- Non-fungible tokens are unique digital assets that represent ownership of real-world items like art.
- NFTs are not currency, but they use the same blockchain technology that powers cryptocurrencies.
- While NFTs have sold for millions, they're highly speculative assets that aren't for everyone.
Non-fungible tokens (NFTs) are digital assets that use blockchain technology to link ownership to one-of-a-kind physical or digital items, such as artwork or music.
NFTs are non-fungible, meaning each token has unique properties and isn't worth the same amount as similar tokens. Art and collectibles are often considered non-fungible since only one original exists.
Digital art is the most popular type of NFT and heavily contributed to the NFT boom in 2021. However, the decentralized technology can be applied to various virtual and tangible assets, including real estate and virtual works.
NFT ownership involves security risks, including high volatilityand the potential for substantial loss. If you're a cryptocurrency investor, these concerns likely sound familiar.
The NFT market experienced a major downturn in 2022 and 2023. Despite these challenges, the NFT market remains resilient and still an active community of sellers and traders. Developers are exploring new ways to use NFTs and blockchain technology by adapting emerging trends like gaming, the metaverse, and improvements in security, accessibility, and user experience.
Many of the best cryptocurrency exchanges provide investors access to the NFT market.
History of NFTs
The first NFTs emerged in 2014, but the market didn't start gaining traction until 2017, when high-demand digital art pieces like Rare Pepes and CryptoPunks were released.
NFTs' popularity skyrocketed in 2021, boosted by celebrity endorsements from big names like Snoop Dogg and Paris Hilton. Even popular brands like Gucci, Coca-Cola, and Budweiser released exclusive NFT collections during this time.
In 2022, the NFT market began to fall as it became oversaturated, with over 1.5 million NFTs actively traded each month.
At the same time, FTX, one of the key players in the crypto and NFT industry, filed for bankruptcy. Popular crypto coins TerraUSD and LUNA lost nearly all their value, costing investors over $60 million. All these factors, plus various scams and fraudulent activity, led to the fall of NFTs, making many digital assets practically worthless.
Since the crash, the NFT market has integrated greater technological advancements to improve its efficiency and security on the blockchain network. It has reached beyond digital art to adopt real-world assets (like tickets and memberships), virtual worlds, fashion, and real estate.
Although nowhere near its 2021 high, NFT appears to be steadily recovering from its fall and adopting stronger regulatory practices and greater use cases.
How NFTs work
You can buy, sell, trade, and create NFTs from online exchanges or marketplaces. The creator or current owner may choose a specific price. Or, there may be an auction, and you'll have to bid on the NFT. Depending on the marketplace, different fees may be associated with each transaction.
- Blockchain technology: NFTs are traded on blockchains, primarily Ethereum. The blockchain's transparency ensures public traceability of NFT ownership, while the option to use a pseudonym protects privacy.
- Digital ownership: NFTs can be considered modern-day collectibles, bought and sold solely online with no physical equivalent. At its core, an NFT represents digital proof of ownership of any given item.
- Smart contracts: Smart contracts are essential for managing NFTs and automating the process of assigning ownership during the minting process. Minting involves converting a digital file into a unique digital asset on the blockchain. Smart contracts can also be used to control the activation or deactivation of NFTs.
Token standards for creating and trading NFTs
Ethereum is the primary blockchain network for NFTs, in part because it uses token standards that allow users to build their applications.
Token standards are application-level specifications that determine how a particular digital token functions, enable interactions between applications and smart contracts, and lay out the foundation rules of the asset. Anyone can create token standards, but standards must be reviewed and accepted by the blockchain network development community.
The two most popular token standards are:
- ERC-721: Created in 2017, ERC-721 provides a standard interface for NFTs, allowing them to be transferred between accounts and traded for other currencies.
- ERC-1155: Created in 2018, ERC-1155 provides a standard interface for smart contracts that manage multiple types of tokens in a single contract. It offers greater efficiency and is better at correcting implementation errors than ERC-721. Additionally, it can verify transaction validity.
What are NFTs used for?
Different types of digital goods can be "tokenized," such as artwork, items in a game, and stills or videos from a live broadcast. NBA Top Shots is one of the largest NFT marketplaces. The most popular types of NFTs are:
- Digital art and collectibles: Artists can token their work as an NFT, establishing verifiable ownership. NFT digital art and collectibles are currently the most popular use case for NFTs.
- Gaming: NFTs can represent in-game items, characters, or virtual land. This appeals to gamers interested in obtaining rare items or collecting memorabilia that can be viewed outside the game. Players can use NFTs to verify ownership of these items separate from the game's server, even if the game is shut down.
- Music: NFTs could potentially transform the music industry by providing artists with a new way to monetize their work. Using NFTs, musicians can directly engage with their fans and retain more ownership over their music, concert tickets, and merchandise. Moreover, NFTs can allow artists to earn passive income through royalty-sharing mechanisms.
- Metaverse and virtual worlds: Similar to gaming NFTs, the metaverse and other virtual worlds can use NFTs to trade collectibles, in-world items, virtual events and tickets, avatars, and virtual real estate. Roblox and Sandbox are examples of virtual worlds that can benefit from NFTs.
Other applications of NFTs
As the underlying technology and concept advance, NFTs could have many potential applications beyond digital art and videos. For example, a school could issue an NFT to students who have earned a degree and let employers easily verify an applicant's education. Or, a venue could use NFTs to sell and track event tickets, potentially cutting down on resale fraud.
As the NFT market matures and enables innovative business models, it could become a valuable tool for enhancing efficiency and accessibility in verifying the authenticity of assets.
Benefits of NFTs
NFTs offer a unique set of benefits, especially regarding verifiable ownership.
Proof of ownership
Since NFTs are securely recorded on a blockchain, there's a level of insurance that assets are one-of-a-kind. This technology can also make it difficult to alter or counterfeit NFTs.
"By creating an NFT, creators are able to verify scarcity and authenticity to just about anything digital," says Solo Ceesay, cofounder and CEO of Calaxy. "To compare it to traditional art collecting, there are endless copies of the Mona Lisa in circulation, but there is only one original. NFT technology helps assign the ownership of the original piece."
When you buy an NFT, other people may be able to make copies of the image, video, or digital item you own. But, like buying a unique art or limited-series print, the original is typically more valuable. Blockchain technology also makes it easier for the public to authenticate the owner of the original work themselves.
Creator empowerment
NFTs empower creators by giving them greater control over their work, fostering direct connections with supporters, and unlocking new revenue opportunities. By offering fractional ownership of their creations, similar to stocks and bonds, creators can democratize access to their work and enable fans to participate in their success.
Additionally, subscription-based models can provide a reliable source of income for creators and exclusive content for dedicated supporters.
"For creators, NFTs create a seamless way to sell digital art that might not have much of a market. Additionally, there are ways in which creators can get paid fees for each subsequent sale of the art," Ceesay says.
Smart contracts allow creators to define specific terms and conditions for NFT ownership, fostering transparency and eliminating the need for intermediaries. This empowers creators to share their works online without the risk of theft or forgery and to set their terms of sale.
Community building
NFTs offer unique benefits to holders, including exclusive content or experiences, which can foster a more active community where creators can interact directly with fans. Some brands have effectively used NFTs to increase engagement and connect the virtual and physical worlds.
For example, fashion brand Dolce & Gabbana's 'Collezione Genesi' NFT collection, released in 2021, aimed to build an online fashion community. Participants could purchase unique virtual fashion designs that could be digitally superimposed onto images and videos.
NFTs can serve as innovative reward programs. Starbucks, a notable example, launched a limited-edition NFT collection of 2,000 unique Siren pieces in 2023 on the Polygon network. Holders of these NFTs gained access to an exclusive rewards program featuring exclusive digital content, rewards, and live events.
Challenges and risks of NFTs
Before you invest in NFTs, ensure you thoroughly understand the risks and challenges involved.
Environmental impact of NFTs
A significant drawback of NFTs is their environmental impact. The creation, storage, and trading of NFTs heavily contribute to electronic waste and high energy consumption, similar to bitcoin mining. NFTs require significant digital storage space, relying on energy-intensive systems like the Interplanetary File System (IPFS). As the number of NFTs continues to grow, so will the energy consumption.
E-waste comes from the outdated or broken specialized hardware needed to run the NFT marketplace. Since these machines contain mercury, lead, and cadmium, toxins and greenhouse gas emissions can be released into the environment.
Adopting responsible practices can mitigate the environmental impact of NFTs. Recycling outdated or damaged computers can help reduce electronic waste and decrease the energy consumption required for manufacturing new devices.
The NFT community has shifted efforts toward sustainability initiatives and developing more energy-efficient blockchain technologies, such as systems that use renewable energy sources instead of fossil fuels.
Volatility risk of NFTs
NFTs are highly speculative assets. Some investors have made thousands or millions of dollars selling NFTs, while others spend a lot of money on worthless digital assets.
Generally, the value of an NFT fluctuates significantly, similar to cryptocurrencies. Unlike assets with value tied to tangible goods like gold or the U.S. dollar, the value of an NFT is determined by market speculation and supply and demand. Plus, NFTs are hard to compare, resulting in a lack of standardization in assessing value.
Security risks of NFTs
The high-priced and headline-making NFT craze has historically attracted scammers and fraudsters. Scammers may try to sell you something and tell you it's an NFT when it's not. Others might claim they have the right to sell an NFT of a piece of work they don't own and didn't create. Some of the most common acts of fraud in the NFT marketplace include:
- Wash trading: The act of inflating the price of a digital asset like an NFT or cryptocurrency by buying and selling assets through multiple accounts and manufacturing a heightened appearance of demand.
- Impersonations and fake NFTs: Impersonators will duplicate a popular NFT to fool potential buyers into thinking they are buying the real deal.
- Rug pulling: An NFT seller/developer promotes future features that can be applied to a digital asset and lures investors to invest in the project. After that, the seller/developer backs out of the project and retreats with the project funds.
One of the largest NFT scams was a rug-pull scheme in 2022. Le Anh Tian, the founder of Baller Ape Club, launched the collection only to delete the entire website, launder the project's $2.6 million investor funds, and transfer them across multiple blockchains (known as chain-hopping).
The Department of Justice charged the founder with conspiracy to commit wire fraud and conspiracy to commit international money laundering on June 30, 2022. The lawsuit has yet to be fully resolved.
The best way to avoid getting scammed is to thoroughly research and fact-check information before buying or selling an NFT.
Legal and ownership challenges of NFTs
Ownership and intellectual property rights are unclear when it comes to NFT ownership. When you buy an NFT, you aren't necessarily buying the copyrights, as the creator or third-party seller can still retain it. The creator or original seller may also retain the right to modify, distribute, or display the asset.
Depending on token standards and smart contracts, sellers and distributors risk accidentally giving up their legal and ownership rights of the NFT when they sell. You can avoid unintentionally selling the rights by paying close attention to the NFT and blockchain coding.
Speculative bubble concerns
One of the major concerns among market experts is the potential for an NFT bubble, where prices are artificially inflated and may eventually burst.
The 2021 NFT boom was driven by speculative activity, which inflated the prices. In 2022, the bubble burst, and the value of investments fell, hurting investors who paid exorbitant prices for overhyped securities.
FAQs about NFTs
Are NFTs worth anything anymore?
Most NFTs are not worth much anymore compared to the 2021 NFT boom. However, a dedicated community of investors still participates in NFT creation and sales to further the policies and technologies of the NFT market.
What are NFTs and how do they work?
NFTs are digital, non-fungible tokens representing ownership of assets such as art, real estate, in-game items, and music. NFTs are traded using the same blockchain technology used by cryptocurrency.
How do I buy an NFT?
You can buy an NFT through an NFT marketplace or cryptocurrency exchange. NFTs are typically bought and sold using U.S. dollars and cryptocurrencies (usually ether). There may be an auction for certain pieces. In this case, interested participants must bid on the NFT to claim ownership.
What are the differences between NFTs and cryptocurrencies?
The difference between NFTs and cryptocurrencies is that cryptocurrencies aim to act as currencies by storing value or letting you buy or sell goods. NFTs create one-of-a-kind tokens that can show ownership and convey rights over digital goods.
Are NFTs a good investment?
NFTs may not be a good investment opportunity for growing wealth over the long term. After the NFT marketplace crashed in 2022, almost all NFTs lost most of their value. However, NFTs may be a good investment for people who believe in the future of blockchain technology and want to contribute to its future growth.