Understanding NFTs

Feel a bit lost and confused by the NFT hype? Fear not.

Copper

In the real world, there is only one Mona Lisa, the iconic painting by Leonardo da Vinci which is on permanent display at the Musee du Louvre in Paris.

Similarly, in the digital world, there is only one Nyan Cat, a GIF of a pixelated flying kitten with a Pop-Tart for a body, which sits on the Ethereum blockchain. 

Last month, it was reported that a cryptographic hash of the GIF had sold on the crypto art platform Foundation for nearly $600k. Though Nyan Cat was created a decade ago, its owner Chris Torres decided it was finally time to monetise his viral animation.

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Then the floodgates opened.

A video of Lebron James dunking sold for $208k. Shortly after, musician Grimes sold several pieces of digital artwork for $6m. Twitter founder Jack Dorsey got in on the action by selling his first tweet, published in March 2006, for $2m. Even the New York Times and Time magazine got involved with their own drops.

But all this is small potatoes compared to the artist Mike Winkelmann, better known as Beeple and his digital work, Everyday: The First 5,000 Days. Comprised of the thousands of daily drawings he had created since 2007, the digital mosaic was put up for auction at Christie’s and sold for an astronomical $69m, placing Beeple in the league of Jeff Koons and David Hockney as one of the three most valuable living artists in terms of auction sales.

And what unites all of these things – besides their large price tags – is that they were all sold as NFTs, or non-fungible tokens.

What is a NFT?

Chances are that you (along with most of the world) have already been force-enrolled into a NFT crash course. 

The NFT mania currently sweeping the world of entertainment is primarily thanks to general public interest in crypto reaching new heights, the incessant stream of news about high-profile sales, and validation from celebrity investors such as Mark Cuban and Elon Musk.

But in the event that you’ve been living under a rock these past few weeks, a non-fungible token is a digital commodity that has been authenticated with blockchain technology, turning it into a unique, non-interchangeable item.

The concept is hardly novel, having been around since 2015. But NFTs have recently piqued the interest of creatives worldwide. 

For artists, NFTs are revolutionary because they provide complete authority over content, how it is distributed and who gets a cut. The smart contracts governing NFTs allow artists to retain a copyright and to earn a percentage of every sale, so they benefit as the value of their work increases.

For collectors, the underlying blockchain technology solves an enormous problem – authentication. Whoever buys the NFT can rest assured that they have the authentic piece. And while physical goods can fall prey to forgers, an NFT can’t.

Anyone can mint anything into an NFT, be it a photo, song, tweet, or GIF, by going through a registration and verification process on the Ethereum blockchain. But it is also possible for NFTs to be minted on other blockchains. The commodities are then traded in specialist online marketplaces such as Nifty Gateway, Open Sea, and Foundation.

Over the past few months, NFT transactions have skyrocketed. According to data from Cryptoart, an analytics platform focusing on cryptocurrency art, March’s volume alone has hit $200m – a $100m increase from February, and an enormously significant hike from January, when the volume stood below $500k. 

And it’s not just individual art collectors who are putting their wealth behind NFTs. On Tuesdsy, Dapper Labs, the company behind CryptoKitties, NBA Top Shot and the new Flow blockchain, announced that it had closed $305m in new funding led by Coatue Management, the hedge fund run by the billionaire Philippe Laffont. The investment round caused the valuation of the firm to go through the roof at $2.6bn, shocking all industry participants.

Global interest in NFTs is expected to continue to rise with elite auction players Christie’s and Sotheby’s now getting involved. The world’s premier basketball league, NBA, is also a key driver of the current NFT craze.

With more and more mainstream names entering the NFT arena, perhaps it would be remiss not to pay closer attention.

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