Non-fungible tokens (NFTs) are revolutionizing the art and collectables markets. An article that recently appeared in Time Magazine pointed out that NFT sales have topped $200 million in the last month alone. This follows a February article in the Coin Telegraph that put total 30 day sales at $100 million. Underneath these astounding sales figures is a technology worth learning more about.
In a technical sense, an NFT is a tokenized ownership contract over a collection of metadata. These contracts live on blockchains such as Ethereum and Worldwide Asset eXchange (WAX). Like other crypto tokens, NFTs can be bought, sold, and traded. They can also be minted in such a way as to prove their scarcity. Some of the most expensive NFTs are entirely unique, and their creators go to great lengths to publicize this uniqueness. The most prominent example of this so far is the group that torched an original Banksy to make the artwork exist only in digital form.
The most important piece of metadata in an NFT is usually a pointer to an image or other media file. The media file itself is almost never stored directly on the blockchain. Instead, the file is stored on InterPlanetary File System (IPFS) or on a private server, and a pointer to this file is stored as metadata on the blockchain. Other important metadata contained in an NFT can include the artist, other creative contributors, item description, and information about the item's scarcity, such as mint number.
The ownership contract part of an NFT can be as simple as a blockchain ledger entry saying who owns the digital property. But more complex ownership contracts are commonplace. These more complex arrangements allow an artist to mint an NFT, sell it, then collect a royalty percentage every time the NFT is subsequently sold. This motivates people to mint NFTs of lasting value. It also creates interesting market dynamics that may lead to surprises down the road. For the latest data on NFT sales, check out CryptoSlam.
The NFT market is not without controversy. The explosive growth of this market's financial value may be unsustainable, leading some to call it a speculative bubble. But this may be less of a criticism than an simple observation. The NFT market is brand new. It will probably go through several boom-and-bust cycles, much as crypto prices have over the past several years.
The electrical energy consumption of Ethereum has also led NFTs to be criticized on environmental grounds. "An NFT sale on Ethereum can result in the consumption of as much as 8.7 megawatt-hours of electricity," according to Wired. Such energy consumption is clearly problematic for Ethereum NFTs, but it is irrelevant to NFTs on EOS or WAX, which consume trivially small amounts of power. Moving forward, Ethereum may also transition away from proof-of-work, which would curb its energy usage.
Perhaps the most controversial issue facing NFTs today concerns their permanence. This issue has been getting lots of press. A recent article in The Verge was headlined, "Your million-dollar NFT can break tomorrow if you’re not careful." Here's a quote from that article:
"The animation that Grimes sold for $389,000 is primarily sourced to a pair of traditional URLs, which could break down if either of the two different companies (Nifty Gateway, the auction site; or Cloudinary, the web host) went under."
This is a big deal for Ethereum NFTs. A related problem is the security of the URL pointed at by an NFT's metadata. On OpenSea, an artist recently changed the art behind a set of already-minted NFTs to illustrate this problem. If the art connected to an NFT can disappear due to hosting issues or change at an artist's whim, the tech will fail to deliver on its promise of secure digital assets.
Fortunately, this problem has already been solved by WAX and EOS. The solution involves three elements. First, files referenced by NFTs are stored on IPFS instead of on some corporate server. Second, only the IPFS address is stored, so it doesn't matter if an IPFS gateway URL remains active. Third, the files stored on IPFS are maintained indefinitely, making them persistently available.
Why Should You Care?
NFTs give artists access to new markets. The world of fine art has arguably been stagnant for decades, with artists unable to connect with serious buyers and would-be collectors priced out of the game by hedge funds. Tokenized digital art with verifiable scarcity completely changes the game. So far, the most expensive fine art NFTs are being minted on Ethereum, but that could change.
NFT commodity collectables get less press than fine art, but what's happening with them is just as exciting. Instead of collecting physical postage stamps or basketball cards, people are collecting their digital equivalents. Beyond virtual trading cards, NFTs make it easy to trade items or other property used in games. Most of this action is happening on WAX.
If you care about art or collectibles or emerging technologies, you should care about NFTs.