What is an NFT?

An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.

Although they’ve been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. A staggering $174 million has been spent on NFTs since November 2017.

NFTs are also generally one of a kind, or at least one of a very limited run, and have unique identifying codes thus creating digital scarcity

Description of NFTs, the market and potential, borrowed from CRYPNATION NEWSLETTER #82 from Bryce Paul and Aaron Malone, August 3, 2021

"The crypto industry has seen an absolute tidal wave of capital flow into it this year. However, few sectors have seen quite the amount of interest as the market for Non-Fungible Tokens, commonly referred to as NFTs.

You’ve likely heard of NFTs due to headlines about artists like Beeple selling an NFT at Christie’s auction house for $69 million, famous Meme creators making millions off their original pictures, and NBA Top Shot gaining traction in the sports community.

Due to the size of the topic, we’re going to spend the next couple weeks diving into the past, present, and future of the NFT sector, starting with a bit of a history lesson on the sector.

In May of 2014, a man named Anil Dash, who was working as a consultant to auction houses and media companies, teamed up with a friend and artist named Kevin McCoy to address the issue of digital artwork being shared online without credit to the original artist. Using a blockchain called Namecoin, the pair created what they called “monetized graphics”, which tied ownership of an original digital work to the Namecoin blockchain. They worked to popularize the idea over the following years, but concluded in retrospect that they were a bit ahead of the times since the idea didn’t catch on for a number of years after their initial proof of concept.

This being said though, the launch of Ethereum in mid-2015 brought some fresh development to the NFT sector, with a project called “Etheria” launching only 3 months after the Ethereum network went live.

So, what is an NFT anyway?

According to the Wikipedia page dedicated to the topic “A non-fungible token (NFT) is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable.”

Put another way, an NFT functions as a digital “certificate of authenticity” that is typically wrapped together with a digital asset to create a verifiably unique asset that is native to a blockchain-based platform like Ethereum. We will eventually see links to physical assets like real estate as the tech evolves, but we’ll cover that when we dive into the future of the tech in part 3 of this series.

With this in mind, let’s take a brief look into the history of NFTs.

Given the current hype around the tech, it would be easy to assume that this is something new to the industry, but NFTs have actually been around for quite a while, even pre-dating the Ethereum network by more than a year.

Etheria was essentially the first blockchain based “metaverse”, allowing users to buy one of the 457 “plots of land” within the digital universe, but like the monetized graphics created by Dash and McCoy, the idea didn’t really gain much traction. In fact, most of the plots remained unsold until the NFT boom in March of 2021 (more than 5 years later), when all plots were sold for a combined $1.4 million in less than 24 hours!

Another interesting example of early development that was initially unappreciated is the CryptoPunks project, which is an Ethereum based collection of 10,000 NFT cartoon characters that was created in 2017 by a company called Larva Labs.

The collectibles were mostly seen as worthless until the recent craze brought about insane valuations for these digital assets. Back in June of this year, a CryptoPunk (#7523, titled “Covid Alien” by the owner) sold for a whopping $11.8 million (800 ETH) at a Christie’s auction. According to Larva Labs website, that crypto punk was most recently purchased on July 10th, 2017 for a mere $1,648 (8 ETH at the time). In ETH terms that is a 99x increase and in USD terms, a 715x increase. Imagine how the original owner feels-- he claimed this NFT for free back when CryptoPunks was launched on June 23rd, 2017! It just goes to show that value is arbitrary and price is determined by whatever anyone is willing to pay.

There have been a few other projects like Decentraland that saw some notable adoption early on, as opposed to the CryptoPunks from LarvaLabs, for instance, which had very little interest upon launch. Decentraland-- a metaverse where the MANA token is the native currency, was first introduced in 2018 and allowed users to buy digital land and also set up businesses on the land within the digital community. Within a few months, the project’s “in-game” economy was worth approximately $20 million and continues to exist and grow to this day with people setting up everything from art galleries to casinos within the digital world.

CryptoKitties, a blockchain-based game allowing players to adopt and trade virtual cats, is another notable example since it was considered at the time to be “the dApp that broke Ethereum”. The game quickly went viral (likely due to the game’s release coinciding with a euphoric phase of the crypto market) and caused enormous transaction pressure, slowing down the Ethereum network.

The game has since faded into crypto history, but the developers (Dapper Labs) spun up a new blockchain called FLOW and created a new NFT experience in partnership with the NBA. Together, they released a platform called TopShot, which tied NFT infrastructure with the vast and lucrative sports memorabilia industry.

NBA Top Shot has produced over $700 million in total sales in less than a year, according to CEO Roham Gharegozlou. This is a staggering amount of sales for a product that the NBA hardly put any marketing effort behind-- it was mostly organic interest from the overlap in fans of crypto and sports.

Moving to the present, 2021’s bull market brought a new speculative boom to the NFT industry, with artists like Beeple leading the charge into the world of fine art on the blockchain and the Top Shot project bringing the tech to the mass market."