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What are NFTs? Non-fungible tokens explained for all

Thursday, April 15, 2021

Lately, non-fungible tokens (NFTs) have taken the world by storm. But what exactly are NFTs? And why are they commanding so much global attention?

Note: Fungible is defined as: “easy to exchange or trade for something else of the same type and value.”

What Are NFTs?

NFTs are digital assets or units of data on the blockchain, (the majority with the ERC721 standard on Ethereum), that can be created in many different forms, from digital collectibles and cartoon characters to virtual pets and even tweets. But what’s all the fuss about? Why not simply recreate the image or file?

[Read now: 5 real-world use cases for NFTs]

Unlike other crypto-assets, such as Bitcoin (BTC) or Ether (ETH), NFTs cannot be mutually interchanged because every one is different. In contrast, BTC is fungible because when you trade one BTC for another BTC (just like a dollar for a dollar), you receive exactly the same thing back. With a one-of-a-kind trading card, you trade something and receive something completely in return.

This adds to the value of NFTs since they can be created either as entirely unique, one-off pieces, or limited-edition items with built-in scarcity. And, since NFTs live on the blockchain, their authenticity can be instantly verifiable. They also come with an immutable history of their ownership (or providence) so buyers can be certain of their origin.

Blockchain's immutability further means that NFTs, unlike physical assets, such as traditional baseball cards or fine art, can never be replicated, forged, or destroyed. They also can’t decay or get damaged over time.

Perhaps even more interestingly, however, is that NFTs are liquid and easy to trade. Unlike a painting hanging on a wall that requires a certain amount of logistics to sell and, sometimes, an intermediary auction house, NFTs can be traded on a peer-to-peer basis and sold for fiat currencies. This makes them more appealing to investors who want the opportunity to unlock liquidity quickly rather than tie up their wealth in real estate or other illiquid assets.

NFT use cases and examples

So far, NFTs are most popular in the world of gaming, where they’re used as in-game items, incentives, and characters. In sports and eSports, as digital collectibles, video moments, and virtual trading cards. Also in the art world, where representations of unique digital art have raised millions of dollars in auctions.

Few people missed the sensational news last month of the most expensive NFT to date, sold by artist, Beeple. His record-smashing work, called “The First 5,000 days,” reached more than $60 million at an auction at Christie’s. Popular Canadian female artist Grimes also cashed in on this technology recently by selling $6 million worth of digital artwork in a series of 10 limited edition pieces.

So too, the National Basketball Association’s project, NBA Top Shots, collected a whopping $230 million for a video highlight “moment” of star player LeBron James. And millions more for clips of other popular teammates.

Beyond the entertainment and arts industries, many experts believe that NFTs can (and eventually will) be used in many more areas of our lives. Some analysts say that the potential use cases for NFTs are “limitless,” including the proof of ownership of assets from fine art and jewelry to cars, real estate. And pretty much anything else of value that we can think of.

NFTs for art, music, and real-world assets

They say that beauty is in the eye of the beholder. That’s perhaps particularly apt when it comes to NFTs. If you’re wondering exactly what the benefit is of a digital artwork you can’t hang on the wall or one of Jack Dorsey’s tweets committed to the blockchain, NFTs may not be your thing. At least for the moment.

Moving away from the hype, however, NFTs have become an excellent way for clubs, teams, and artists to monetize their work, open up new revenue streams, and engage with their fan bases. At a time when many live events are being held behind closed doors due to the pandemic, and clubs are taking a hit from a loss of revenue on ticket sales. Raising funds through sales of NFTs can unlock new ways of profitability and generate fan engagement.

Moreover, NFTs appeal to a younger generation of digital natives that are no longer interested in traditional sporting memorabilia or tradable items like physical collector’s cards. Using NFTs, fans can instantly trade with their peers over any geography, interact more personally with their favorite clubs and players, and support the artists they listen to most.

The future of NFT applications

Moving forward, NFTs may well start entering into more areas of our lives to improve efficiency and liquidity. Since they allow for the frictionless and secure transfer of digital assets and ownership globally, NFTs could become big in real estate. In fact, legendary venture capitalist and cryptocurrency advocate Tim Draper stated:

“I am excited about how NFTs in the virtual world are going to be applied to real estate in the physical world. I suspect that people will soon be able to buy a building, buy the air rights and buy the virtual rights of any physical space. The future is awesome.”

When you consider the amount of time, resources, and bureaucracy involved in transferring property ownership currently, the tokenization of property rights would make them infinitely easier to manage and trade. And that’s just one example.

NFTs have seen spectacular growth lately and, as more and more industries embrace their digital transformation and move their processes online, the use cases for non-fungible tokens look set to grow exponentially.

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