NFT 101 – The complete guide on all that is NFT

March 11th, 2021 was a normal day by most standards. At least that’s what Mike Winkelmann thought until the news hit. Better known by his digital pseudonym, Beeple, he quickly became the viral artist who sold the most expensive NFT ever for a whopping $69.3 million. Titled “Everydays – The First 5000 Days”, his digital work of art was auctioned by Christie’s, forever cementing Beeple’s name in the record books as one of the top 3 most valuable artists of all time. For many, this monumental move came as a surprise. Not even Winkelmann himself could have anticipated the ravaging interest in his digital art to blow up to these proportions. But this auction was simply a precursor to what NFTs can potentially unlock for the crypto-blockchain industry. In the words of Noah Davis, a specialist in post-war and contemporary art at Christie’s, ” It was just so monumental and so indicative of what NFTs can do.” 

But it isn’t just the world of art that’s been revolutionized. Twitter CEO and Founder, Jack Dorsey, sold his first-ever tweet as an NFT for $2.9 million. A community member went as far as purchasing virtual plots of land in the virtual game of Axie Infinity for $1.5 million. From online cats to music albums to sports footage, everything can and is being sold as an NFT. Mind-boggling, isn’t it? After all, why would anyone want to shell out six figures for a video, gif, or jpeg? 

Well, to understand that, we first need to dive deep into untangling all the loose threads about NFTs. 

Let’s begin. 

WHAT THE HELL ARE NFTS? 

NFTs or Non-Fungible Tokens are blockchain-based assets that are unique, non-imitable, and wholly-owned by someone. If you own an NFT, you hold complete ownership rights over a digital product – the product can be anything from a video clip to a picture to a video game character. Imagine buying a plot of land in Manhattan. Once the deed is transferred to your name, no one else can stake a claim to it. People can admire the land from afar or even walk through it but the sole ownership rests with you. NFTs operate on a similar level, just with digital assets. 

Simply put, an NFT is a code that’s associated with a particular file along with a certificate of authenticity. This file is stored on the blockchain ecosystem, ensuring that the real owner’s information and ownership rights are not duplicated. This is what makes them unique in nature and hence their immense value. 

Wait. Wait. Wait. How does blockchain figure into this whole picture? Blockchain can be defined as an electronic universal ledger of online transactions that are stored across all the computers or nodes that are part of the network. This makes it nearly impossible to hack or alter transactional data since even a minor change will have to be duplicated over thousands of computers. NFTs are stored on this secure network along with a unique identifier that distinguishes it from every other token. The unique identifier makes them easily traceable and distinguishes them from copies. Anyone can peek into the open blockchain network to find out who the real owner is. 

Look at it this way. You can see the Mona Lisa in a museum for however long you want. You can take photos, download online copies, and frame a counterfeit in your home. But you’ll never be the rightful owner of the original painting. Since each NFT is stored on the blockchain network, the original work can always be traced down to its actual owner. No matter how many screenshots of the digital art you have on your phone. 

Naval Ravikant, Founder of AngelList, put it best – “By assigning a unique token to a thing, its ownership (and not the thing itself) becomes programmable, verifiable, divisible, durable, universally addressable, composable, digitally secured, and easy to transfer.”

HOW ARE NFTS ANY DIFFERENT FROM CRYPTOCURRENCIES? 

The difference between a million-dollar NFT and Bitcoin lies in the name itself. The ‘fungible’ in Non-fungible tokens refer to interchangeability, as in, having the ability to change it with a similar token. Such as Bitcoin or Ether. Each Bitcoin is similar to the next. Individual coins have no defining features or markers to make them unique. Much like the fiat currency we use in our everyday lives. 

If you loan a $100 note to a friend and he returns the money back to you after a month, it won’t matter whether the note is the same or not. The $100 will still be $100. On the other hand, a flight ticket that you hold cannot simply be swapped with another ticket. The ticket that you purchased contains your personal information, your seat number, your flight number, and your destination amongst other details. If you switch tickets with another person, anyone can easily find out. 

This is the primary difference between NFTs and cryptocurrencies. The fungibility of crypto is what makes it transactable. Each Satoshi is as valuable as the next. They can be substituted with one another and no one will ever know the difference. 

On the other hand, ownership of an NFT is not reversible. Once it’s been punched into the network, it becomes a permanent part of history. NFT ownership can only be transferred from one person to another. 

THE PROPERTIES OF NFTS

1. Each NFT is unique – The digital value of each NFC lies in its uniqueness. No two NFTs can ever be the same. Referring to the Mona Lisa example above, no other painting in the world can be similar to the original Mona Lisa. 
2. Irreplaceable – Two NFTs cannot simply be replaced with one another. They can be traded for other NFTs but they’ll never be the same. 
3. NFTs must be whole – NFTs can’t be broken into smaller parts and sold. Each NFT has to be whole to be an NFT. Bitcoins can be broken down into smaller Satoshis and dollars can be broken down into cents. But NFTs must remain whole. 
4. NFTs must have an owner – No NFT can exist without having an owner. The ownership can change hands when necessary but it’ll never be held ownerless. Moreover, all this information can be tracked using blockchain’s public record. 
5. Token Standards – Developers need to comply with specific blockchain token standards for a successful token launch. These standards are a set of rules and regulations that tokens must follow to make them compatible with blockchain platforms. Most cryptocurrencies are based on the ERC-20 standard. While NFTs use the ERC-721 and ERC-1155 standards. 

The ERC-721 standard represents a non-divisible asset class with no interchangeability. All information about the owner and the asset is stored in personalized smart contracts. This standard is known for its transparency, security, and immutability. 

The ERC-1155 standard is a multi-token standard that is used when trading multiple tokens at once. It supports both fungible as well as non-fungible tokens. 

SO WHY ARE PEOPLE PAYING MILLIONS FOR CRYPTO ART? WHAT MAKES THEM SO VALUABLE? 

What convinces the big players to shell out truckloads of money for a piece of digital art is its authenticity, provenance, and rarity. Since each NFT is tied to the blockchain system it can be verified for its originality. The digital product itself might not be unique but the NFT is. This makes it comparable to owning physical artifacts. For instance, a signed original Picasso can be verified for its authenticity and priced accordingly. Crypto art too can be verified using NFTs. The scarcity of unique NFTs makes them so valuable. 

NFTs also derive much of their value from people’s perception of supply and demand. According to the Subjective Theory of Value (STV), a service holds no inherent value in itself but is dependent on how important it is to the consumer. An Armani suit holds more value than a Zara one because the consumers think so. Supply and demand fundamentals also come into the picture. Due to the non-reproducible nature of NFTs, their demand outpaces the supply. These factors combined explain why NFTs, despite their intangibility, continue to be worth a lot of money. 

ADVANTAGES OF NFTS

1. The biggest benefit lies in the hands of up-and-coming digital artists. They get a platform to not only monetize their work but also get paid handsomely. NFTs have turned digital art into rare, collectible items making them as valuable as physical pieces of art. Additionally, the smart contract can include clauses wherein the artists can get royalty payments every time the art piece changes hands. This allows them to get a chunk of the profits in case their work blows up in value over time. 
2. The integration with blockchain makes NFTs a promising and secure investment. Moreover, NFTs can be used to signify ownership of physical objects and items too. 
3. The recent surge in the NFT market can be attributed in part to the ease of accessibility. One can simply scour the Internet for websites where NFTs are traded. 
4. The non-fungibility aspect makes them unique. Counterfeiting is nearly impossible because tampering with blockchain records is extremely hard. 
5. The market for NFTs has skyrocketed since December 2020. People aren’t just collecting tokens for bragging rights anymore. They’re looking at them as tangible investments with sizable returns. 

HISTORY OF NFTS

It all began in the sultry year of 2012. Yoni Assia published an article titled, “Bitcoin 2.X (aka colored Bitcoin) – Initial Specs”. This article was the first to mention colored coins, precursor to the NFT. Colored coins could be issued on the blockchain ecosystem and assigned to hold a value of as little as a single Satoshi. But what separated it from other Bitcoin transactions was that these coins were uniquely identifiable. A paper published by Meni Rosenfield explored the idea of assigning colored coins to represent multiple asset classes. This opened the doors to using NFTs blockchain to hold real-world assets. But blockchain back then wasn’t built to enable such behavior on its platform. It was only in 2014 when Robert Dermody, Adam Krellenstein, and Evan Wagner founded Counterpart that a more flexible blockchain ecosystem suitable for asset creation was introduced. 

Counterparty afforded its users the opportunity to create their own tradable currencies and assets. The creators of the Spells of Genesis video game were the first people to issue in-game assets via Counterparty. In 2016, the fourth largest selling trading card game in North America, Force of Will, partnered up with Counterparty to launch their cards on their platform. This was the first time a large, mainstream company had entered the NFT ecosystem. Soon, community members on Counterparty began trading in memes, primarily the Rare Pepe, a frog meme that had gone viral in 2016. While this may sound quirky, meme trading played a huge role in convincing outsiders that there was a market for NFTs and digital items. 

In June 2017, John Watkinson and Matt Hall started a project called Cryptopunks. Building on the popularity of the Pepe meme directory, they created 10,000 unique characters on the Ethereum blockchain. These Cyberpunk characters were initially offered for free and were snapped up by users almost immediately. Cyberpunk soon turned into a thriving secondary marketplace where characters were being traded, sold, and bought digitally. 

In October of the same year, came the biggest boost for NFTs. Cryptokitties!! For those who are unaware, Cryptokitties is a blockchain-based virtual game where one can adopt, raise, breed, and trade virtual cats. This project was covered by several mainstream media houses giving it universal appeal. In fact, many of these cats were sold for upwards of $100,000! The success of Cryptokitties prompted the founders to spin off a startup called Dapper Labs that received funding worth millions from the likes of a16z and Google Ventures.