What are NFTs and why are they so valuable?

The relentless growth of NFTs shows no signs of slowing down in 2022. From original works of art to providing proof of ownership of almost any physical asset imaginable, non-fungible tokens are fast emerging from their niche in the crypto sector to find a visible and important position in the global market. The inability to recreate or divide these assets provide them with verifiable digital scarcity, making them the perfect medium to link to a particular asset as proof of ownership.

Put simply, owning an ERC-721 standard token is akin to owning a diamond – no two are the same, and some are more valuable than others.

Overhyped or the future of ownership?

In March 2021, Michael Winkelmann sold 5,000 pieces of art in a single sale at global auction house Christie’s. Mr. Winkelmann had created one original digital piece of art a day for a period of 5,000 days (or 13 years, depending on your preference), before placing them together and selling the piece as an NFT under his artist name; Beeple. The piece, titled Everydays: The First 5,000 Days, sold for $69 million, catapulting NFTs into the public consciousness.

While the price tag may seem excessive, the rationale behind the purchase isn’t dissimilar to that of traditional art collectors who shell out millions to bag a one-of-a-kind piece by a notable artist. Why? Because NFTs are unique by design – an NFT is a scarce, verifiable, secure asset with proof-of-ownership at its core.

From Van Dyke to Basquiat, artists that create notable pieces of work have only ever had the first sale of their work to accrue money. Andy Warhol sold all 32 Campbell Soup can canvases for $1,000 in 1962. By 1996 the Museum of Modern Art purchased the set for over $15 million. That’s all well and good – but what does this have to do with NFTs? When NFTs are created or ‘minted,’ they outline the content contained within them; for example, a digital NFT may also contain a physical canvas that is part of the NFT. Unlockable content such as a video of how it was made could also be included – but the most compelling aspect for NFT creators? You can write in a resale commission (usually around 10 – 15%), which will give the NFT creator commission payments on every resale for as long as the NFT is in existence.

These one-of-a-kind collectibles have seen a phenomenal rise on the Ethereum blockchain, with $41 million dollars’ worth of NFTs traded during 2018, rising to $40.9 billion in value – on the Ethereum blockchain alone – in 2021 according to Chainalysis, a crypto analytics group cited and reported by the Financial Times in December.

Besides the importance of scarcity, the individual value of an NFT is typically based on these core elements:

  • Utility: What the token can be used for and / or which asset it is tied to
  • Liquidity: The ability to easily exchange for cash (e.g., an NFT issued on the Ethereum network is far more liquid than those issued elsewhere)
  • Issuance and owner history: Whether the token was issued or previously owned by an influential company or individual

Speculative value also plays a significant part; like art and diamonds, an NFT is worth whatever someone is willing to pay. When selling NFTs, the creator or seller can state the sale price or place it up for auction with a reserve price.

The past, present, and future of NFTs

2021 will go down in history as the year NFT’s really took off and entered the vernacular, with March as the firm catalyst. Pop artist Grimes sold an NFT collection that tipped $6 million in sales during the same month Beeple astonished Christie’s. The Kings of Leon also saw the potential with the NFT space, becoming the first rock band ever to release their new album as an NFT, again in March.

Several NFT-powered art marketplaces, across various networks, have sprung up in the last few years, allowing creators to put their blockchain-authenticated art under the hammer. Celebrities and influencers such as Paris Hilton haven’t let the opportunity to capitalise on the trend pass by; a hand-drawn portrait of her cat sold for 40 ETH (worth $17,000 at the time) in August last year. In January 2022, several pop-culture icons, such as rapper Eminem, musician Britney Spears and comedian Dave Chappelle, have all been reportedly snapping up Bored Ape Yacht Club (BAYC) NFTs for six-figure sums.

All sorts of innovative companies have established themselves in the new space, outside of the digital art world. Howie Schwartz, CEO of New York-based company Always Legit, utilises NFTs to facilitate the sale of investment-grade sneakers. Howie explains, “Instead of buying a high-end pair of sneakers and having to warehouse them, then when you want to sell them, they have to be authenticated each time. What we do is we take the sneakers and store them in a secure vault, then mint an NFT that represents the ownership of that asset. Investors buy and trade the NFTs of the sneakers that sit in our physical custody.”

The sneakers are wrapped and stored in a temperature-controlled space, with the proof-of-ownership logged on the blockchain – the very core of NFTs – while the authentication documents, videos and collateral are all included in the items NFT. Howie continues, “You can imagine if a previous owner was a prominent athlete or Travis Scott, for example, you can see on-chain who actually owned that sneaker. . . and of course with NFTs, the original seller of the sneaker will enjoy a royalty payment and the price appreciation as rare items pass through celebrity and VIP ownership.” If an owner ever wishes to take possession of the physical sneakers, Always Legit will burn the NFT and send the physical pair to the owner.

Other leading global sports brands including Adidas and Nike announced exciting moves into the NFT space in December 2021. Adidas revealed its collaboration with popular non-fungible token (NFT) collection Bored Ape Yacht Club, which followed hot on the heels of an earlier partnership announcement with Coinbase. In the same month, rival sports brand Nike took a major step into the NFT marketplace and metaverse with the acquisition of a leading NFT fashion and collectibles start up called RTFKT.

One of RTFKT’s flagship products is a hybrid NFT and physical shoe collectible inspired by the legendary CryptoPunks NFT collection, and the project attracted headlines earlier in the year when a digital footwear collaboration with prolific non-fungible token artist FEWOCiOUS sold $3.1 million in metaverse kicks.

Does the utility of NFTs extend beyond art, sport, gaming and merchandising?

These immutable tokens are finding real-world use cases. Within supply chain management, NFTs are tackling counterfeiting by tracing the authenticity of a product from source to its end destination. In the same vein NFTs can also be used to counter copyright claims, and ownership disputes by embedding trademarks and intellectual property rights directly into the metadata of an NFT smart contract. When it comes to authentication, verification and proof of ownership, the possibilities for NFTs are virtually endless.

There is a new buzzword in the crypto community – and that word, is the Metaverse. Contrary to popular belief, this dynamic new concept was around well before Mark Zukerburg seized his opportunity to rebrand Facebook to Meta. There will be hundreds of different Metaverses, all providing digital worlds build on gaming, business, education, entertainment and real estate . . . and every asset within them, will be an NFT. There is a sea change happening. How we interact, invest and consume is all about to evolve. The world just doesn’t quite know it yet . . .

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