Easy to Understand Blog: What are NFTs, and why should you care?

Is the NFT a new phenomenon?

Let me set the scene by first making you aware of the fact that -

NFTs date back at least to 2014. They first became popular during the short-lived CryptoKitties mania of 2017, when people started thousands of dollars on digitally generated, and blockchain-recorded, kittens. While CryptoKitties (*created by Dapper Labs - who also run the NBA TopShot exchange)started as a fun, goofy game, money was a big part of the story from the start.

The quintessential collectible, something that speaks to the historical moment and becomes a seeming route to riches, ours is clearly the “non-fungible token” (or NFT). Over the past year, NFTs — which include, among other things pieces of digital art, digital cards featuring NBA highlights, and limited-series music albums, all recorded on the blockchain.

Like with most things, NFTs operate on the principles of supply and demand - where scarcity drives up demand and both perceived value and actual price.

It has a cryptocurrency angle, a virtual-reality angle, a meme angle, and it’s a social media-fuelled speculative frenzy on top of it. NFTs are us.

Why do they exist?

There is, though, one big difference between the NFT collectible craze and collectible crazes of the past, which is that, from the start, the NFT collecting frenzy has been largely about money, and the prospect of getting rich.

The first great speculative bubble in the West, Dutch Tulip Mania in 1637–1638, was effectively a collectible bubble, as the Dutch became so obsessed with owning the rarest and most beautiful tulip variants that they were willing to pay the price of a home for especially rare bulbs. More recently, we’ve seen booms in Hummel figurines, Magic: The Gathering cards, Legos, Beanie Babies, comic books, and baseball cards, as well as higher-end obsessions like classic cars and vintage watches.

Here is more detail and context... What is an NFT?

NFTs can link to any form of digital asset — digital art, text (such as a document), videos, photos, songs (or samples) or lines of code. NFTs can also represent, in a tokenized form, any digitally represented artifact, i.e., a physical asset that has been digitalized.

NFTs are digital assets created from whole cloth. “Token” simply means that an NFT is an item on the blockchain, like bitcoin or Ethereum’s ether: its existence has been permanently recorded there from the start, and anything that happens to it — a sale, a trade, etc. — in the future will be permanently recorded as well. It’s the “non-fungible” part that really matters to the potential value of NFTs, since non-fungible means each NFT has a distinct identity and cannot be simply exchanged for another. One bitcoin is exactly like another, just as one dollar is exactly like another, so it makes no difference which particular dollar you own. NFTs, by contrast, are all distinct “objects.”

NFTs’ - unlike other fads or collectable trends - that are borne out of a need to OWN and COLLECT- not to re-sell or trade or SPECULATE. Mostly a privilege of the uber-wealthy in society who used their wealth to increase their control, power, and influence.

In contrast, NFTs seem to democratise this system. Removing elitism and introducing the concept of trade, re-sale and fractional ownership.

NFTs bring in the need for OWNERSHIP and SPECULATION together. Where the latter - although exciting and potentially lucrative - opens a pandora's box of nasty surprises and mass volatility - mostly for the herd who jump on the bandwagon to make a quick buck, caught-up by the hype, mass hysteria and recycled stories of people who became ultra-rich overnight. Sadly, the majority of the market is driven by these speculators - who end up losing more than winning!

For example, take NBA TopShot exchange, that enables users to buy and sell NBA highlights as NFTs. NBA is using NFTs to turn collectibles, previously the role of trading cards, into digital products.

The case for ‘Speculation’ - and the possibility of making money is at the core of this other such NFT exchanges — where buying an NFT, not because you think it’s cool, but because you think you’ll be able to flip it to someone else for more than you paid — is integral to the process.

The real winners of the NFT craze, in fact, may not be the people speculating in NFTs, but the companies and technologies enabling them to speculate.

And while some speculators will get rich and others will end up losing money, the companies running the exchanges where these NFTs are traded may well clean up. (Dapper Labs is now raising money at a reported $2 billion valuation.) You can make money being a gambler. But in the long run, it’s much safer to be the house.

The Process of creating your first NFT.

The first step is to identify the ‘assets or products’ - which could be any form of content - be it audio, video, or design - that can be digitalised and added to a commercial marketplace to be sold - either fully, partially (fractional ownership), as part of a wider offering, leased, licensed or all of the above (I am serious, that is totally possible). Once you have completed this process, your digital asset eg: a video clip - has to be ‘minted’ ie: created and added to (an ever growing list) a NFT exchange or marketplace; the popular ones being OpenSea, Nifty Gateway or Rariable. Once your NFT (single or multiple - usually a limited quality to drive up value and demand) is ready for sale, it can be sold to a single or multiple buyers, who will then fully or fractionally own your NFT, and have the option to re-sell in a secondary market, giving you added income via an annuity, that take form of royalties, commission, licensing, leasing or alike.

How big is the NFT market?

The potential of the NFT market — which ballooned to $41 billion in 2021 — has drawn increased attention from more traditional investors and big name companies. Big brands have entered this space - from Disney, Budweiser to the NBA.

NFT startups in 2022.

The volume of startups operating in the NFT space continues to rise rapidly. In 2022, three startups have already raised rounds of $100 million each (The startups are OpenSea, Autograph, and Pixel Vault). In comparison to $37m raised in all of 2020 (across 21 deals). 2021 was a mammoth year - with $4.8b raised across 259 deals.

How do NFTs make life easier for Artists - from music to design.

NFTs enable artists (musicians, visual designers, tech enabled artists, traditional artists, content creators) to monetise their creations - not only at the point of sale but also in perpetuity via a royalties model that is built into the trading system using blockchain technology. Every artist should consider minting (creating) their own NFT as a way of generating new income streams, building their brand and taking advantage of the virtual world of trade.

NFT Art centric marketplaces to explore.

Nift Gateway

Rariable

Super Rare

Async Art

Makers Place

Known Origin

Nifty Gateway - for artists, project creators and buyers

‘Art underpinned by NFT technology, is quite simply, Art.’

3 distinct value

1. Limitless creative expression using blockchain - implying that the form factor of the art can evolve from a piece of digital art into currency or tickets.
2. Immutable Provenance, Authenticity and Ownership ensures that traditional market issues - security, forgery, copies don’t impact the artist
3. Artists are in control - 80% of proceeds on primary market and royalties on secondary market sales

How do NFTs generate value for large global enterprises and brands?

NFTs enable enterprises to create new business models, extend the value of their existing products and services, and enter new markets. Case in Point: Budweiser, NBA TopShots, Christies, Disney, MGM and the list goes on.

Other benefits are;

Increase in the tradeability and valuation of digital products = more revenue realised per product vs nondigital trade models

New customer engagement model with scope to leverage data flows between seller and buyers' communication to personalise future digital product pipeline — and improve customer outreach and segmentation.

Why are NFTs HOT, and why now?

NFTs make it easier to trade collectibles, like player cards or digital art, by bringing in a marketplace model that drives the value of a product based on scarcity of supply and rise in demand, and increases buyer engagement by adding gamification. The scarcity of the collectibles define their value. But the use of NFTs improves the ease of trading such collectibles, as well as the use of gamification to encourage purchases and trading.

How do they work?

The best way to understand how a NFT is created, marketed, sold, re-sold is to share an example of a NFT trade. We will unpack the process the NBA Top Shots playing cards.

NFTs provide an opportunity to explore the digital fractionalization of commerce. Any type of asset can be digitized, at any kind of size, and that digital representation is monetized and shared with appropriate counterparts on a P2P basis. Terms and conditions of doing business are set and agreed to by the commercial participants — not by a centralized intermediary.

NFTs thrive on networking and community. One the one hand Status and Exclusivity matters for some, and for others the wow factor of the NFT creation eg: Art Piece is the magnetiser.

The 10 reasons why NFTs will replace traditional buying and selling processes

NFTs are agile, customisable and programmable, and enable the creation of new business and commercial models using blockchain technology

The NFT creator can extract higher value and get remunerated for secondary trading of the digital asset

The blockchain ensures that the creators ownership rights are verified, secure and protected

There transparency and flexibility of the trade process gives both sellers and buyers confidence and drives engagement

The creators and owners of the NFT engage actively and have a feedback loop that helps to create value and build connections

Micro-segmentation owners / buyers helps to build gamification and value-add offers

NFTs manage the risk that comes from selling a product via an adjustable authentication and certification processes

The continual engagement between a creator and owner forms new and varied data flows

What are the risks associated with NFTs?

Like with any asset class based on speculation and connected with emerging tech-based business models, NFTs bring with them a lot of hype and mass scepticism. Here is what you should know.

The market value of a NFT (especially in the case where a NFT rapidly increases in price in a short time-frame - without any commercial logic or compelling event that justifies the event) is highly volatile and sometimes even meaningless and worthless.

The market value is based mainly on exaggerated social media success that feeds into elevating the brand and reputation of the NFT originator or trend that it creates and/or rides

The entire NFT trade process - from exchanges to wallets - is made up of various independent players (and still at an early stage of development) operating in silos, still trying to figure out how to build a robust and secure integration layer (which could add significant cost, risk and complexity)

The underlying NFT asset can be altered, even deleted or moved after the NFT sale —depending on the rules created under the NFT construction.

The purchase of a NFT doesn’t necessarily give automatic ownership control over the underlying asset (very odd for many of us to understand the economic logic here… especially those of us who understand how the collectible market works and the importance of ownership - be it physical or virtual)

Most recently, the Beeple NFT was "sleepminting," - crypto counterfeiting exercise which could raise doubts about legality, value and indicate that the market for crypto-collectibles may be scaling up faster than the technological foundation can support.

NFTs are another manifestation of the initial coin offering (ICO) market hype of 2017 that requires significantly enhanced levels of governance.

NFT Exchanges

OpenSea - uses Solana blockchain (which has a lower gas price for minting vs Etherium).

Non-custodial wallets = non-custodial wallets like Metamask 9 you need these wallets to buy an NFT on OpenSea) or Rainbow.

You need to link your wallet to a portfolio tracker like Zerion

Layer 2" NFT solutions such as Immutable-X. These allow creators to mint and trade NFTs on Ethereum, but blockchain transactions are batched and processed in bulk to reduce costs.

Decentralised Exchanges = Uniswap, Sushiswap or Balancer

In summary.

The emergence of NFTs exposed the flaws and limitations of existing economic and commercial models that are highly centralised and lack digital innovation. Blockchain and decentralised finance has fundamentally transformed the core digital infrastructure so NFTs become common place.

Today, NFTs are applied to a small set of digital assets. However, as crypto platforms such as Ethereum and Solana evolve, we will witness the rise of a multi-trillion-dollar economy powered by blockchain, using decentralized P2P distribution,

smart contracts and digital tokens and becoming the default marketplace in the Metaverse!

Reference Material (Must Read)

Media and Research Channels

NFT Now: NFT drops, interviews, and insights

Daily Gwei: All things Ethereum

Forefront: Social tokens, DAOs

The Defiant: Real-time DeFi news

Bankless: DeFi resources, guides and thought leadership

Daily Ape: Everyday's most pressing Tweets and stories

Messari: Research portal for the financially focused

Delphi Digital: Deep dives on specific projects and topics

The Block: Trust crypto news outlet

Global Coin Research: Community driven coverage of community tokens and DeFi

NFT use-case examples

Beeple. a 10-second video clip created by digital artist Beeple sold for $6.7 million at Christie's NFT auction

Christie’s sale of a digital collage of photos known as - Beeple - Everydays: The First 5,000 Days by Mike Winkelmann https://onlineonly.christies.com/s/beeple-first-5000-days/beeple-b-1981-1/112924 for $69m!!

NBA TopShot is an NFT platform for the sale and trading of what are essentially digital basketball cards, featuring highlights of great plays (like this phenomenal shot block by rising star Zion Williamson) the Williamson NFT was recently bought for $100,000, a LeBron James dunk highlight went for $208,000, and the platform has already handled more than $250 million in transactions. And yet there are more than one of almost all these NFTs since they’re typically issued as part of a limited series, much the way artists issue a series of prints. In the case of Williamson’s block, for instance, there are 50 NFTs in the series, all containing the exact same highlight. The only thing that makes them distinct from each other is that they each have a different number. (The NFT that sold for $100,000 was number one in the series.) If you buy one of these, you’re paying for scarcity (there are only, and only ever will be, 50 of these “cards” in the world), but not uniqueness. And, of course, buying the NFT doesn’t give you any rights to the highlight itself — anyone can go to YouTube or NBA.com and see Williamson block that shot over and over again. (A great comparator example is Whiskey collectors - buying rare whiskey with a finite production and bottle count).

Andrew Kiguel, CEO of Tokens.com, made a million-dollar investment in property in Decentraland, a virtual open world. He said he made this investment because he believes the metaverse can be a trillion-dollar industry and has the potential to attract customers both new and old.

Well-known brands have announced NFT drops, including MGM Studios with James Bond NFTs, Warner Bros. with Matrix NFTs, and Pulp Fiction NFTs from Quentin Tarantino. Interest among investors, creators, and the public is growing.

Edward Fairchild followed Beeple well before the artist gained mainstream popularity. Bought a piece at under $1k - which sold for $200k in a few weeks … and is likely to sell for over a $1m . All an accident! Nifty gateway . https://www.businessinsider.com/i-bought-nft-beeple-crypto-ethereum-blockchain-digital-assets-future-2021-3

Disney, which is also investing into the metaverse, is the latest of a number of companies, including Gamestop, hiring to expand into the space. In June 2021, Disney signed a partnership with digital collectibles company Veve to sell NFTs based on the Marvel franchise.

The "crypto coven" is a set of 9,906 digital images of witches minted as nonfungible tokens. They have crossed $20 million in trading volume, and count Kat Dennings and Randi Zuckerberg as buyers.The witches look drawn but are generated from code, what's known as "generative art."

Budweiser launched an 11,000-object NFT collection that sold out in 19 hours. The launch was devised by VaynerNFT, an NFT consultancy launched by entrepreneur Gary Vaynerchuk.

Kings of Leon (KOL) recently issued some NFTs representing access to digital files containing a new album release. Some of these NFTs included software code that guaranteed purchasers of the NFT, in perpetuity, rights to front-row seating at future KOL concerts.