A closer look at NFTs
As much as cryptocurrency has grown in the past several months, non-fungible tokens (NFTs) have been right there with it, receiving tremendous levels of buzz as the public aims to wrap its mind around the concept of digital paintings and trading cards selling for hundreds of thousands of dollars.
But behind all the noise and headlines is an intricate platform powered by blockchain technology and designed to produce assets that are valued for their uniqueness and scarcity. And yes, the NFT space has been growing at an astonishing rate of late, with trading volume increasing from $20 million combined in November and December 2020 to $119.75 million combined in January and February 2021.
While volume has decreased some in the months since, it is clear people see value in these digital assets and that the market stands to continue to grow from here. Here is a closer look at what NFTs are, how they came to be, and what advantages and disadvantages they present within the world of digital assets.
At a surface level, NFTs might not seem to differ much from typical digital files we would send to one another, such as images or MP3s. But the main difference is that those files are fungible, in that both can be copied and modified rather easily from almost any device.
NFTs are different in three particular ways:
- NFTs are rare, and much of their value is tied to their scarcity. Developers of NFTs can create as many as they want, but they often limit the supply to increase scarcity, demand, and value.
- NFTs are indivisible. Most NFTs cannot be divided into smaller units, meaning if you are interested in purchasing one, you must either buy all of it or none of it.
- NFTs are unique. Each one possesses a unique identifier and has a permanent information tab that records its uniqueness, operating as a sort of certificate of authenticity for the owner.
So, while traditional asset files are easy to modify and replicate, NFTs represent one-of-a-kind digital assets that are truly unique. And that is where their value comes from – though it did take a while for this notion to catch on in the mainstream.
History of NFTs
The origins of NFTs can be traced back to 2013 with the advent of Color Coins on the Bitcoin network. While Color Coins themselves were largely useless, their underlying tech did pave the way for the rise of CryptoPunks and CryptoKitties on the Ethereum network in 2017. It was not until 2020 and into 2021 that digital art and other collectible NFTs entered the limelight.
CryptoPunks is a series of 10,000 unique images minted on ERC20/ERC721 that was originally spread for free on a first-come-first-serve basis. It has since commanded hundreds of thousands of dollars on the NFT market.
CryptoKitties, on the other hand, is a mobile gaming platform released in 2017 that hosts a wide array of NFTs that are usable in the game. Since its creation, CryptoKitties has sold millions of dollars worth of NFTs representing characters and items in the game.
Today, digital art and other collectibles such as NBA Top Shot “moments” have succeeded in moving NFTs closer to the mainstream – and the value has followed. Just ask digital artist Beeple, who sold an NFT piece for $69 million earlier this year.
Advantages of NFTs
Apart from being rare, indivisible, and unique, NFTs have a few other advantages that make them appealing to users:
- NFTs are transferable, unlike exchange-traded fungible tokens.
- NFTs are authentic and powered by blockchain technology, ensuring your asset is 100% genuine. It is nearly impossible to create counterfeit assets within a decentralized immutable ledger.
- NFTs preserve ownership rights. Due to the use of decentralized platforms, no owner can alter the data of an NFT once committed.
Disadvantages of NFTs
While NFTs certainly have their appeal, there are a couple of key disadvantages newcomers should keep in mind:
- NFTs are often noted for their inaccessibility, in that it can be difficult for individual users to begin trading in the space due largely to the need to transfer assets through multiple exchanges and coins in a somewhat convoluted manner.
- NFTs’ reliance on their native blockchain is also often cited as a disadvantage. NFTs rely on their native blockchain for reliability and transaction time, which has caused increased transaction times and gas fees on certain blockchain networks after NFT launches.
- NFTs are also highly volatile – much like crypto – with their value being heavily tied to market perception and emotion. This is simply the nature of the beast when dealing in digital assets, and as the NFT market continues to grow, it is likely to stabilize over time.
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