NFT is a relatively new phenomenon, but one that has been making headlines with increasing frequency. In 2021, the Hermitage is planning to hold an exhibition of NFT works. Twitter founder Jack Dorsey previously sold his first tweet in the same format for $2.9 million, and artist Mike Winkelmann received a record $69 million for his NFT painting.
What are NFTs and why is everyone talking about them?
What is NFT?
The acronym NFT (non-fungible tokens) means “non-fungible token.” To understand tokens, you need to understand the environment in which they exist – in this case, the blockchain.
To keep it very simple, a blockchain is a database that is stored simultaneously on a huge number of computers. In the traditional Internet model, all devices are connected to centralized nodes (in the form of servers or Internet service providers), whereas blockchain works in a different way. It has no central nodes; in its system, all devices simultaneously store all the information published on the blockchain.
Cryptocurrencies – such as Bitcoin, Ethereum or Monero – work precisely because of blockchain technology
Cryptocurrencies – such as Bitcoin, Ethereum or Monero – work precisely because of blockchain technology
Tokens, in turn, are a register entry within this blockchain. The distinctive feature of most tokens is the principle of interchangeability. It can be compared to currency (including cryptocurrency): one dollar, one ruble or one bitcoin can be easily replaced by one dollar, one ruble or one bitcoin belonging to other users.
However, it is clear that not all digital assets are fungible. A painting by Pablo Picasso is not identical to a work by Claude Monet, and an mp3 file of The Beatles song can hardly be replaced with a recording of an Eminem concert. That is why the format of non-interchangeable tokens was created in order to transfer unique objects to blockchain.
Each NFT is unique and exists in a single copy, it cannot be divided, and all information about its author, buyer and all transactions with it are securely stored in a blockchain. In other words, an NFT is a digital certificate attached to a unique object.
What can be sold in the form of an NFT?
Virtually anything. Music, images, text, video, 3D-models – in other words, any digital product claiming to be unique:
Particular attention NFT pay collectors (who, if not them, to search for unique items), gamers (who are interested in in-game items: skins, weapons, collectible cards, etc.), as well as figures and fans of art. And art lovers in all its forms.
Singer Grimes (aka the mother of a boy named XÆA-12, the child of Ilon Musk) sold her drawings in the NFT format, raising $5.8 million, and Russian artist Pokras Lampas sold a projection of his drawing at the Chirkei hydroelectric power plant for $28 thousand.
Pokras Lampas’s page on Foundation.app. The projection on the Chirkei hydroelectric power plant is on the right
Pokras Lampas’s page on Foundation.app. Projection at the Chirkei hydroelectric power plant – right
DJ 3LAU became the first musician to put his album up for sale, receiving $11.6 million for it. Other musicians who have also sold their creations as NFT include the band Kings of Leon and singer Weeknd.
The record sale was for artist Mike Winkelmann’s (aka Beeple) painting “Everydays: The First 5,000 Days.” The JPG-file, consisting of all the images that the artist painted every day for five thousand days, was sold for $69.3 million. The picture of Winkelmann became the first NFT-work sold in the history of the auction house Christie’s.
Non-exchangeable tokens are of interest not only to art figures, but also to major publications. The Times Magazine sold three of its covers (including the iconic “Is God Dead?”), and The New York Times sold its column with the telling title “Buy this column on blockchain!”
Not only music tracks or drawings, but also models are being auctioned off as NFT lots. For example, Canadian artist Krista Kim was able to get $520,000 for a minimalist model of a house designed in Martian settings.
I created an NFT. What do I do now?
There are a large number of marketplaces that work with NFT. Some are highly specialized marketplaces and differ in the categories of items for sale: somewhere you can find items for video games exclusively, somewhere you can find digital art.
Notable ones include OpenSea, Rarible, Niftygateway and SuperRare. The platforms charge a fee in ether (as the exchange unit of the Ethereum cryptocurrency is called – non-mutually exchangeable tokens were created based on its infrastructure). The amount of commission varies, but is usually in the tens of dollars.
Some services immediately generate a token from a downloaded file (and charge a commission immediately), while others create NFT only at the time of sale.
We hadn’t heard of NFTs before. Have they only recently appeared?
Although blockchain and cryptocurrencies have been around for years, NFTs are relatively new.
Tokens of this kind were created back in the mid-2010s, but the first NFT projects only became available in 2017. The popularization of NFT, which people are now earning millions of dollars with, was originally credited to CryptoKitties, a game in which you can breed virtual cats. The game became extremely popular, and the sums for which you can sell digital pets exceeded $100,000.
Professor Donna Redel – formerly the managing director of the World Economic Forum and now an expert on blockchain and cryptocurrency at Fordham University – shared her views on the development of NFT.
She notes: “the ‘resurgence’ of NFT in 2021 is closely tied to advances in the blockchain infrastructure itself. “We’ve been watching the continued development of blockchain,” says Redel. – People have been taking the bitcoin system as the basis, and that’s how the Lightning protocol (a payment protocol that allows instant transactions – GA note) came about. […] We also watched the development of technologies based on the Ethereum blockchain platform. People were building [the infrastructure of non-interchangeable tokens] rather than making purchases.”
Donna Redel is the first woman to lead a U.S. exchange
Redel notes that the development of blockchain technology and the emergence of NFT services (many of which appeared in the past year) has also coincided with other processes in society and the economy. A large number of new players, including non-professional traders and amateur investors, have emerged in stock markets (and cryptocurrency markets).
The democratization of the stock market (the apotheosis of which was the situation around Gamestop shares) coincided with a pandemic: being in self-isolation, alone with their devices, many people began to pay attention to new financial instruments.
A certain role in the “revival” of NFTs was also played by the information buzz around them. The big names in the news headlines in their neighborhood with NFTs couldn’t help but draw attention to them. It is one thing when NFT is talked about in narrow gamer communities, and another thing when celebrities such as Elon Musk, Banksy, or Paris Hilton release their tokens.
I bought a JPG picture in NFT format. Do I have all the rights to it now?
Probably not. This is the main reason to criticize the new kind of token: because owning an NFT does not guarantee full rights to the item.
Take, for example, the uncomplicated viral video Nyan Cat, which is an animation of a cat flying through the sky and leaving a rainbow trail behind it. The creator of NFT with the animated cat was paid $580 thousand for it. However, you can still watch this video on YouTube, download it to your smartphone, or install a screenshot of it as a desktop screen saver without fear that the NFT’s owner will ask you to pay for it.
As an example, mentioned by Redel, NBA Top Shots – that’s what spectacular moments in National Basketball Association games are called. That is, it is possible to buy an NFT that has James LeBron’s shot of the ball or Michael Jordan’s slam dunk attached to it.
“You can buy that ‘moment,’ but you don’t own the rights to it and you can’t dispose of it outside of the blockchain,” Professor Redel says. – You can’t borrow it, you can’t divide it into its component parts. You can only do what the owners of these ‘moments’ (the NBA and Dapper Labs, creators of the aforementioned CryptoKitties – GA’s note) allow you to do, which is buy it, keep it in your collection, and sell it.
According to the Voice of America, the list of what can be done with NFT (and how it will relate to copyrights) may expand, but for now everything is happening purely on a blockchain network.
One might speculate that other “moments” might exist in a similar fashion. In theory, movie companies could sell snippets from your favorite movies in the form of NFT – that is, you could become the sole owner of a token tied to the final scene in “Titanic” or the dance from “Singin’ in the Rain.” However, (unless there are other arrangements with the rights holder) you will not receive royalties at all every time that movie is shown, but you can make money by re-selling those scenes.
If NFT buyers don’t own the items, why do people buy them?
While we can indeed download the files we like, their exclusivity – not their availability on the Internet at all – is what carries the main value. Blockchain securely records the fact that it is you who has purchased some unique item previously created by its original owner, data about which is also stored in the blockchain.
For collectors, gamers and art lovers, such purchases are akin to purchasing original paintings. It is theoretically possible to buy an original copy of Kazimir Malevich’s “Black Square”, but the very fact of this purchase (as well as its cost) will be quite different from if we just hung a reproduction of this painting on the wall.
But NFT can be seen not only as part of a collection or something valuable in terms of emotional experience, nostalgia, or the opportunity to boast about a unique acquisition. The resellability of NFTs embedded in their smart contracts allows them to be viewed as an investment as well.
However, as Redel points out, while we have a good idea of what the value might be from buying art – for example, paintings by Picasso or Monet – in the case of NFTs, which represent a relatively new market in creativity and art, many questions remain.
“Let’s imagine that six months ago I bought one NFT for three ethers worth $600 each,” Redel reasoned. – Today I would be paying $1,800 for each airplay because of the substantial increase in price. That begs the question, has the purchased artwork become more valuable or is it just the cryptocurrency that has become more valuable? What is the investment itself: the art itself or the relationship between the art and the rate of cryptocurrency?” In this regard, the question of what the price of NFT will be as time passes is also inevitable: will the buyer be guided by the amount paid during the last token purchase, or will he pay an amount according to the increased rate of the cryptocurrency.
Does NFT have a future?
The market for non-interchangeable tokens is developing extremely fast and blockchain technology and infrastructure have undergone significant changes over the past few years. However, there are still many questions today about how the NFT market can (and should) function and in which areas non-interchangeable tokens can be used.
For example, one potential future application of NFT is the blockchain recording of unique documents. Due to the reliability of blockchain, diplomas, certificates and various documents could be issued in NFT format, potentially helping to eliminate the risk of forgery.
NFT is likely to have (and is already having) some impact on formats for creating and distributing content, creative objects and art.
“It’s a kind of new environment for creativity,” says Professor Donna Redel. – The current situation can be compared to the period when photographers moved from film cameras to digital cameras; it is appropriate to remember the aversion with which many people regarded new camera equipment.
According to Redel, NFTs have the potential to affect not so much creativity itself, but the associated formats of interaction between consumers, distributors and content creators. “People are interested in new ways to create collections, to express themselves, so that process will continue,” she states. – Will it [NFT] replace all other formats? Absolutely not. Will it impact existing business models? Yes”.
“Blockchain is evolving, transaction capabilities are growing, and we’re at the very beginning of that journey,” Redel sums up. – “We’re just getting started with this topic, and a lot of professionals – extremely smart, knowledgeable in finance, technology, art – are experimenting and looking for new ways that we can use blockchain and cryptocurrency and tokens in our future.