Non-fungible tokens (NFTs) have exploded out of the ether this year. From art and music to tacos and toilet paper. But are NFTs really worth the hype - or even an investment? A closer look at the assets and how we got to this hype.
While a majority of non-fungible tokens (NFTs) have been created by unknown artists and creators, we have seen many serious players such as famous musicians, big corporations as well as celebrities getting involved in the space, which considerably accelerate the hype by a magnitude that probably nobody has seen coming.
In August alone, the most popular market place for NFTs valued at USD 1.5 billion has seen 7x monthly growth and daily volumes trending at USD 1 billion - while some twitter users are bragging about making millions flipping NFTs within a month. But are NFTs really worth the hype - or even an investment? Some folks say they’re a bubble poised to pop, drawing the usual comparisons with the dotcom craze or the tulip mania. Others believe NFTs are here to stay, and that they will change investing forever.
But first of all - what is an NFT?
Although people joke about “only buying JPEGs”, there is of course more going on here. To understand NFTs, it helps to understand aspects of blockchain technology. The aim of this article is not to provide an analysis of the technical aspects behind any NFT projects or the blockchains they are issued on, but rather to discuss relevant use-cases and present existing examples, which should help you to understand the fuel behind this hype. If you are interested in the technical aspects, this short article about how NFTs are presented on the Ethereum blockchain should give you an easy technical overview.
Let’s start with a simple question: what does fungibility mean? All fiat currencies or also Bitcoin are considered fungible, which means 1 BTC can be exchanged for any other 1 BTC with both having equal value. Most digital blockchain tokens fall under this category of “fungible tokens”. Assets that are non-fungible, such as a painting, cannot be exchanged for any other painting, as all paintings have different (subjective) values. NFTs (non-fungible tokens) are unique digital token variants that retain the feature of non-fungibility, with clear differences between two tokens.
Important to note is that the token itself should not be confused with the asset it represents. In fact, the asset - let’s say a digital art piece - is never stored on the blockchain. Instead, the NFT represents something similar to a digital certificate that contains a link to the art piece. By holding this certificate, you only prove the ownership to the asset it’s linked to without owning any exclusive (copy-)rights on it. The legal and regulatory implications of this are mostly unexplored, but use-cases beyond digital art, such as real estate ownership titles or any other non-digital assets (paintings) are being heavily explored by the wider market. More to that later.
How did we get here?
If you have been following the crypto markets for the last five years or even longer, you know that we saw many hypes come and go - sometimes so fast that the people living outside the crypto bubble have not even grasped what the hype is even about. NFTs is the latest in a long list of 3 letter acryonyms – DAOs, ICOs, DEXs and now NFTs. Along the way, there have been always loud (and salty?) opponents shouting from the sidelines against every innovation that emerged, from “rat poison squared” over “funny businesses” to the ubiquitously used money laundering narrative.
However, regardless of whether those allegations have merit or not, even the most vocal opponent has to admit one thing: there is one hell of a lot of innovation-exploration happening, probably second to no other industry and especially not the traditional financial industry. This claim is supported by looking at the technology’s adoption rate today. The wider blockchain industry has come a long way, growing at a faster pace than the internet back in the day.
It seems that this year, NFTs have contributed greatly to the speed of crypto adoption. Perhaps even more importantly, NFTs finally managed to attract a totally different set of newbies to the industry, who are neither interested in fiscal policy ideals nor complex DeFi-yield farming nor automated market makeing. Still, looking again at the adoption curve above, it also becomes clear that we are still at an early stage of an emerging industry/technology.
We are still early - but maturing more and more
Is it just a new hype for a new audience you might ask? Will NFT projects leave a similar bitter aftertaste as ICOs did? The answer is yes and no. Given that a great part of the industry is still considerably young and at the “experimental stage”, it has to be assumed that a great number of existing NFT projects will eventually die, become irrelevant or change completely when the current hype eventually levels off. What is different however to the previous ICO hype is that the entire market, as well as the underlying infrastructure, has grown more extensive and advanced than three years ago. Besides the growing general adoption rate and increased liquidity in the digital asset markets, the following underlying factors should be considered when considering the magnitude of today’s NFT hype:
- Different market participants: NFTs are relevant to a different set of market participants, both on the issuing side (e.g. famous artists and well-known corporates) as well as on the buy side. NFTs have attracted a new mass audience beyond the scope of fintech-savvy people.
- Different product stage: Unlike many 2017-hype projects that used an ICO to fund their garage-stage crypto-startup/scam, NFT projects today are often built upon an existing community (e.g. sport clubs, influencers) or product/services of existing companies (e.g. marketing tool, user interaction) with the consequence that NFTs are underpinned by a more credible and established projects.
- Higher public awareness: Crypto topics are already covered in mass media almost daily while famous people across many industries get themselves (and their communities) involved.
- Lower entry barriers: User experience has improved tremendously through easy & fast fiat on- and off-ramps (e.g. through mainstream mobile apps), user-friendly wallet UIs, seamless usability and integrations into de- and centralised marketplaces. Ignoring the topic of proper security setups, it has never been easier to access the crypto ecosystem, in fact the experience is arguably better than traditional financial applications.
Considering the above-mentioned factors, it could be argued that the current craze for NFTs will not fade away that quickly. Despite this many financial industry experts and leaders have missed the boat, while more and more individuals and companies starting to explore more opportunities that arise from NFTs. The topic of non-fungible tokens is not expensive JPEGs, but rather the exploration of new technology and with it, potential revenue models or use-cases bringing us a step further toward the metaverse.