The Non-Fungible Token Bible: Everything you need to know about NFTs
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on-fungible tokens (NFTs) are unique, digital items with blockchain-managed ownership. Examples include collectibles, game items, digital art, event tickets, domain names, and even ownership records for physical assets.
If you’ve been living in the crypto world for a while, you’ve likely heard of the term “Non-Fungible Token”, or “NFT”. Maybe you’re a skeptic, a believer, or perhaps you still don’t really know what exactly a non-fungible token is. In any case, this post is for you!
NFT ecosystem is a tight-knit group of incredible innovators: everyone from enthusiasts to developers to gamers to entrepreneurs to artists. We’re honored to be a part of this community.
This post serves to provide an in-depth overview of non-fungible tokens: the technical anatomy of an ERC721, the history of the NFT, common misconceptions about NFTs, and the current state of the NFT market. We hope it will be relevant both to folks who are new to the space, as well as those who already know about NFTs but want to better understand the nuances of their inner workings.
Earlier in 2021, the news media began reporting on a strange phenomenon in the art world. Instead of selling physical paintings, some artists were now selling digital files, with many going for astonishing amounts of money. A JPG file of a work by the digital artist “Beeple” had sold for $69 million at the auction house Christie’s. A pixelated graphic of a man smoking a pipe sold for over $7 million. The works are sold as what are called “non-fungible tokens” or NFTs, which means that the sale of the work is recorded in a secure digital ledger, giving buyers permanent proof of their “ownership.his first tweet as an NFT, and fetched over $2.9 million. A New York Times writer reporting on the phenomenon was shocked when he sold his column as an NFT and received $560,000. Tesla CEO Elon Musk offered an NFT of a tweet containing a techno song about NFTs. Bidding reached $1.1 million before Musk announced he had decided not to sell after all. Things have only gotten stranger since. People apparently pay hundreds of thousands or even millions of dollars to get a particular custom cartoon of a monkey to put on their social media profiles. A few weeks back, a simulated yacht in a computer game sold for $650,000 in real money. Not an actual yacht, a 3D image of a yacht.What the hell is going on here? Why would you pay for a digital image of a man smoking a pipe? Couldn’t you just screenshot it? The work that sold for $69 million at Christie’s is available to look at for free on the internet.
How does it make sense to pay these astronomical sums? Is the NFT some kind of unique derangement of our time?
But what looks like a unique kind of stupidity at first may just be the latest example of a very common kind of stupidity. I remember whenI was in middle school, Pokémon cards were hugely popular. Cards with particularly rare Pokémon on them would sell for fortunes (the rarest has gone for $200,000). Pokémon cards were, from one perspective, anincredibly stupid thing to place value on. They were a piece of paper with a drawing of a fictitious monster on them. You could use them as part of a game, but people seemed to care about the collecting more than they cared about the game.
Why are NFT's so Popular
NFTs, or non-fungible tokens, have been around since 2017, but they really made their debut on the stage of public consciousness early 2020, with momentum building from there. By 2021 NFTs generated $2.5 billion in sales in the first half of the year alone.
Topping the NFT sales chart are the likes of Jack Dorsey, the CEO of Twitter, who sold an NFT of his first tweet for a whopping $2.9 million and a collection of CryptoPunk pixelated faces that sold for several million dollars each. Yet even they couldn’t hold a candle to Mike Winkelmann, the digital artist known as Beeple, who sold an NFT of his work in March for $69 million at Christie’s.
Like most NFTs, the above items could be downloaded from the internet for free. So, what is driving people to spend millions of dollars on them? And what made their popularity explode now? Is the jump in sales an indication that we should all hop onto the NFT train and invest in what mainstream media call NFT stocks?
The trends are complex and there is no simple answer to any of those questions. Instead, let’s look at some of the key forces that are driving the current popularity of NFTs to gain insight into their potential for the future.
Loss of ownership in the digital world
The desire for ownership is innate in human beings. Since the dawn of time, people have fought wars over the ownership of land and natural resources and invested in accumulating possessions, including possessions that serve little or no practical purpose. In some cases, the possessions are a status symbol, and in others, they are an expression of a unique element of identity or a personal passion.
Pre-internet, content could also be owned. People purchased books, records/CDs, and paintings, that became theirs to enjoy, sell, or bequeath without limitation. Today, that is no longer the case. When we consume content on popular platforms like social media or subscription services, we are essentially “renting” it—the terms and conditions of the platforms make it absolutely clear that the content doesn’t belong to us.
There is no permanence—the host platform could decide to remove our favorite content at any moment, leaving us with no recourse as non-owners. Even when platforms enable ownership, it is tied to the platform in a centralized way—you can’t sell a Fortnite skin on eBay.
While this is not a new issue, many people only became aware of it recently. The streaming wars with Disney, Hulu, and HBO that forced Netflix to drop popular shows like “Friends”, “The Office”, and “West Wing”, and high-profile social media banning have served to illustrate our dependence on the internet and media giants. A heightened understanding of the ramifications of lack of ownership, and concern over the control that media and internet platforms exercise has driven many people to look for alternatives that will enable them to own the digital assets they care about.
NFTs offer an ownership alternative
NFTs offer an alternative model, allowing people to independently own digital content that is of value to them, independent of the whims and interests of leading media platforms. NFTs can be shared and used on multiple platforms, and they belong to the owner until he or she decides to sell them. For example, if you’re a basketball fan, you can buy an NFT of the best shots of 2021 that will be yours forever, to be used on the platform of your choice, no strings attached.
An NFT is always unique and its built-in blockchain authentication provides proof of ownership— it’s like an “original” of a digital asset. Blockchain allows you to determine easily if an NFT you are looking at is authentic. Like with other “originals”, owning an NFT can be a status symbol for collectors. But its not just about digital bragging rights. Just as with other more tangible art forms, NFT collectors vary in their motivations. Some may simply love the piece and want to own it, while others may see it as a financial or status-gaining opportunity.
Owning an NFT creates the permanence and ownership experience that we enjoy with physical items, but for digital assets. And that’s become a major draw for many people, especially those concerned about the influence of major media and internet companies.
The Covid effect
These ongoing trends were compounded by the effects of the global pandemic. When people were forced to shelter in place, they began to search for digital alternatives for community, connection, and meaning. NFTs offer an innovative way to engage directly with things we are passionate about, without leaving home.
NFTs eliminate the need for intermediaries and middlemen—buyers can interact and influence creators directly, and payment is transferred to the creator in a transparent and trustless manner. With some NFTs, the creator becomes an active participant in their own community, offering perks like face-to-face interaction, early access, and even the opportunity to voice an opinion and contribute to the creation.
In addition, during the pandemic people who were lucky enough to keep their jobs found themselves sitting on a lot of cash with nothing to spend it on. Pre-pandemic, the money might have been spent on exclusive vacations, trendy restaurants, and dressing to impress, but the pandemic eliminated those options. People had money burning a hole in their pockets, and NFTs offered an exciting new venue to engage in.
A steady trend or a bubble ready to burst?
What does this tell us about the future? Will we continue to see seven-digit sales for NFTs of digital art in the coming years, or is it a passing trend? It’s hard to predict whether people will think a digital cat is worth several hundred thousand dollars five years from now, but the technology behind NFTs, which essentially enables smart contracts, is in no way limited to its current uses. So, although a specific NFT may not end up being a profitable investment, the field as a whole may be prime for growth.
Investing in NFTs
That’s why Defiance has launched yet another first-mover ETF, this time to target the dynamic NFT space. An NFT ETF offers investors the potential to benefit from growth while minimizing the risk of overexposure to a single NFT stock. Defiance’s latest offering, NFTZ tracks the performance of an index of publicly listed companies with relevant thematic exposure to the NFT, blockchain, and cryptocurrency ecosystems. These elements are often collectively referred to as the metaverse, so in some ways, NFTZ could be seen as a meta ETF. But whether it’s metaverse stocks or an NFT fund you are after, NFTZ is the first ETF to bring the NFT space within easy reach of retail and institutional investors. Via NFTZ, investors can access this exciting new field that is attracting so much attention, while seeking to minimize the inherent risks.