Welcome to the first installment of PYMNTS’ series on nonfungible tokens (NFTs), the newest craze in cryptocurrency.
Over the coming 12 days, we’ll be looking at every part of the NFT craze sweeping the worlds of art, video games, social media, fashion and sports.
When it’s finished, you’ll have a solid grasp of the basics of NFTs — what they are, how they work, what they are going to be used for, what their drawbacks are, what you need to be aware — and wary — of, and why people are paying so much money for them.
So, what’s an NFT?
The shortest and most literal answer is that it is a nonfungible token. Fungible is an economics term and means an asset that can be interchanged with any other of the same type, like a bitcoin, a share of stock or money, as a $10 bill is always worth two $5 bills.
A nonfungible token is a digital asset similar to bitcoin or any other blockchain-based token, but with one big difference: It is unique, like a painting or a house.
An NFT is a one-of-a-kind, digital asset onto which any type of data can be stored — images, video, music or text. And because it is built on a blockchain, that data cannot be changed, forged or destroyed. As long as the blockchain exists, it is there.
And because all transactions are public on the Ethereum blockchain — on which the vast majority of NFTs are hosted — anyone can trace the source, verifying its provenance.
That means it can be sold and resold on marketplaces and kept in digital wallets like any other crypto. It can also be hacked and stolen, although it’s a lot harder to sell an NFT that’s known to be stolen if you want to make some real-world use of it.
See also: Samsung Adds NFT Platform to Smart TV Lineup
If you’re new to crypto, you’ve probably come across three types of NFTs: art, video clips and avatars.
The NFT holding of a digital collage that artist Mike Winkelmann, also know as Beeple, sold at auction last year for more than $69 million made it the third-highest price ever paid for a living artist’s work. That number ensures plenty of mainstream coverage, even though it’s not Beeple’s only multi-million-dollar NFT.
Read more: Sculpture by NFT Artist Beeple Set for $15M Auction at Christie’s
Others have gotten in on the trend, ranging from ’90s bad boy artist Damien Hirst (of floating shark in formaldehyde fame) to musician and Elon Musk’s ex-girlfriend Grimes, who sold $6 million in NFT artwork last year.
See also: Kraken Crypto Exchange Targets NFT Art Lending Market
For video, think of the NBA Top Shots NFTs, which had brief highlight clips of slam dunks and such that the National Basketball Association pushed hard during the past season, resulting in the first real spike in NFT sales beyond the crypto world.
You’ll also be seeing more NFTs in music. Musicians and labels are interested in NFTs as a way of distributing music, with the band Kings of Leon releasing their March 2020 album “When You See Yourself” as an NFT — and all the normal channels, of course — with extra features ranging from art to a very limited and expensive one that came with free concert seats for life.
The Coming of Avatars
On one level, avatars are those weird little images of CryptoPunks and Bored Apes that celebrities have been paying so much for lately. The rapper Eminem just spent $452,000 for one of the latter, a Bored Ape Yacht Club NFT featuring an ape wearing his signature gold chain and khaki cap.
Like most people who own these super-hot avatars, Marshall Mathers promptly made it the profile picture on his verified Eminem Twitter account. And like a growing number of celebrities, the sale got plenty of press, with the digital agency that facilitated the sale naming it “EminApe.”
And that’s where a good chunk of the big money is going right now, as many of these avatars were minted in limited runs, so when one captures the public imagination, price can soar.
A potentially bigger market is video games built on blockchain platforms, which can use NFTs to represent both characters and objects. One NFT is your warrior, another is a magic sword, and a third is a special, hard-to-get outfit. There’s a lot of potential here. Play-to-earn games like Axie Infinity — the top NFT platform by the number of sales — allow players to create useful items to sell to other players, while items built of standardized NFT tokens could be usable across platforms, like an outfit that travels with the player, not the game character.
Read also: What’s a Metaverse, and Why Is One Having a Fashion Show?
And NFTs are a big part of the blockchain-based version of the hottest next big thing: metaverses, the interactive virtual worlds which rocketed to public attention when Mark Zuckerberg renamed Facebook Meta and announced he thought it would eventually be a metaverse. Nike, Gucci and Dolce & Gabanna have all sold virtual products on NFTs in metaverses like Decentraland.
There are a lot more uses for NFTs, which can hold verifiable, unforgeable data. Plenty of companies are working on saving ownership documents on NFT, with stock shares and real estate titles the most commonly cited but still very rarely used, as the law has to catch up.
The law is doing that, as these NFTs — and others — could well be securities, according to the U.S. Securities and Exchange Commission, which is planning to examine the issue this year.
NFTs can also be used to tokenize property so it can be sold in fractions, opening up investments that are out of reach to non-wealthy buyers to the general public — a share of a hotel or a painting, for example.
See also: Charities Turn to NFTs for Fundraising
They can also hold smart contracts that add a royalty feature so an artist could get a fraction of any future resale of their work.
Read also: 42% of Cross-Border Firms Use Blockchain-Based Smart Contracts That Trigger Payment
Then there is identity documentation. Portable identification documentation containing personal data that the owner controls — known as self-sovereign ID — is a blockchain use being explored by groups ranging from opponents of Big Tech data vacuuming to United Nations refugee agencies.
Finally, there’s the wild card NFT. By giving something the provenance of being authentic, you can sell almost anything. Former Twitter CEO Jack Dorsey — a bitcoin booster who leads payments firm Block (formerly Square) — sold an NFT of his first tweet for $2.9 million last March. And while the tweet still “lives on Twitter” where anyone can see it and copy it, the buyer has the NFT signed and verified by Dorsey.
After the sale of his $69 million collage, Winkelmann made a point that any NFT buyer needs to know what exactly they are buying. The person who bought “Everydays: The First 5000 Days” did not buy the copyright, only the NFT and the right to display it. Like everything in crypto, caveat emptor — let the buyer beware.
Next Up: What’s an Avatar and Why Are People Paying So Much for Them?
Avatars are the first way NFTs got any practical use — as a digital representation of the owner and their personality. Why would Eminem buy a $450,000 picture of an ape wearing his chain and cap? Prestige, being in an exclusive club, an expression of individuality, publicity, investment — there are many reasons.
And then there’s the important question: When will a Kardashian buy an NFT?
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