This is Crypto Swami. He’s part cat, part Pop-Tart. The GIF of a rainbow-casting feline was a viral meme back in 2011. Fast forward to February 2021, the original GIF was sold at an online auction for 300 Ether, the cryptocurrency that powers the Ethereum network. That was equivalent to nearly $600,000 at the time.
You may be asking how someone can own the original copy of a GIF that was pervasive around the internet. It’s because it was sold as an NFT or non-fungible token, which acts like a digital certificate of authenticity.
The market for NFTs ballooned in 2020, climbing to a market cap of at least 338 million from about 41 million in 2018. But skeptics are asking whether these assets are really worth the value assigned to them, especially if all it takes to view them is an internet connection. To understand how NFTs work, first you need to understand what fungibility is.
Fungibility refers to the ability of an asset to be exchanged or substituted with similar assets of the same value. A simple example of a fungible asset is currency. Say you have five one-dollar bills in your wallet. You may not want to carry around so much change so you exchange them for a single five-dollar bill. The value of your money is still five dollars regardless of the fact it’s now in a different form.
Non-fungible assets are the opposite. Each one is unique and can’t be easily substituted for something similar. Think of the “Mona Lisa.” It’s an original piece of art. It couldn’t be swapped out for, say, a “Mona Lisa” poster from the Louvre gift shop because the poster doesn’t hold the same value.
The idea behind Crypto NFTs is that you have this digital signature in the way that a great work of art might bear the signature of the person who created it so you can always go and look at the original and say, “Yes, this is the real one. This is authentic.” A Crypto NFT winds up having that through the blockchain where the information is recorded. NFTs are cryptocurrencies but unlike fungible cryptocurrencies like bitcoin, they are completely unique. They exist as a string of numbers and letters stored on a blockchain ledger.
This information can contain who owns the digital asset, who sold it, and when it was sold. This information is also encrypted, ensuring the NFT’s authenticity and scarcity. In doing so, they fix a difficult problem for digital creators on the internet: how to make your creation scarce and therefore more valuable. So, with NFTs, you wind up having the scarcity because they are non-fungible and because of that, there’s only one of these tokens that can exist. It can’t be traded for anything similar because there is nothing similar that exists.
And so, you wind up getting that scarcity and that limitation which helps drive up some of the prices. One of the early applications of creating this scarcity was the digital collectible game Cryptokitties, which emerged in 2017. Users were able to buy, trade, and breed digital cat collectibles. Each new cat was an NFT which certified its originality and ownership. Since then, NFTs have been applied to video games, digital art, and sports memorabilia.
One example is NBA Top Shot, which allows users to procure a collection of digital basketball highlights, like a video clip of a postering dunk. All highlights are NFTs and have become big business. By mid-March, NBA Top Shot had clocked in over $338 million in sales since it went live in October 2020. Non-fungible tokens are making their way into the mainstream art world as well.
Auction house Christie’s opened bidding for its first purely digital art NFT. Bids rocketed into the millions of dollars. People are really excited about NFTs because, unlike with the blockchain underlying bitcoin, you can do a lot more complex things with it. You can wind up setting terms within it such as, you know, the original creator upon each resale of this asset will get x-amount. Or you can take it and you can have an NFT that itself mints other NFTs. And it winds up having all of these really untested applications.
The surface has only been scratched in terms of its potential. Along with all the hype around NFTs, experts have raised some concerns. One issue is that not all NFTs verify the person selling a digital art piece is actually the original creator. This is difficult particularly in online marketplaces. – One of the concerns is that anyone can essentially go on a lot of these marketplaces and say, “I am the person who created this token,” and it can be really hard to verify that, especially if you don’t know who they actually are or they’re saying someone that they’re not.
And some are skeptical that ownership alone makes digital assets valuable. When it comes to digital art, a buyer owns the original digital painting but the person can’t keep others from copying the image and sharing or changing it online. – You have had a lot of scams in cryptocurrencies just historically and so the concern is that, you know, people are hyping these up. They’re saying, like, “Go buy these NFTs. It’s great.
” But in reality, you know, there’s always gotta be a digital art buyer for there to be a digital art seller and people might decide all of a sudden, you know, “Let me cash in my profits,” and someone’s going to be stuck holding the bag. Proponents are bullish on the potential for NFTs but critics are wary that it may be a digital art bubble in the making.
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