What exactly does NFT bring to the table?
Non-Fungible Tokens (NFTs) are taking the world by storm. In this article, we'll go beyond the market hype and cover everything you need to know about NFT.
Non-Fungible Tokens (NFT) are taking the world by storm. Celebrities such as Steve Aoki and Jay-Z proudly display their NFTs as their profile pictures on Twitter. Major brands such as Adidas and Nike have entered the space. Adidas raised $23 million by launching its own NFT line, which serves as a pass to exclusive Adidas physical and digital products. Nike acquired RTFKT, a virtual design studio in the NFT space, to enter the metaverse. NFT pieces are being auctioned at Sotheby's and Christie's for millions of dollars.
As the mainstream adoption of NFT grows, it's becoming increasingly difficult to ignore this upward trend. In this article, we'll go beyond the hype and cover everything you need to know about NFT.
What is NFT?
An irreplaceable token or NFT for short is a unique cryptographic token that represents a set of non-fungible metadata stored on the blockchain. On the other hand, fungible tokens are interchangeable. Tokens such as Bitcoin and Ether are examples of fungible tokens. 1 bitcoin = 1 bitcoin, and users make no difference to the exact bitcoin they buy or receive. Each NFT is uniquely identifiable, and in most cases, users will care about the exact NFT they purchased or received.
Blockchains are distributed and decentralized digital ledgers. They consist of blocks of data that are linked together in chronological order. The most commonly used blockchain for NFT is currently Ether. We are also starting to see the rise of niche blockchains built with NFT and gaming at their core, such as Flow and Ronin.
The metadata for NFT can be found in the smart contract stored in the blockchain block. A common misconception about NFT is that the displayed image or JPEG representing NFT is stored on the blockchain. While this is true for a few projects (Anonymice, Chain runners), most projects store the image on an external storage platform (IPFS, Arweave) and the metadata on the blockchain contains a link to that image. The cost of storing images on the blockchain is very high due to the file size of the images, which makes it uneconomical for projects to be fully on the chain.
What problems does NFT solve?
The Internet solves the problems of the physical world by digitizing everything. It's easier than ever to have unlimited scale and connect with a global audience. Distribution costs have also been greatly reduced - newsletters vs. newspapers. However, it lacks the benefits of the physical world. Ownership and scarcity are virtually non-existent, and the ability to verify digital assets is much more difficult than with physical goods. While "right-click and save" NFT is a modality, it reflects the current state of the Internet. Digital assets have no ownership and little value appreciation.
At its core, NFT provides the proof of ownership that is missing in today's digital economy. It creates the ability to combine the benefits of the digital world (global audience, scale and distribution) with the benefits of the physical world (ownership and authenticity).
Before the rise of NFT, it was difficult to accumulate and capture value from digital assets. This made it very inexpensive for users, but detrimental to creators. Today it is difficult to track and attribute true ownership on the Internet, and NFT solves that problem. Creators are rewarded more accurately for their work and are able to extract a greater percentage of the value they create. Users benefit from being able to gain ownership of their digital assets and the ability to easily trade and value them. Being an early fan of the biggest bands in the world today doesn't give you any additional benefits, but with NFT, consumers have the potential to be rewarded by doing what they already do every day.
What are the uses of NFT?
The most popular use case for NFT is to use NFT as a collectible artwork. NFT provides a way for artists to easily sell their artwork to a global audience while ensuring ownership. Art NFTs can be broadly divided into two categories: non-generative art and generative art.
When we think of art, we usually think of non-generative artworks. They are created by humans without the help of an autonomous computer system. Digital artists can list their work on the NFT marketplace, and anyone anywhere in the world can view and purchase their work. In today's traditional marketplace, artists can only earn income from the initial sale of their work. NFT gives artists the option to embed royalties into a smart contract for their work. This allows them to share the value of their artwork more fairly. NFT makes it easy to verify the authenticity and ownership of artworks, which is a huge benefit of the technology. Notable names in the field: Beeple, plpleasr, ferocious, Pak.
Photo NFTs are a rising use case for NFTs. Photographers sell their work as NFTs and receive similar benefits to artists who sell their work as NFTs. Justin Aversano is one of the best known figures in the field. He made history when one of the NFTs from his Twin Flames series was sold at Christie's. Popular markets for such NFTs are Opensea, SuperRare, Foundation, Rarible and Nifty Gateway.
In addition to art drawn and created by artists alone, the rise of art NFT owes much to generative art. Generative art is art created through the use of autonomous computer systems, often algorithmic computer programs. Collections of profile pictures (PFPs) such as CryptoPunks and Bored Ape Yacht Club (BAYC) are created with the help of such programs. The creator completes the individual features and the program randomly combines them by integrating them and creating unique characters. There are fully generated collections done entirely by computer programs with no human input other than the creation algorithm. The most popular collections under this category are subseries of Art Blocks, such as Snowfro's "Chromie Squiggle" and Tyler Hobbs' "Fidenza". OpenSea is the leading marketplace for generative art NFTs, while LooksRare is a popular newly launched NFT marketplace.
Types of Art NFT
Acknowledgements to artists Justin Aversano, Beeple, 309 Labs, and Tyler Hobbs
Art NFT is a use case that receives mainstream attention, however, one collection surpasses all art NFT collections in terms of sales. The NFT game Axie Infinity currently holds the crown (excluding laundered transactions on LooksRare). The combination of NFT technology and gaming has given rise to a new gaming paradigm: Play-To-Earn/Play-And-Earn/GameFi.
Top NFT Collections by Sales
Axie Infinity was the breakthrough star of 2021 and launched the rise of Play-to-Earn (P2E). The game generated over $$1.3 billion in revenue in 2021 and has over 2.5 million active players per day. Unlike traditional games where publishers earn revenue by selling assets to players, Axie Infinity achieves this by cutting marketing transactions and breeding fees. Breeding is done by players to create new Axies. Teams are incentivized to make the best games to grow their user base, not incentivized to sell assets to their users.
Axie Infinity's cumulative revenue
The integration of NFTs in the game provides players with similar advantages to artistic NFTs in that it allows players to truly own their in-game assets. In-game items and even the characters themselves can be NFTs. For Axie Infinity, the Axies you need to play the game are NFTs and the in-game currency is cryptocurrency. In traditional games, the money flowing into the game usually gets stuck in the game because the player cannot extract value from the game. NFT games give players control and ownership of their assets, which they can sell and cash out if they decide to do so.
The value flow of traditional games and blockchain games
Music NFT is an emerging use case for NFT. Like art NFT, music NFT is the key for artists to capture most of the value they create. Artists typically receive only about 12% of the revenue they generate for the music industry. Producer/artist Daniel Allan sold his produced music NFTs on Opensea for 1.1 ETH, equivalent to 1.2 million streams on Spotify.
True fans are also affected by this trend. They are able to support and own copies of works created by their favorite music artists directly from the artist. This creates new ways for artists to engage their fans to a level that is difficult to achieve with existing methods. By owning an original copy of an artist's work, fans are able to be tied to the future success of the artist. Artists are rewarded more fairly, and as a fan you can participate in the benefits of supporting the artist early on. Sound.xyz and Catalog are two projects that provide a platform for artists to sell their work directly to their fans.
Sports NFT is a growing and thriving use case for NFT. Similar to baseball trading cards, Sports NFT allows fans to build collectibles of their favorite teams and players. Two of the most popular programs are currently NBA Top Shot and Sorare, both of which have official partnerships with related organizations and official licenses.
NBA Top Shot essentially creates GIFs of key moments during NBA games and bundles them randomly into digital card packs, each moment being an NFT. the packs are divided into different rarities based on player, importance, and virality of the moment. The less time you have, the less supply you have. A pack starts at $9 for a common item and $999 for a legendary item. Users can trade NFTs on the official marketplace of NBA Top Shot. LeBron James' legendary dunk that won the championship in the 2020 Finals sold for $230,000, the highest price sold to date.
When Fantasy Football meets NFT, you will see Sorare. player cards are NFT and rewards are paid in ETH. Users can trade player cards on the Sorare marketplace. The benefits of Sorare are similar to NFT games, with ownership of in-game assets and the freedom to cash out and extract value from the game.
NBA TOP Shot Market
With the ability to easily authenticate and verify ownership, NFT can act as an access pass. An example of such a collection is the Flyfish Club, which acts as a membership pass to a private dining club, while the Adidas collection gives holders exclusive access to the brand's physical and virtual merchandise. While some collections have the sole purpose of being a membership pass, this use case is the overarching theme of many collections, and all forms of NFT can act as various access passes.
Gary Vaynerchuk's Flyfish Club NFT
A key factor that contributed to the rise of Art NFT was the community that supported the project. NFT holders have exclusive access to certain Discord channels and there is a sense of camaraderie within the community. Large projects (BAYC) have hosted physical gatherings and exclusive parties for those who own NFTs. Holding certain NFTs may give you early access to new NFT collections from the same team or through partnerships with new projects. Similar to Adidas NFTs, some collections (BAYC, Creature World) have released their own physical merchandise and NFT holders have received early/exclusive access. Music artists and games are able to offer similar benefits to holders of their NFTs.
Decentralized autonomous organizations (DAOs) and gaming guilds are another area where NFTs can act as access passes. Ownership of the associated NFT will provide you with exclusive membership access and can be used as voting tokens. Yield Guild Games is an example of a gaming guild that uses NFT in this way. NFT holders can access exclusive features on the site and sign up for various programs in the guild.
How do you create NFT?
There are many ways to create an NFT, and you can do it manually or with the help of systems created by NFT marketplaces such as OpenSea and Rarible. Beyond the technicalities of creating an NFT, an important point to consider is the blockchain on which you want to build your NFT: Ether, Solana, Avalanche, Polygon, etc. Different blockchains have different trade-offs and communities, which can have a big impact on the success of your project.
OpenSea provides a great guide on how to easily create your own NFT on Ether using their platform here.
How do I buy NFT?
The largest marketplace in terms of trading volume is OpenSea, which is likely the starting point for your NFT journey. While the most popular NFT collections today are built on Ether, there are thriving projects on other blockchains such as Solana, Terra and Polygon. Other popular marketplaces include LooksRare and Rarible for Ethereum/Polygon, Magic Eden and Solanart for Solana, and Random Earth for Terra.
You need to set up a crypto wallet that is compatible with the blockchain on which you are building your NFT project in order to interact with the marketplace. The most commonly used wallets are MetaMask for Ether, Phantom for Solana and Terra Station for Terra. after setting up the wallet, transfer ETH/SOL/LUNA from the centralized exchange of your choice to the wallet and you're ready to go!
How do you choose NFT for your investments?
When purchasing NFT as an investment, it is important to evaluate the project as a whole and not just rely on how it looks. Similar to picking a crypto project to invest in, the quality of the founding team, proven ability to execute and deliver, and the project's roadmap are important factors to consider. Perhaps the most important and difficult factor to measure is the strength of the community the project has managed to build. The value of NFT comes primarily from its community, and projects with strong communities will be able to withstand bearish periods. We have even seen cases where communities have rallied and revived projects by delivering projects in areas where the founding team failed. The latest example of this situation is Stumpy Penguin.
The only way to truly measure the strength of a community is to be with them, and the quality of the members is more important than the quantity. Join Discord, hang out in the channel, and get a feel for the vibe of the members. If the conversation mainly revolves around the bottom line and the environment is harmful, then this is probably not the program you want to bet on.
With the number of NFT projects being released every day, it is almost impossible to keep up with all of them. One strategy is to follow the Smart Money and focus on the projects that are of interest to them, and the Nansen NFT Dashboard can help with this. You can view trade data for specific items in "NFT God Mode," view casting data in "Mint Master," and view the last 24 hours in "NFT Smart Money" to see an overview of Smart Money activity for the last 24 hours.
Some of the NFT dashboards available on Nansen.
BAYC's NFT God Mode Dashboard
The latest casting breakdown on Mint Master
Smart Money 24 hour trading of NFT
Common criticisms of NFT
"Why spend thousands of dollars on JPEG files that I can just right-click and save?"
Yes, you can get a copy of the artwork by doing this, but it is not the same as having the actual NFT. just as a counterfeit luxury item can never come close to the valuation of a genuine one, a "right-click to save" version of the NFT will never have the same value, even if the materials and build quality are exactly the same. A counterfeit or, in this case, a "right-click to save" version will only increase the value of the original. It creates a feedback loop - the original item is copied > gains virality and traction > value goes up > item is copied more often. The more copies of a particular image are seen around the world, the more viral, iconic and valuable the original copy becomes. What propelled the Mona Lisa to fame was the power of the painting to spread when it was stolen, not the fact that it was painted by Leonardo da Vinci. Being plastered on the front pages of newspapers around the world gave it international fame and made it a household name.
You could argue that the reason a physical counterfeit is not worth the same as the original is because it is not the same item as 100%. This is true for physical items, and it is also true for NFT. The concept is more difficult to understand because NFT is completely digital and, on the surface, the copied JPEG is identical to the original 100%, but, just like the physical item, what really matters is what follows. The "right click to save" version will not have the same underlying data on the blockchain. It does not give you the same benefits and rights that having a real NFT provides. It does not grant you access to events or locations, access to the community of individuals who own NFTs, the ability to resell works on the marketplace, access to in-game experiences, etc.
The implementation of NFT does not mean that users have to pay more, it just means that they have a choice. Don't want to pay thousands of dollars for JPEG? Of course, you can download and use it for free if you wish. Those who want to support their favorite creators by buying and owning their work now have the ability to do so in a much more equitable way than the current method. Looking at OpenSea's sales (about $17 billion in 2021), it's clear there's a fair amount of capital interested in this.
"NFT is bad for the environment"
While it is true that proof-of-work (PoW) blockchains such as Ether are energy-intensive, many newer blockchains and even Ether itself are moving to proof-of-stake (PoS). PoS blockchains such as Solana consume much less energy and are likely to be carbon neutral. Most importantly, NFT is unlikely to result in additional energy use, as other applications (such as DeFi) may take up any free transaction capacity on the blockchain if NFT does not exist.
The Future of NFT
The future of NFT may look quite different from what we see today. While NFT has established itself as a viable and value-added tool for artists, we are only in the beginning stages of utilizing the technology.
Given their primary function as ownership tokens, NFTs can be a tokenized representation of any asset, both physical and digital. Housing deeds, school certificates, and ID cards are just some of the potential items that could be improved with a tokenized version. Since the blockchain is immutable and data is easily verifiable, if a person's academic credentials and past work history are stored on the blockchain, institutions can seamlessly verify it.
NFT does not exist as an asset in a silo, but can be integrated with DeFi protocols to create a fluid crypto ecosystem. Imagine a world where you could use NFT as collateral to draw loans from DeFi protocols such as Aave or JPEG'D. Currently, NFT is a relatively illiquid asset, with high prices preventing smaller players from participating in the rise of certain collections. Fragmentation of NFT would help increase liquidity in the space and allow smaller participants to share in the upside. An NFT index tracking the total market value of NFT could create new investment avenues and open up the space for investors who want exposure to the sector but do not want to hold specific NFTs.
Popular NFT collections may begin to become highly valuable assets in the virtual world and may require the use of NFTs for advertising purposes. in the real world, brands engage with celebrities and use their brand and influence to promote their products. Specific NFTs may become meta-universe influencers, and brands will rent NFTs for such situations.
Over time, successful projects can grow into big brands in their own right. Once a project has solidified itself in popular culture and gained enough mindshare and cultural significance, they may be able to compete with traditional companies such as LVMH. Owning NFT from the program becomes a strong social signal of wealth and becomes very popular, similar to owning a Rolex watch.
NFT offers us a way to leverage the strengths of both the physical and digital worlds to create new distribution channels and monetization models for creators. It provides us with new ways to engage and inspire communities of like-minded people and has the potential to change the way we coordinate social groups. They allow us to better attribute and determine the value of digital assets and enable relevant creators to receive a greater share of the value they create. "Right-click-and-save" will always be a feature of the Internet, but NFT gives creators and users the option to take ownership and exercise greater distributional control over their assets. Right-click-and-save also returns the value to the original copy, rather than reducing it.
The current implementation of the technology is limited and not perfect. However, this does not eliminate the long-term potential and future use cases that will emerge in the future. We are only in the first inning of the rise of the virtual economy, and it is our responsibility to find new and exciting ways to leverage the benefits of NFT.