What Are NFTs?

Non-fungible tokens (“NFTs”) is a term which made its way into mainstream media in early 2021. But what exactly are NFTs?In this article, we will discuss:

Understanding the Difference Between Fungible and Non-Fungible Items.

Benefits of NFTs.

NFT Use Cases.

Fungible vs Non-Fungible

To understand what NFTs are, we have to first understand the concept of fungibility. Fungibility refers to the interchangeability of an item with another. For example, if you lent your friend a $10 dollar note, you wouldn’t expect to receive the exact same note back as any other $10 dollar note would hold the same value.

Digitally, the concept of fungibility holds too. If you borrowed 1,000 in-game currencies from a friend, it doesn’t matter to them where you get the 1,000 from, as long as they receive the same amount back. Therefore, fungibility implies items holding equal value.

Non-fungible on the other hand means that items are unique and have differing qualities that affect individual value. The original Mona Lisa in the Louvre holds significant value over a print from the gift shop. You can’t claim to own or sell a print copy as the original because that is exactly what it is, a copy. It’s not authentic, does not hold the same provenance, and therefore holds a completely different value compared to the original.

In the digital world, Beeple auctioned off his NFT digital artwork “Everydays: The First 5000 days” for approximately $69 Million USD. Some might say “Beeple sold a JPEG file for $69 million, but I just simply copied and pasted it onto my computer and now I own the NFT too!” Not exactly. They are just owning a copy of the original digital artwork, the same concept that someone could own a print copy of the Mona Lisa. Therefore, while anyone can view and download a copy of Beeple’s NFT JPEG file on their devices, they do not own the original copy.

Benefits of NFTs

Buying and owning physical assets such as a valuable art piece, collector’s watch or a rare trading card is met with challenges such as verifying ownership, authenticity of the product and likelihood of physical deterioration. These problems are not something you have to even think about with NFTs as it is used to drive the adoption of digital collectibles. So what are NFTs and why do they matter?

Verifiable Ownership

Ownership is the basis of NFTs. NFTs are proof of ownership of digital assets — image, sound file or any other type of media. It uses blockchain technology; a decentralized digital ledger that documents transaction data, allowing for verification of ownership of the NFT. While anyone could claim they own an NFT after taking a screenshot or downloading it, they only own a copy and not the original because true ownership of the NFT is recorded on the blockchain.

Authenticity and Provenance

In the physical world where counterfeits of premium assets are rampant, getting your product appraised and verified for authenticity is a troublesome process. Digitally however, as each NFT contains the record of ownership of the digital asset, the history of the ownership can be traced back to the original creator. This allows owners and potential buyers of the NFT to be assured that the digital asset is genuine, protecting it’s value in the process. Therefore, the NFT also functions as a certificate of authenticity.

Overcoming Physical Constraints

With physical assets, collectors have to ensure that their assets are kept in pristine condition to preserve it’s value while facing physical storage constraints. Removal from its original packaging or even any minor scratch, crease or fold would reduce the value of the asset. This means that you could never take out a collectible figurine from it’s packaging to display or use the ultra-rare trading card to be played as it was intended as you risk damaging and devaluing them. NFTs on the other hand are fully digital and do not face the same constraints as physical assets. NFT owners can have full utilization of the digital asset as it was intended, not have to worry about space constraints and can be assured that there would be no damage, fully retaining its original value, with a chance of appreciation as well!

NFT Use Cases

Digital Art

Similar to Beeple’s NFT digital art, CryptoPunks is an NFT digital art project. It is a collection of 10,000 24x24 pixelated avatar NFTs and was given away for free when it launched in 2017. Today, they are symbols of owning a piece of NFT history and are selling on OpenSea (an NFT marketplace) at an average of 14.96 ETH (~$35K USD) as of this writing.

‘Covid Alien’ CryptoPunk #7523 recently sold for over $11.7 Million USD on Sotheby’s.

Digital Collectibles

Bored Ape Yacht Club (BAYC) is a set of 10,000 unique NFT digital apes which have become popular with NFT collectors in recent months. Owning a BAYC NFT also doubles as a membership to their exclusive “swamp club”, with additional benefits planned for the owners. The launch price in April was 0.08 ETH (~$220 USD) and is being sold on OpenSea at an average of 1.75 ETH (~$4,000 USD) as of this writing. Early purchasers are making 1,818% on their returns on digital apes! Other notable NFT collectible projects include NBA TopShot (digital NBA collectible cards) and VeVe (pop-culture licensed digital collectibles).

Bored Ape #197 is the highest sold ape on OpenSea at 109 ETH (~$200K USD at time of sale)
One of 8,888 First Appearance Superman NFT on VeVe initially sold for $50 USD. Currently priced on the marketplace for around $400 USD.

Official Documentation

With the capability of proving ownership and authenticity, NFTs can be used in official documents such as IP and title deeds for physical assets. Using NFTs, it would be irrefutable as to who owns the particular licensing, trademarks etc. as ownership is recorded on the blockchain. For title deeds, authenticity and condition of the document affecting its validity is not a concern because of NFTs function in proof of ownership, guaranteeing authenticity and digitization.

Video Games

NFTs in video games are quickly becoming one of the hottest topics in the NFT space. These are blockchain-based games that allow users to own, collect and use their NFT in-game assets. Blockchain games allow users to resell the NFTs they bought or earned and some games also reward players with cryptocurrencies for playing the game. Making real money while playing games sounds like a concept that interests you? Look out for our next article.

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