NFTs: What they are and why everyone’s talking about them
Considering different NFT types, use-cases, and their future
Welcome back!
This week I finally veered off the path of crypto policy. It was bound to happen eventually, and I’m sure you all would like a break from the usual content (I know I would).
As mentioned in my first newsletter, I got interested in crypto through NFTs. Finally, the time has come for me to talk about them.
You’ll notice that this article is more “casual” than my other ones. Art is a topic that hits close to home, as you’ll read about, so it deserves a more warm approach.
I hope you enjoy it, and see you next Friday.
-Katja
NFTs: What they are and why everyone’s talking about them
Anyone who knows me, knows that I love art. I love looking at it, learning about it, and making it. But my love of art isn’t unique. As people, we are all drawn to art because it is a mechanism that stores our collective history and showcases our current societal values and fascinations.
Even if you have no interest in art, you can’t escape it. Whether you’re looking at graffiti on the side of a building or a graphic tee, art is simply everywhere.
Because of this pervasive nature of art, we have forgotten (or never even cared to learn about) the long and arduous journey artists have gone through for us to live the way that we do. At one point, every pigment, medium, and artistic style was considered outrageous and shocked society.
It seems surreal to look at a Pollock and think how those splatters of paint came about from tens of thousands of years of creativity and innovation. Without our ancestors painting caves over 40,000 years ago, we wouldn’t develop the ability to visually express ourselves. Without such an ability, the Egyptians wouldn’t have a need to create new colors from semi-precious stones. Without the Egyptians creating new colors and adopting artistic tendencies, the Christians wouldn’t have ushered in the Romanesque period, the first mass artistic movement. Without such a movement, we wouldn’t have Romanticism and the creation of tin tubes to store paint.
For thousands of years, people continued to push the boundaries of what is possible and imaginable, and this is what eventually allowed Pollock to famously throw paint at a canvas.
Change is rarely easy and simple. Every new way of doing things brings with it a wave of resistance fueled by misunderstanding and fear.
That is how we got to today. Artists continue to adopt the latest technologies, despite society’s reaction to them. At one point this technology was tubes of paint and a canvas, but now it’s the blockchain. Through NFTs, the blockchain has provided an opportunity for art to become more ubiquitous, accessible, and influential.
In this sense, saying an NFT is just a JPEG misses the whole point. Don’t get me wrong, there are plenty of bullshit NFTs that try to maximize profits by preying on the ignorant. But at the heart of the emerging technology is an incredible force that is propelling art into a new era. It’s history in the making.
NFT basics
NFT stands for non-fungible token. “Fungible” means replaceable, and “token” means an asset that allows the transfer and storage of information and value. Putting it all together, an NFT represents some unique asset. “Represents” is important here because the NFT in itself is not the asset.
An NFT serves as a tool by converting the asset’s details into a sort-of “digital ID card” or “signature” that lives on the blockchain. For example, making a doodle into an NFT would require converting information such as artist, date, and medium into a chunk of code (this is the NFT) that can be put on the blockchain.
The process of creating the code is called tokenization (turning an asset into a token). Once an asset becomes a token, it can be moved, stored, and (most importantly) recorded on the blockchain. On the blockchain, the token becomes immutable, unique, permanent, provably scarce, and counterfeit-resistant.
You may be thinking, NFTs are online and a simple “right-click” and “save as” would mean I now own that doodle. Of course, everything digital can be infinitely copied, and NFTs don’t try to prevent that. What NFTs do is allow you to distinguish “copies” from the original, promoting a “trustless digital scarcity” that gives the work its value.
Types & use-cases
In all likelihood, the first time you’ve probably heard about an NFT is when a celebrity bought some “monkey JPEG” for millions of dollars. Seeing this, NFTs may seem like a foolish waste of time and money, equivalent to throwing dollar bills into your backyard campfire.
However, these “monkey JPEGs” are just one use-case of one type of NFT. This use case is called PFPs (profile picture projects), and (as much as I don’t want to do this) we can group them into a larger category of “art” NFTs. Other NFTs fall into other categories that have different use-cases. Below, I outline some of these as well as offer examples of popular projects.
Art. This is a fairly large category of NFTs and can include anything from traditional art to photography to AI-generated art to fashion. An art NFT set off the 2021 NFT craze and has become one of the most well-known NFTs. It is a work by Beeple called “Everydays - The First 5000 Days,” and it sold for $69 million.
Collectibles or PFP. I mentioned the monkey JPEGs before, and now I must introduce them formally: Bored Ape Yacht Club (BYAC). These PFPs, alongside CryptoPunks (one of the earliest NFT projects), are the most famous collectible NFTs and they sell for millions of dollars.
A different type of collectibles come from sports. NBA’s Top Shot tokenizes moments from NBA games, which can be thought of as baseball trading cards but instead of pictures of players it’s videos of moments in a game. Other sports leagues, like the NFL, have started to join the madness with their own platforms.
Music. We’ve heard repeatedly about how difficult it is for artists to make money off music streaming. The countless intermediaries chip away at the ownerships rights for a piece of music until the artist is left with almost nothing. NFTs can fix this problem by removing the middlemen and giving the power back to artists.
Gaming. Not only are some games trying to develop mechanisms for importing art NFTs (like avatar skins), but full games have been created on the blockchain with the main components of the game being NFTs. Two examples stand out: CryptoKitties and Axie Infinity.
CryptoKitties was the first game built on the Ethereum network and one of the first adoptions of NFTs. It allows you to collect, breed, sell, and trade virtual cats (each cat is its own NFT). It was experimental at the time it was released, and, even though it doesn’t sound like much, it quickly shined a light on some of the scaling issues present on the Ethereum blockchain (triggering a movement of L1 and L2 solutions).
Axie Infinity is a “play-to-earn” game, where users get paid to play the game, which involves purchasing monsters (NFTs) and pinning them against each other in battles. Axie Infinity took off during the pandemic with some people even quitting their full-time jobs to earn money through this game.
There are also other types and uses of NFTs like domain names, metaverse land, real estate, finance, among others, which I’ll have to save for a future discussion.
NFTs don’t come without problems
Turning physical objects into NFTs brings certain issues. For one, the NFT is supposed to be rare, which is part of its appeal and value. This rarity aspect gets diminished if the supposed “original” that is the NFT has its own original (the physical copy).
To solve this issue, artists have employed several methods like burning or disposing of the original work (after taking a photo of it) or sending the original work to the NFT purchaser.
I don’t think I have to explain why destroying an original work of art is sad and ridiculous. Several solutions have been proposed to avoid such an archaic practice (look out for a future article on this soon).
Another problem comes up on the blockchain network itself. Because of scaling issues, the more people trying to purchase or sell NFTs, the higher the transaction fees and the slower the transaction speed. I talked about this issue and potential solutions in a previous article, so I won’t rehash this topic here.
Future of NFTs
Over 2021, NFT sales climbed to almost $12 billion. In the past month alone, NFT sales have already hit $5 billion.
As Dragos Dunica, co-founder and chief data officer of blockchain analytics platform DappRadar, put it:
"NFTs are continuing to perform well not necessarily ‘despite’ falling crypto prices, but arguably and in part because of that … Investors are currently getting a discount for the most hyped digital asset class, at least on fiat terms, and as NFTs maintain their upward trend, this discount might turn into a neat return on investment as crypto prices pick up too.”
Despite this huge movement to ape into NFTs, many are (in a lot of cases) rightfully criticizing the industry. While some have critiqued the “art” put on the market, others have voiced serious accusations regarding wash trading and money laundering as well as general criticism over the “disastrous” NFT landscape. (I’ll have to save this discussion for another time.)
NFTs are very new and will develop over time. Despite their current downfalls, NFTs will continue to change how art is bought and sold, what kind of art is valued, and which artists are valued. You don’t have to love what you see on the NFT marketplaces, as long as you can appreciate the revolutionary technology behind them (and the power it has given back to modern-day artists).
Crypto news of the week
Here are some of the big NFT developments from the past week…
GameStop partners with Australian blockchain startup to develop NFT marketplace
Bored Ape creator seeks funding from Andreessen Horowitz at $5B Valuation
Disney looks to hire NFT expert to lead its efforts in the space
Tom Brady just retired to spend more time at his NFT company
Pixel Vault raises $100M for NFT development platform