What is an NFT and why do they have value?
The crypto industry evolves in ways that even its own creators can’t picture. Vitalik Buterin, an Ethereum co-founder, said that initially he thought DeFi would be an important thing, but he couldn’t predict other trends. Today, by explaining what is an NFT, we would cover some unpredictable uses of this powerful technology.
Blockchains and especially Smart Contracts give us the possibility to develop decentralized environments that comes with transparency, permissionless, and trustless features. But, one other major feature derived from these inventions is ownership.
NFTs, bring to the table, the opportunity to create digital tokens that represent and guarantees the ownership of unique items. When we think about them, it may be images or art that first comes to mind, however, these tokens are extremely versatile and are able to represent almost anything that we can imagine.
Now, let’s break them down to fully understand the infinite possible use cases they have unlocked.
What is an NFT?
NFT is the acronym for Non-Fungible Tokens. When we define something as non-fungible means that is not interchangeable with other items or, in this case, tokens because of its unique properties. So, basically, an NFT is a token that represents a unique or rare item.
A perfect way to understand what is an NFT is to compare it with the opposite kind of token, fungible tokens. The main difference is that fungible tokens are interchangeable for another token of the same kind. Let’s see an example. 1 ETH is interchangeable for another unit of ETH. It doesn’t matter if it’s the first ETH ever mined or the last one, they all have the same value.
So, NFTs are tokens able to represent the ownership of unique items. That’s why the first uses that we gave them were tokenization of:
- Real estate
As they are tokens deployed on blockchains, their ownership is easily verifiable. Also, they can only have one owner at a time. Nevertheless, one of its essential characteristics is that it can have attached whatever you can imagine that could be digitalized.
Well, we now have a better idea of the endless possibilities that come with NFTs. However, before we understand why these tokens have value, which may seem a little obvious right now, let’s learn a bit more about their short history.
A brief history of NFTs
Nowadays, it’s quite easy to create an NFT, even if you’re not a software developer. It’s as simple as taking a sample ERC-721 token contract, modifying the parts we want and that’s it. Ethereum’s community-powered with the open source spirit delivers great results. Standards, like ERC-721 for NFTs or ERC-20 for fungible tokens, allow everyone to be developing with the same structure. After that, Smart Contracts developers would know what kinds of tokens are going to be interacting with.
Anyway, in June 2017, a few months before the ERC-721 standard was proposed, the Larva Labs team launched the CryptoPunks project. It was a series of 10,000 unique and unrepeatable NFTs inspired by the London Punk scene, cyberpunk culture, and certain novels that gave impetus to this movement.
Each of them, a simple digital image, possesses unique and unrepeatable features, which added to the historical weight of being the first major NFT project generated on the Ethereum network, providing each CryptoPunk with an extremely high collectible value. The record sale price is held by CryptoPunk number 5822, which sold for $23.7 million.
Later on, inspired by the code written to create the CryptoPunks, Open Zepellin developed the ERC-721 standard. Thanks to them, the possession of every item that can be digitalized, is NFT material.
Where does the NFT value come from?
I believe that, if I did a good job until now, this question may have a quite obvious answer. Generally speaking, NFTs are valued because they represent the ownership of a unique, scarce, or rare digitalized item. However, the value of a particular NFT depends on the asset whose property it represents.
It is clear that certain assets obtain their value from a market with some objectivity or at least governed by certain parameters that make it feasible to predict their value. But, when we talk about NFTs collection that represents art or just some collectibles images, their value is more difficult to establish. Subjective considerations come into account.
Let’s clarify with some examples. In the last section, I wrote about CryptoPunks. We can have different opinions, but most people coincide that they are not extremely well-designed pieces of art. However, their value has reached exorbitant levels. Some analyst thinks that its value comes from being the first big NFTs collection on Ethereum.
A completely different example are NFTs that represent a house title deed. Definitely, the NFT represents the ownership of a unique item, but the price would be determined by the Real State Market.
In some, the item whose ownership is represented determines the value of a specific NFT. While, talking about NFTs in general their value come from their scarcity, rareness, or unique traits.
Common use cases for NFTs
Up-to-date, the NFT market mostly focuses on digital art. However, this is not the only function that NFTs fulfill today. Real-world items represent a highly growable usage for this non-fungible token.
To get a clearer picture, I can elaborate on the following list:
- Digital Art:
- Game characters or items
- Real World Items:
- Deeds to a car
- Tickets to a real-world event
- Tokenized invoices
- Legal documents
NFTs fit perfectly in almost every real or digital item that we can imagine. Real-world event tickets, ID credentials, or personal data and signatures, from my point of view, are the fields that can get leveraged by this amazing technology.
NFTs and their future
When we think about NFTs, bored apes images, CryptoPunks pictures, or even weird-looking cats are the things that mass media present to us. Sales volumes can make this technology look frivolous and a trend that will not last long.
However, I hope, that after reading this article you end up with a clear idea of how this technology can revolutionize the world as we know it. Digital evidence can replace thousands of papers used to prove ownership.
That’s not quite novel, but the transparency, trustless, and permissionless features that blockchain technology prints to every development that takes place on them, that’s extremely unique and innovative. NFTs have the potential to disrupt our world, the outcome depends on us.