2022 continues to be the year of the NFT. Still, by-and-large, most people don’t understand why they matter or even what they are. We’re penning this post to help you understand the value of NFTs and where they fit into the crypto movement.
Fundamentally, an NFT is any asset that lives in a blockchain network and can’t be seamlessly exchanged for another of its kind. Now let’s take that simple thought and extend it a bit. Consider the Krone. Any one of its’ kind has the same value as any other. Consequently, it’s considered “fungible.” An NFT, by contrast, is considered “non-fungible.” It’s easy to understand why if you consider the current digital art movement. For a piece of art to become an NFT, it has to first exist in digital form, such as in a JPEG, then be “hashed” into a decentralized storage network. If you don’t already know what that is, just think of the Bitcoin network and how it stores data. Items like the date, originating location, and amount of a transaction are fed into a mathematical function called a “hashing algorithm” and spit out as randomized letters and numbers that look like a secret code. It’s this code that’s called a “hash” and hashes are highly secure because they’re the result of “one-way functions,” which just means it’s highly improbable that their outputs will ever be cracked.
Think Bitcoins, Ether, and NFTs. Anything that’s stored on a blockchain exists as a hash.
The JPEG, PNG, or other file that illustrates the NFT serves as the part that you, the user, actually sees. Put all of the above together and you’ve got the basics of what NFTs are today. Now, what’s left to discover is why they’re attaining such value.
An NFT can be a proof-of-ownership or “deed” to anything unique both in and outside of the blockchain world. Think art of any kind, in-game items, and even pieces of property like a house and you’re off to a good start. So, assets that were previously illiquid or very hard to move around become easy to trade once they’re made into NFTs. Now add in the fact that since NFTs exist in the crypto-sphere, they allow any artist or creator to earn a living through leveraging an instant, new audience that’s interested in and used to rare digital items. These rare digital items can be just as provably scarce as say, Bitcoin, because everything about them is publicly verifiable using their smart contracts.
At this point, you’ve got the gist of why NFTs matter but not the full picture. To understand that, it’s important to be clear on where NFTs are today and where they’re likely going.
$2 billion in sales in the first quarter of 2021. It’s hard not to look at that number and feel like you’ve already missed out on the next best thing. Still, once you understand the current state of the NFT space, you’ll find that it’s still early yet. As of now, the bulk of the revenue being generated from the NFT space is from digital art alone. That’s not to say that this “crypto-art” isn’t valuable in and of itself. On the contrary, crypto artists have been so successful thus far because at their core, they’re excellent at creating works that kickstart conversations. It’s these conversations, in turn, that lead to recognition for the artists, which in turn, pushes their sales into a high gear.
Before the blockchain, however, the professional art world was truly a walled garden. Now, anyone with access to the internet can instantly share their art with the world and even earn perpetual royalties on it from any secondary sales. These royalties are set from the time that the NFT is “minted”, which means that, for example, “10%” is set as the all-time creator-cut of any secondary sales of the work. So, if someone sells their digital art for 1 Ether, then the buyer flips it for 1.5 Ether, the creator of the work will receive 0.15 Ether from that sale. As a general rule, this process continues forever, unless the work of art simply stops being sold, and it’s self-enforced. This is because the smart contract that manages the NFT itself works on its own, based on conditional logic. Any time a sale needs to be made, the software itself manages it.
All in all, the promise of smart contracts related to NFTs actually extends far beyond this point. Sets of guidelines for creating smart contracts like the ERC-721 standard have become the dominant frameworks for nearly all NFTs that currently exist but they’re limited in scope on their own. Over time, the evolution of technologies like oracles and blockchain networks focused on interoperability will be key to watch to gauge where the NFT space is going next.
Additionally, digital art is only the tip of the iceberg. What’s likely to happen is each and every creative vertical will be disrupted. Consider in-game items. We asked Kerberos from Nordavind: do you see value in being able to trade your favorite in-game items cross-platform (outside of the game they're from)? We then followed that up with: do you feel connected to any specific in-game items?
“I'll just say yes and yes, haha! I mean personally I would just say it's because I play games a lot. After I have thousands of hours in a game for example I feel a connection with things inside the game. If I could express some ownership to that via an NFT, I probably would, partially like a souvenir, possibly also to trade and further my experience within the game if that was also possible.”
His thoughts mirror the consensus of the Esports space, where all players tend to have connections to items they’ve spent time with in a game, earned through completing a specific challenge or series of challenges, or just found particular success with. Just as digital art has taken the crypto industry by storm over the past year, we expect that in-game items have an excellent chance to follow suit. Over time, we’ll continue to follow both their progress and the progress of the NFT space as a whole.
For now, however, we hope you feel comfortable with the idea of what NFTs are, how they work, and why they matter. As Raoul Pal of Real Vision and Global Macro Investor recently said, the cryptocurrency industry at-large, including NFTs, is “a black hole that is sucking in all of the world’s talent and value at a speed that no one can comprehend” and likely part of a new age of innovation called the “Exponential Age”. While we agree with most of this sentiment, we disagree with the idea that “no one can comprehend” crypto’s progress. If you stick with us, then you’ll find yourself armed with the knowledge to build an effective toolset for weathering any sort of market storm. With Ether having just jumped over $3000 a coin for the first time in history and Bitcoin still on a powerful long-term trajectory, there’s no better time than now to find a guide for your crypto journey. Next time, we’ll dig into true ownership versus only “representative ownership” of your crypto and why it’s important to make sure that the former applies to you.
Until then, keep your eyes on our Instagram, where we have released our own unique NFT in collaboration with the Norwegian-based NFT artist, mus1tie, and our friends at the Nordavind esports team. Mus1tie is an incredibly talented artist based in Oslo. He is originally from China, the Uyghur ethnic group and has specialized in 3D art since 2017. The NFT that we’re releasing follows that trend, depicting a moon-man “hodling” the top two cryptocurrencies, Bitcoin and Ether, as he readies himself for his ascent. It can be taken to symbolize having faith in the future of the crypto movement and it continuing to be led by its top two networks, Bitcoin and Ether.
Until then, remember that you can always reach out to us across all of our socials with any questions or other input, including our recently launched Discord channel!
Special thanks to Kerberos and our friends at Nordavind, and mus1tie!
This text is intended to inform and is not an investment recommendation.