What is an NFT?
NFT is an acronym that stands for Non-Fungible Token. This article will break down the meaning of the acronym and answer the question, "What is an NFT?"
The term non-fungible simply means that an object is not interchangeable with another item. It is the opposite of the word fungible.
To make the idea clearer, it's good to first understand what fungible means. Fungible simply means that the item can be replaced by another object with the same attributes. For example, one ounce of gold is replaceable with another ounce of gold. One bitcoin can be interchanged with another bitcoin. Other examples are currency, oil, items in grocery stores, and other commodities used in trading.
Non-fungible, on the other hand, means that the item is unique and possesses irreplaceable value. Non-fungible items are not interchangeable like currency or a commodity. For example, a piece of art can never be replaced with another work of art because each is unique. A diamond can never be replaced with another diamond despite having the same weight in carats. Each diamond possesses unique features in its composition.
A token is a tangible representation of a value, fact, feeling, emotion, or an abstract concept. Examples of tokens include vouchers, plaques, badges, medals and trophies. All of these bring physical manifestation of abstract concepts such as success, gratitude, honor, and integrity.
A non-fungible token (NFT) is a unique digital asset with verifiable identity and ownership that, like their physical counterparts, represents an irreplaceable value, emotion or concept. They are managed by a blockchain, which is a digital ledger containing records of all cryptocurrency transactions. Blockchains utilize peer-to-peer networks that replicate identity and transaction data, making them highly resistant to tampering. This sounds technical, but all you have to remember is that an NFT is just a certificate of an image, file, document, music or other asset that is stored in the blockchain.
We will talk about what blockchain is in another article.
NFT Types
NFTs and their ecosystems are often classified into four types, namely, the collection PFP (Profile Picture), one-of-one art, gaming, and metaverses.
Collection PFP NFTs are digital images that can be used as a profile picture (PFP). For example, in the app called Cryptokitties, you can buy, collect and trade virtual cats. The most famous PFP collections are Cryptopunks by Larva Labs Studio and the Bored Ape Yacht Club(BAYC) by Yuga Labs LLC. Each PFP NFT can fetch a price from $180,000 to $28M for Cryptopunks and $170,000 to $2.5M for BAYC as of this writing.
The one-of-one art NFT is a work of art that exists only once in the digital world and it's registered on the blockchain. The NFT is like a certificate of ownership; the artist can't make another copy of it. One example is Beeple's Everydays: The First 5000 Days, which was sold for $69M at Christie's auction house in March 2021. This sale holds the record for the highest price ever paid for a work by a living artist. Another example is Pak's NFT artwork Clock, which sold for $42.7M.
Gaming is the most popular application for NFTs these days. Play-to-Earn games are popping up in different blockchains like Ethereum, Binance, Polygon, Wax, and Immutable, to mention a few. NFT games like Axie Infinity have turned a small company into a $3-billion company with a $34-billion market cap overnight. Other games followed suit like Cryptoblades and Bombcrypto. These games provided people with a good source of income, especially during the Covid-19 pandemic. Like all trends, however, NFT games right now are likely experiencing a slowdown because of the problem of tokenomics (economics of the game). Tokenomics greatly depend on new players joining the community, but, as of writing, there are only roughly a million people who are into NFT and NFT games.
Metaverses are an emerging set of social 3D ecosystems / communities ideally suited for NFTs. The precise definition of metaverse is still debated, but they all share the aforementioned characteristics. Users of these platforms can play games, buy things like clothes, caps, watches, and build houses much like in the real world. You can own NFTs that give you ownership of virtual land with properties ranging from an island in Decentraland to a Sandbox. In Cryptovoxels, you can buy parcels of land and build on them. The Metaverse is not just about games, however; the concept will eventually encompass all aspects of human activity including work, learning, and social interaction.
Why are NFTs valuable?
Now that we know what NFTs are, let's talk about why they're valuable.
As mentioned earlier, NFTs are unique and each one is special in its own way. They are often associated with digital artwork, videos, or audio files.
The property of non-fungibility of the token makes it valuable because it can't be replicated. This creates a sense of scarcity which provides value if that asset is valued by the market. NFTs stored on a blockchain are permanent and immutable, meaning they cannot be changed or deleted. This adds to the security and trustworthiness of NFTs. But this only holds true for NFTs that are “on-chain”. We will learn about on-chain and off-chain tokens in my next post focusing on blockchain.
The notion of uniqueness, scarcity, and immutability are just a few of the reasons why NFTs are valuable. While it is true that there can be an inherent value in an NFT, there is also an extrinsic value as well. The extrinsic value is the other side of the coin, which is the community.
NFTs often have a community or ecosystem around them that supports and adds value to these digital assets. Whether it’s a one-of-one art or a PFP collection, the community that supports the artist or the project is often the driving force of its value. If the community finds the NFT very valuable, holders will take a long-term view of its possession. This will help the value increase over time.
On the other hand, the opposite sentiment of the community devalues any NFT. Members will unload their holdings of the NFT and drive the price lower.
The NFT market is expected to grow in the coming years. According to a report by Coindesk, the NFT market was worth $250 million in 2020 and is expected to reach $80 billion by 2025.
Knowing what an NFT is and how they are valued is a good starting point to getting involved in the market. NFTs have already begun to change how we value digital assets, and there is no doubt that this trend will continue into the near-future. So, whether you are an artist, a collector, or just someone who is curious about this new technology, NFTs are definitely worth your time, attention, and investment.
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