NFTs or Non-fungible tokens are an emerging asset class. As per Nonfungible.com, the total volume traded in NFTs is $415m as of 11th March. With so much money pouring into this new are in such a short span, what does one make of this trend? Is this a bubble that will burst and fizzle out soon or does it have long term implication for the way we buy and sell valuable items on the internet?
NFTs or Non-fungible tokens are an emerging asset class. In simple words, these are unique assets that are created and traded on a blockchain network. According to Investopedia, NFTs are “cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other”. The uniqueness of the token means that it cannot be exchanged for another ‘similar’ token, as there isn’t another token like this. It is a 1-of-1 version. Their existence over blockchain means that their ownership is completely transparent, can be tracked and is immutable (meaning: unchanging over time or unable to be changed). For context, your currency notes are fungible assets, meaning that you can exchange a $100 note with another $100 note because many such notes exist and they are of the same value.
NFTs can take the form of any asset. Currently, some NFTs which have recently made headlines include digital art, music, digital baseball cards or even tweets! A few days ago, Jack Dorsey put a digitally autographed version of his first tweet on a platform called Valuables. The highest bid for that tweet is $2.5m. If a tweet is not your cup of tea, a $3,600 image of a Gucci branded ghost might strike your fancy. Christie’s, a major global auction house, closed the auction for the first NFT art on its platform this week.
According to Christie’s website, the sale of “Everydays: The First 5000 days” a digital collage by Beeple (a famous digital artist), marks “two industry firsts, Christie’s will be the first major auction house to offer a purely digital work with a unique NFT (Non-fungible token) — effectively a guarantee of its authenticity — and to accept cryptocurrency, in this case Ether, in addition to standard forms of payment for the singular lot.”
The auction for the art piece started at $100. It closed at $69.35m on 11th March 2021. EulerBeats, an “algorithmically generated art + music limited edition NFT of 27 originals and prints priced on a bonding curve” - i.e. music generated using mathematical formulae, generated $10.3m in transaction value over 7 days in February 2021. The most popular NFTs, however, are cyptokitties - “digital representations of cats with unique identifications on Ethereum’s blockchain”.
These tokens reproduce and create off-springs that have a new set of attributes. The cryptokitties fan base spent $20m worth of Ether (the currency for Etherium blockchain) on cryptokitties within the first few weeks of their launch.
Most of these trades are based on the Etherium blockchain and are said to have developed based on the standards features developed in the ERC-20 (defines tokens), ERC-721 (non-fungible token standard) and ERC-1155 (batching multiple NFTs) standards. ERC stands for Ethereum Request for Comments which define application-level standards for the Etherium blockchain. Other platforms like Rarible that support NFTs have also benefitted from the increased attention that NFTs have received recently. Rarible defines itself as a “creator-centric NFT marketplace and issuance platform that utilizes the RARI token to empower users who actively interact with the protocol.”. The price of the RARI token increased from $1.78 on January 12th to $34.4 on March 11th.
So what does one make of this trend? Is this a bubble that will burst and fizzle out soon or does it have long term implication for the way we buy and sell valuable items on the internet? Mark Cuban, a billionaire investor and basketball team owner, thinks that the NFTs could be a $100bn sector in the next 10-15 years. He highlighted how NFTs could evolve over the years and have multiple applications including event tickets, borrowing against receivables, selling second-hand digital copies of college textbooks, etc.
Furthermore, Investopedia highlights that “NFTs can be used to represent real-world items like artwork and real-estate.” It adds that tokenisation of physical assets allows them to be traded effectively while reducing the chances of fraud. Through NFTs, music artists can monetise their art directly with their audiences, without the need for intermediaries. Earlier this month, the Kings of Leon became the first band to release its album as an NFT.
As per Nonfungible.com, the total volume traded in NFTs is $415m as of 11th March. With the ability to provide, undeniable authenticity, creating scarcity and protection from fraud NFTs certainly have the potential to become the basis of the marketplace going forward.