Non-fungible tokens, commonly referred to as NFTs, are a type of asset built on the blockchain that have become all the rage during the present cryptocurrency boom. While NFTs have been around for years, they’ve drawn increased attention in recent weeks after a number of incredibly lucrative sales.
NFTs are essentially smart contracts utilizing the blockchain to make sure specific conditions are met before processing a transaction. In practice, the primary use of that feature at this time is to validate transactions and record ownership of the NFT.
The “non-fungible” part of the name refers to the fact that each NFT is totally unique. For example, two people may have purchased different NFTs for the same price, but those NFTs aren’t necessarily interchangeable. One might be a GIF by a renowned illustrator, while the other may be an exclusive song by a musician. And their owners may not see their exchange as one to one the same way they would an exchange of say, Bitcoin (CCC:BTC) for Ethereum (CCC:ETH-USD).
Historically, NFTs have primarily been used for digital collectibles. You can think of them as online baseball cards, or similar to purchasing a piece of art.
Those digital collectibles are a big part of why NFTs have been a hot news topic of late; last week, graphic designer David Rudnick sold an NFT for 10.8 ETH (approximately $18,600) on Zora, an NFT marketplace.
This particular NFT provides a valuable case study: Rudnick himself shared a copy of the digital art piece for free online. This is one area where NFTs truly begin to differ from visual art, which derive value from not only their aesthetic value or perceived growth potential, but also their actual scarcity.
NFTs however, can become more valuable by virtue of being shared widely. Some liken this to buying a print of a painting, as opposed to owning it outright. Yes, I can put up a poster of the Mona Lisa in my home, but its not the real deal, even if it looks exactly the same. And by owning a poster of the Mona Lisa, I’m adding to the perceived cultural value of the original work.
Due to the blockchain nature of NFTs, creators can profit not only off the first point-of-sale, but also take a commission fee of subsequent resales, providing a distinct advantage for artists over traditional models. And it’s not just visual artists engaged in the space.
The NBA has also gotten into the digital collectible game with its NBA Top Shot app. The app allows users to purchase certificates of ownership for game highlight videos, such as a particularly strong block by Zion Williamson.
Meanwhile, in the music world, producers are releasing sample packs and exclusive music via NFTs.
One potentially lucrative future application of NFTs might be concert tickets. Given that NFTs are smart contracts, the blockchain could validate rules for tickets to set a ceiling on resale prices and how often a ticket can change ownership before the show.
There are also NFT applications in gaming and decentralized finance (DeFi) to consider.
While it’s hard to say where NFTs go next, surging interest suggests we’re on the cusp of the technology being more broadly adopted, similar to how increasing use of blockchain and cryptocurrencies led to their widespread acceptance today.
On the date of publication, Vivian Medithi did not have (either directly or indirectly) any positions in the securities mentioned in this article.
