Getting A Bit More Technical: How They Work
[Update 12 March]: A piece of art titled Everydays — The First 5000 Days has just sold for $69.3 Million USD through the popular auction house, Christie’s. That places artist, Beeple, in the top 3 highest-value artists alive today.
Here it is (well, the unofficial version):
Non-fungible tokens are the three (two?) words on everyone’s lips at the moment. They’re mostly going by their acronym, NFT’s, because who knows how to pronounce fungible (fun-jih-bill is my best guess).
They’ve experienced a very rapid rise in the last few months:
And that uptick in popularity has translated into a huge increase in industry transaction volume. Super Rare, one of the two most popular digital art trading platforms has seen a huge rise in transaction volumes:
So, is it just another 21st-century crypto-bubble?
There may be a certain hype to it at the moment that might fade, to an extent. But long term… my bet is that NFT’s are here to stay.
They’re a huge enabler for the rapidly growing creator economy. [Side note: Over 50 million people worldwide now consider themselves a creator!]
While the current hype is probably going to wear off, the technology and systems behind NFT’s aren’t going anywhere as long as two things still exist:
✅ A digital world, and
✅ Humans valuing scarcity.
Here’s the low down on what you need to know, and how to jump on the NFT wave.
Breaking it down: Non-fungible + token.
When something is fungible, it is easily replaceable. You drop your 10 dollar bill and it gets ruined, you have another one in your wallet that can replace it. It’s fungible.
The opposite (naturally) is non-fungible. You drop the scarf that your Granny knitted for you in the mud - it gets ruined - there’s no other identical scarf like it which can replace it. It’s something completely unique, and 100% original. Sure, Gran-dog can knit you another one, but it will never be exactly the same thing.
The token bit is the easy part. It’s just a descriptor used for an item that holds value. So Bitcoin is a token, so is your $10 bill.
Putting it all together, an NFT is essentially just a 100% unique asset that you can own, which is digital.
So if the Mona Lisa was the creation of a 21st-century artist, and instead of painting it on canvas, he illustrated it using his laptop, he would use blockchain technology to convert it into an NFT so that when he sells it, the owner knows that it is — without a shadow of a doubt — the original (digital) Mona Lisa.
In the case of digital art, it is very easy for me to go onto SuperRare.co, choose a piece of digital art I like, right-click and press “Save As…”. Boom, I’ve got the exact same (maybe not hi-res, granted) version of the art that the owner will have on their computer. So what’s the big deal?
Well, it comes down to the fact that humans have a serious aversion/attraction to scarcity. We want what we can’t have.
“Owning any digital content can be a financial investment, hold sentimental value, and create a relationship between collector and creator. Like an autograph on a baseball card, the NFT itself is the creator’s autograph on the content, making it scarce, unique, and valuable.”
It’s something that tech startups are using to create hype and growth for their products. Clubhouse launched in beta through invite-only user access. You can only complete your sign-up to the app if you are invited by someone else.
More recently Dispo has done the same thing. As a result, both of these tech startups have garnered huge media attention and consumer-driven hype. Everyone wants what they can’t have!
In a world where companies are paying top dollar to acquire customers, Clubhouse and Dispo have flipped the coin on its head and have consumers banging on their door begging to be let into the promised land. Take my money, please? (Okay, I know they’re free, but you get what I mean)
NFT’s are an enabler for unequivocal ownership of digital goods. William Shatner explains (more on him below):
“It’s critically important both to the person who wants one unique thing, or someone who spends a great deal of money on a very expensive object and wants to be sure it isn’t a counterfeit,”
Because of blockchain technology, not only do you have unique ownership of something, but everyone knows you are the owner too. The double whammy for an ego-driven human.
Before we get into anything technical, it's probably going to be valuable to give you some examples of different types of NFT's available at the moment.
The musician and artist, Grimes, has auctioned off her latest digital collection named "WarNymph" on Nifty. One of her videos in the collection called "Death of the Old" fetched $388 938.00 USD.
Just last week, Kings of Leon became the first recognized band to release an album as an NFT. Titled "When You See Yourself", the NFT-album (?) comes in different 'packages' with perks attached like front row seats, and digital art from their creative partner Nigh After Night.
One of the most popular exchanges for digital art is SuperRare.co. You can search the platform by popular tags (like #surreal, pictured below) and then make bids, or outright buy, pieces of digital art.
SuperRare has an "Activity" tab where you can see all the most recent trades happening. Here's an example of the type of art being traded:
Perhaps the most popular at the moment: Jack Dorsey, the founder of Twitter, is auctioning off the first Tweet. After 5 days on auction, current bidding is at $2.5 million USD (9 March 2021).
Valuables is making it possible for anyone to ‘mint’ a tweet and sell it.
Star Wars cult hero, William Shatner, has also sold 125 000 non-fungible trading cards on the WAX (World Asset eXchange) blockchain. WAX reports that the 10 000 packs containing 25 cards each “sold out in under 9 minutes”.
Nifty is one facilitator of collectibles, offering NFT’s in “drops”:
“Nifty Gateway teams up with Top artists and brands to create collections of limited edition, high quality Nifties, exclusively available on our platform. We’ve teamed up with people like world renowned artist Michael Kagan.”
“Each collection will be opened at a specific time (a drop), and will only be available for a limited time.”
Another interesting collectible is Crypto Punks.
They are 10 000 uniquely generated characters which can only have a single owner. They were originally released on the Ethereum blockchain for free, but are now actively traded by buyers and sellers. Here are some recent trade volume statistics:
CryptoPunks has been the most traded NFT in the last 7 days (9 March 2021) with a 7-day total trade volume of $14,194,432.18 from 274 sales. That's an average trade price of $53 000!
One of the more fascinating use-cases for NFT’s is the purchase of virtual real estate… wait, what?
OVR is one platform enabling the purchase and use of virtual land. Yup, you heard me right. They have created a virtual map which you can buy portions of, and do with what you like. OVR’s main focus is online gaming in that world, with different digital experiences available.
And that digital piece of land is uniquely yours, made possible by NFT’s.
“OVR is the decentralized infrastructure for the spatial web, merging physical and virtual worlds through Augmented Reality, creating a new dimension where everything is possible.”
Another player in this sector is Decentraland:
"Create scenes, artworks, challenges and more, using the simple Builder tool, then take part in events to win prizes. For more experienced creators, the SDK provides the tools to fill the world with social games and applications."
Virtual Real Estate is also fetching the highest prices in the NFT world. User "Flying Falcon" on the gaming platform Axie Infinity, bought nine adjacent "Genesis" blocks for 888.25 ETH, which was around $1.5 Million at the time.
I think we have a decent understanding of what's out there, and what's being traded in the NFT space. Time to get a bit more technical then?
NFT's are enabled by the Ethereum blockchain, among others. (Ahem, remember what I was saying about Ethereum being powerful?)
What makes an NFT unique is three factors:
Getting into the real nitty-gritty, NFT's are almost all powered by the Ethereum network.
They are primarily running using two standards: ERC-721 (original) and ERC-1155 (newest). A standard is just the set of rules that the token is governed by. Think of it like the structure of a bill. You can't just mint your own $10 bill. There is a defined structure to it, with certain characters. That's what a standard is, kind of.
ERC-721 (Ethereum Request for Comments 721) was the original NFT standard which implements the functionality for tokens within smart contracts. That has been further developed into a newer standard: ERC-1155 which is primarily differentiated by its ability to accept multiple token types.
So ERC-721 = One smart contract to One token. ERC-1155 = One smart contract to many tokens and token types.
ERC-721 is the software behind a vending machine which only accepts $1 dollar bills, and only outputs 1 type of chocolate bar. ERC-1155 takes in any denomination of bills, and can give you any number and or types of chocolates.
The neat thing is ERC-1155 can be used to create the "old-style" ERC-721 type transaction.
Well, there have been a few attempts. Nike is the most predominant, through it's CryptoKicks project. It attempted to verify ownership and authenticity of a pair of real-life sneakers using NFT's. The process is quite simple:
When you buy a pair of the CryptoKicks, it has a unique identifier which then relates back to an NFT. That NFT is minted when you buy the kicks, and you are marked as the owner. So naturally, the amount of sneaks produced is directly related to the number of NFT's issued.
If you're a trader, you'll get transferred the physical goods, as well as the NFT, and the blockchain will be updated.
This is by no means the definitive guide, but here are some options for yah to go browse for your favorite $20 000 GIF (collectible or virtual world).
So, where are things headed, how can you get involved?
Well, they display it. No one buys a multi-million dollar piece and then sticks it in their basement.
Collectors want to show off their collections.
If you’re buying a GIF of Michael Jordan dunking for a few thousand dollars, you’re likely going to be fine spending a few hundred on a top-quality display for it.
This also has a flywheel effect. The more you’re able to impress others with your collection of art, the more valuable those pieces seem. The more valuable they are, the more people want to buy them and trade them, value goes up and the NFT economy grows.
Nifty Gateway Display and TokenCast provide a real-life physical option where you can display your NFT’s in a frame. Tokencast is an Open Source solution that requires a Raspberry Pi setup and some technical expertise.
There may be a gap for an end-to-end display that simply links to an NFT-repo that you own. It is a beautiful frame, with a high-definition LCD screen behind it that can displays your artwork, either on a loop or statically.
Another option is a digital-world display. Create a gallery where NFT owners can show off their collection in a VR gallery.
NFT’s-as-a-service. Nothing revolutionary.
Basketball and football have both already started with their collectibles. The next step is finding fanatical fans of sports, online games, and other activities which attract a cult-like following and then NFT-ise their favorite memorabilia and moments.
Licensing will be key to make sure you are the only ‘producer’ of these moments which is verified and allowed to distribute them. Scarcity!
Start super-niche with gaming communities (usually super-engaged) and then work your way up to higher-profile, bigger-ticket type sports.
Partner with big brands on a revenue-share licensing model and handle the entire process for them. Create NFT-as-a-service.
One of the best ways to jump onto any ‘gold-rush’ is to supply the miners with tools — “sell shovels”.
Not everyone is an artist. But where there is money, people will flock. NFT’s have quite a high technical barrier to entry.
One way of selling shovels is to facilitate creators and artists converting their artworks into NFT’s and then posting/advertising them on various channels.
There is obviously going to be a glut of NFT’s that surge into the market now as popularity has increased.
Curate the best options for the discerning buyer, and take a portion of the sale price as a fee for facilitating the sale.