The spread of blockchain and Distributed Ledger Technology (DLT) applications and their use in financial markets is facilitating the exchange of goods without the need for a central authority or intermediary.
The issuance of crypto-tokens is the best-known application of DLT. The tokenization of an asset consists of the creation of digital tokens on the blockchain that represent that asset. One digital asset that is rapidly gaining ground is the NFT, the non-fungible token.
What are NFTs?
NFTs (Non Fungible Tokens) are unique cryptographic tokens that represent a digital property on the blockchain. They are not mutually interchangeable. In contrast to cryptocurrencies such as Bitcoin which are by nature fungible.
Fungible VS not fungible
NFTs are opposed to fungible tokens, i.e. tokens that have no specific individuality and can be replaced with other tokens of the same kind.
To explain the difference through an example, the money we have in our wallet is the ultimate fungible asset. If we were to exchange a little of our cash for as much of the same value, our assets would remain unchanged. This is because, e.g., each 10-euro note represents an identical value. This is why money is considered a fungible asset.
If we think of an artwork, it is a unique piece and even if there is some other good that has the same economic value, there is nothing identical in the world. An artwork is therefore by definition non-fungible, because it cannot be exchanged for a good that is identical in value.
What are NFTs used for?
The most common use of NFTs is the representation of a digital property. Most systems that support NFTs today allow you to tokenize a digital work of art, image, game or video. Although all these assets are indeed reproducible in copies, an NFT represents the ownership of that asset.
How NFTs work?
Like classic cryptokens, NFTs are also exchanged via blockchain. The one that most frequently supports them at the moment is Ethereum, which enables the creation and exchange of NFTs. The most important of the standards used for NFTs today is ERC 721, which provides relatively simple rules for the creation of a unique token on the Ethereum blockchain. The token is created on the blockchain, incorporating a unique ID that uniquely represents it. Since they are crypto tokens in their own right, these tokens can be exchanged either through smart contracts or manual exchange. They are, to all intents and purposes, assets that we can buy and sell, and many marketplaces have sprung up for this purpose, allowing for auctions or private deals.
NFTs and the art market
The art market was the first to open the door to NFT technology. In the field of digital art, however, the question arises as to what is the point of buying an NFT of a work if actually anyone can download the corresponding file. Moving the art market to the internet has presented artists with the problem of proving that they have created the artwork and monetising these digital creations, as everything can be downloaded freely. The non-fungible token standard (ERC-721) is there to solve this kind of problem: digital creators have the possibility to make their digital artworks as unique assets that can be bought, sold and traded, only with provenance of ownership. Each tokenized artwork is created directly by the artist, using his cryptographic keys to create the NFT. Thus, the original digital artwork becomes the token. Anyone can download the image but will not be able to own it or get any value from it without having its NFT. The infinite possibility of enjoyment of works on the net therefore becomes a very positive factor as its dissemination, even through copies, allows the value of the original to increase.
A 69.3 million JPEG
At the moment, the most famous of the NFTs is “Everydays – The First 5000 Days”, a collage of five thousand digital works by Beeple, the stage name of designer Mike Winkelmann, the best known author of digital art. The auction for the work represented a turning point because Christie’s, a historic auction house, had never sold anything that was just an NFT. In doing so, it accepted payments in cryptocurrency and the work sold for $69.3 million. It was purchased by an individual known by the pseudonym Metakovan, owner of Metapurse, which is considered the largest NFT fund in the world. Metakovan bought a JPEG file that sits in his digital wallet, which is made unique by a smart contract address.
The NFTs Marketplaces
We are currently witnessing a boom in non-fungible tokens, with the major marketplaces reporting record volumes. Hashmasks and CryptoPunks are in second and third place in terms of sales. Hashmasks, based in Switzerland, hosts a collection of unique digital portraits created by a collective of more than 70 artists. More than $8 million has been paid and one particularly rare token sold for $650,000 in ETH. The main retail market for NFT is OpenSea that saw a 400% increase in money volume in February, from $8 million to $32 million.
NFT tokens are an interesting technological solution that can really make a difference in the management of digital and non-digital property. They are going to become more and more prevalent in the near future where every asset, from artworks to licences, will need their uniqueness guaranteed by NFTs.