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What are NFTs? How Do they Work? Why are Some NFTs Worth Millions?

Mar 22, 2021 8:56 AM 5 min read

A GIF for $580,000. A music video for $1.3m. A 10-second clip for $6.6m. Bids for Twitter CEO Jack Dorsey’s first ever tweet crossing $2.5m. A clip of LeBron James slam dunking for $208,000. A .jpeg file for $69m.

These are some of the more high-profile examples of NFTs that have hit the market in recent weeks.

What are NFTs?

An NFT or a non-fungible token is a digital asset with a unique identity and ownership. This uniqueness is ensured using blockchain technology, which is why NFTs are often also called crypto-art or crypto-collectibles. "Fungible'' means interchangeable with similar assets.

NFTs' namesake non-fungibility is derived from their underlying blockchain signatures, which serve as a public ledger allowing anyone to authenticate its originality. Basically, no two NFTs can be the same.


Can Any Digital Object Be An NFT?

Practically, yes. Images, videos, GIFs, text, tweets, songs - you name it and it can be turned into a monetisable non-fungible asset.

Virtual rainbow-coloured sneakers can be NFTs. Elon Musk tweeted a song about NFTs and auctioned it as an NFT. Kings of Leon released their latest album as a collection of NFTs. William Shatner sold Shatner-themed trading cards (one of which was apparently an X-ray of his teeth). The article you’re reading can be an NFT too! ;)


Where to Buy or Sell an NFT?

Practically anyone can “create” NFT art as long as they have a digital wallet and an account on an NFT marketplace.

To buy or sell one of these blockchain tokens, some of the most common marketplaces include OpenSea, Mintable, Nifty Gateway and Rarible. There are also some niche marketplaces for more specific types of NFTs. For example, there’s NBA Top Shot for basketball video highlights. Or Valuables, where Dorsey's tweet is currently up for grabs.


But… Why Are People So Interested in NFTs?

Off the bat, the NFT craze seems batty. Tens of millions of dollars for a JPEG sounds ludicrous, like capitalism gone wild. Sure, art is “subjective”, but a JPEG is, well, still a JPEG.

What’s the point then? Well, if you’re a buyer or collector, NFTs’ lure lies in their non-fungibility. It gives you digital bragging rights to owning a work of art - kind of like if you owned an original Picasso or van Gogh. Yes, you wouldn’t be able to display your NFT file in your living room, but hey - we’re living in the Internet Age.

FYI: If an NFT is similar to a physical painting in a museum, can it be stolen? Well, thanks to blockchain tech, there is a record of each time such a transaction takes place, making it difficult to steal or flip an NFT. That said, NFTs are not entirely steal-proof.

NFTs are also attractive because of their rising prices. They work like your typical speculative asset - you purchase it expecting its price to go up and then sell it for a profit some day. In this way, NFTs become an investment. Art collector Pablo Rodriguez-Fraile, for example, bought digital artwork "Crossroads" for $67,000 in October - and sold it for a neat $6.6m in February.

On the other hand, if you’re an artist/creator, the lure is obviously the money. NFTs offer digital artists a lucrative market, with the alternative being pittance. Moreover, every time an NFT is resold or changes hands, the artist can get a percentage of the proceeds as royalty.


Why are NFTs Suddenly So Popular?

NFTs have been around since 2017, but sales have surged in recent months. Here’s how Google Search trends for “NFT” rose this year:

And here’s how sales have surged of late on some of the marketplaces:

Source: Crypto Art Data

One explanation for the NFT craze is that the lockdown has left too many people with too much disposable money with too much time to kill.

The rise of NFTs can also be seen as a sign of the times. In recent months, the price of major crypto currencies has surged and this has created a class of crypto-millionaires with a lot of Ethereum or Bitcoin to spend.

Moreover, enthusiasts opine that NFTs are the future of art, investment and ownership. A future where blockchain will rule the world, a future where all kinds of property - from music albums and videos to houses and possessions - will have their ownership status tokenised in an NFT-esque way.


Criticism of NFTs

The boom may very well turn out to be a bubble and burst. In the 17th century, investors were crazy about a similarly stupefying speculative “asset” - tulip bulbs. That… didn’t end well for the tulip-philes.

FYI: Even Mike Winkelmann, the creator of the $69m .jpeg file, thinks we’re in an NFT bubble.

And not to go all socialist, but those who frown upon the NFT craze also point to how it is essentially a playground for the super-rich, where a small minority of people throw around millions for intangible assets that anyone with basic Photoshop or Illustrator skills can create. All for bragging rights or to sell to other super-rich people. Juxtapose this with the larger economic picture of dismal inequality and pandemic-induced disquiet, and the contrast will make the NFT mania look like hubris.

Then there’s the environment. Most NFT art is stored in the blockchain of Ethereum or Bitcoin, which have a heavy carbon footprint. In fact, their annual energy use is comparable to Ireland's. The culprit is blockchain tech itself, which is notorious for its carbon footprint. It takes a tremendous amount of energy to power computers at the scale currently needed to sustain and grow crypto markets, and NFTs contribute to this. Many artists have raised these concerns, but making crypto Earth-friendly is easier said than done.


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