday: the first 5000 was sold at Christies for $69,346250 in a single lot deal; representing the unignorable fact that NFTs have now entered the high art auction world.
The Case for NFTs:
One of the main philosophical cases for NFT adoption among consumers is the fact that we already “own” a good amount of digital assets. For example, digital copies of video games and skins we purchased on Steam, digital music downloads we purchased from Bandcamp, movies we downloaded from Apple TV. We don’t really “own” these digital assets however, the tech platform that sold them to you still owns them, and consumers are still beholden to their rules, locked into the platform, unable to sell the product, and the possibility to lose access as their platforms fall out of vogue, looms. NFTs are, in theory, the answer to this dilemma, decentralizing these assets and freeing you from the control of big tech platforms. You are free to sell whatever you own, and have more control over the asset, because it’s yours.
Who Should Sell:
For sellers, the implications are huge, artists, musicians, filmmakers and game developers now have access to increased revenue streams, and new service lines. Artists can increase their audience, sell a physical and digital copy of their painting, and be less beholden to the more traditional avenues and institutions required for art-dealing. For musicians, and live entertainment companies, tickets can be sold as NFTs, and in fact have already, where buyers now have a more secure way to store, buy and sell their tickets to events on the secondary market. Game developers can offer more valuable in-game assets and provide a real sense of ownership to their customers when they purchase, for example, an avatar, or skin.
Who Should Buy:
For buyers, there are also many types of individuals who should be interested in NFTs. Art collectors are maybe the most obvious, but those with an understanding of the complex inner-workings of how to value art. Getting involved in NFTs Is a way to diversify their art collection, get access to new buyers and sellers, increased deal flow and have potential for tremendous upside. To expand, collectors of basically anything should be interested in NFTs, sports cards, for example, are a collectible physical asset that have now been created as NFTs. There is also the idea that those who see long term value in NFTs are a vehicle for investment, albeit a very risky form of an investment, so if you have money that you are comfortable with exposing to risk, an NFT could be right for you.
NFTs do create the pride of ownership in the digital world, where before the technology, there was none. Pre-NFTs, the internet was a cut and paste world, where copies of things were traded for free, and now users can stake their claim and prove what they have really is theirs.
The Case Against NFTs, what is value?
Like with any new technology, there are a host of concerns. NFTs have been the subject of some criticism, including their environmental impact, their use in money laundering activities, their legal implications, fraud, and the fact that owners don’t actually own the copyright when they own the NFT, the artist still technically owns the art, and could create an additional NFT of it, or reproduce it in any way they see fit. Naysayers have also spoken out on the fact that NFTs could basically be considered “just JPEGs”, but really the difference between NFTs and the typical JPEG is the same difference between the actual Mona Lisa, and a print of the Mona Lisa.
One of the main criticisms of NFTs, which is a valid one, especially when talking about them in terms of being an investment vehicle is the idea of how they get their value. A stock price, and the price of most assets is based on their future cash flows, profits, earnings, or other underlying fundamentals. The value of NFTs are notably not based on these fundamentals, and follow a much more similar valuation model to art, which is hard to understand for those not involved in the art world. Art valuation is not based on the value of the inputs, it’s based on the concept of consensus conferring value, the idea that a consensus of individuals have all deemed, through scarcity, supply and demand, what the value of the piece should be worth; not its use, or exchange value. This is a speculative market, and one that cant confer reliable returns if you’re just interested in buying NFTs as investment vehicles.
Overview of Platforms:
Opensea is the most well-known NFT marketplace, founded in 2018. They charge 2.5% on every sale and offer minting and auction services. Investors include a16z and Coinbase.
Rarible is a cross chain platform that gives gamers the ability to farm tokens.
Super Rare is a platform focused on authentically created art tokenized on the Etherium network. They specialize in 1/1 creations that are all authorized by the artists.
Ethernity is a platform that specializes in minting unique artwork with a focus on the licensing world — a platform where artists can license their work and get credit when it is used.
Enjin is another gaming focused platform that allows anyone to mint NFTs without code, allowing more buy-in from those not familiar with crypto.
How to get Involved:
There are a few basic steps to creating, buying and selling NFTs. I wont get into specifics regarding actual steps on platforms, just some basic things to consider.
Firstly, you will need some crypto. If you’re in the market to buy an NFT you need to pay for it, and if you’re in the market to create an NFT, you need to pay a platform the gas fees to mint/generate your NFT, as well as fees to sell, additional gas fees as well as commission in some cases. Most often, payment is required in Ether. You need to purchase Ether, add it to your digital wallet, and connect your digital wallet to your NFT platform of choice.
To choose an NFT platform, you need to consider the fees, the features, the track record, and what exactly you want out of the platform. The list above is by no means exhaustive and also by no means to represent endorsements of the platforms, but could be a starting point.
Once you’re connected to the platform, it should be relatively straightforward to create your NFT, you’ll need to upload your file, mint your NFT, and pay the gas fees — be wary of these, they can vary widely and could eat up your profit if your likely selling price is low.
After your NFT is minted, and you want to sell, you set up an auction. Again, you’ll need to pay the fees, set your minimum price, and you’re good to go. Every platform does fees in a different way, and the commissions can vary widely.
After the auction, the buyer’s money goes from their wallet to yours, and the process is complete!
Just to elaborate a little on gas fees; these are fees associated with the platform that are made by users to compensate for the computing power required to process and validate transactions on the blockchain. Additional features on the marketplace will often cause higher fees.
Future:
After all that, what are we left with? Where will the technology go from here? One of the main interest points for this tech is the idea of the metaverse. The metaverse is a concept referring to an immersive digital world where the in-world assets, everything from digital homes, hairstyles, cars, whatever could all be owned using NFT technology. Facebook has plans to make its social media empire more immersive, and include digital assets in it, and game developers have already made use of the tech and sell in-gameworld assets as NFTs. There are some that believe that we already spend a good portion of our lives in the digital world, that our digital lives will continue to become more immersive and there will be more and more of a use-case for NFT adoption among anyone that wants to own anything in the digital realm when it comes. Only time will tell.
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