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WTF is an NFT?!

Over $69 million! That’s the astronomical price that the highest-grossing NFT by artist Beeple sold for on March 11, 2021. And Beeple isn’t the only one making the big bucks. Cryptopunks, the creators of the first NFTs, made millions selling out all 10,000 of their pixelated character portraits. The top-selling of which grossed over $7.5 million!

In total, over $100 million in NFTs has been sold in the last 30 days. For reference on just how much that is, NFT sales for all of 2020 were just over $250 million. That’s a 500% increase in sales, so it’s safe to say the NFT market is booming.

All of the money pouring into NFTs has generated a lot of hype, but WTF even is an NFT? If you’ve been asking that question and are getting some serious FOMO, I’m here to help you out. In this post, I’m going to break down what an NFT is, tell you how they use blockchain technology and what that even is, fill you in on why they’ve become so popular, and give you my opinion on whether their popularity is here to stay.

What is an NFT?

NFT stands for non-fungible token, and since that probably didn’t help your understanding at all, here’s what that means. Non-fungible means that the item is one of a kind and can’t be exchanged for another one of the same item. For example, an original piece of art by Ashley Longshore (If you don’t know who that is, look her up. She’s incredible.) is non-fungible because only one exists. If you make 100 prints of her original piece, those are fungible because you can exchange one print for another copy of the same print.

It’s pretty simple to understand this in terms of physical art, but how does this translate into the digital art being sold as NFTs? Well, just like you need proof of authenticity for a piece of tangible art, buying an NFT gives you proof of authenticity for a piece of digital art. Sure, other people can make prints of the art, but they won’t have the real thing like you do. And you might be thinking, but isn’t it super easy to just fake this “certificate of authenticity” on the internet? Not with blockchain.

What is Blockchain

Blockchain is a type of database structure that stores information in a block, and once the block is filled, it chains it to the previous block. It then starts entering new information into a fresh block, and once that block is full, it gets chained to the previous block, and the cycle continues. This system stores data chronologically instead of the way a typical database does where the information is stored in a table format similar to what you see in an Excel spreadsheet, but on a much larger scale.

Another key feature of blockchain databases is that their information is typically stored on a decentralized network of computers. This setup is what makes it super hard to tamper with stored information or create fake certificates of authenticity.

A typical database’s information is stored on many computers that a company owns and houses in a single location. If the company wants to tamper with their stored data, they can easily do it because they have access to all of the components of their database.

With a decentralized database, like Bitcoin’s, the thousands of computers that store their information are owned and housed by thousands of different individuals. If one of these computers alters the information stored on it, all of the other computers, or nodes in the network, will recognize the altered information as incorrect and restore it to its original content.

This means that to fudge a certificate of authenticity, you would first have to get more than half of the individuals in the network to agree to modify their data in order to get the rest of the computers to accept the change. If politics is any indication of how hard it is to get the majority of people to agree, it’s safe to say that this task would be incredibly difficult. Unless you can climb that insurmountable hill and get over 50% of the nodes to agree to falsify their information, the rest of the nodes will never recognize your fake certificate as legit and will remove it from the database.

This almost tamper-proof technology is obviously great for traceability and security, but how is it making NFTs so popular?

Why NFTs are so Popular

The first reason is their ability to increase the value of a digital artist’s work. Before NFTs, digital art could be copied countless times, and the artist would never be compensated. This issue is demonstrated well by popular memes.

When a meme goes viral, everyone wants to use it so its demand increases. In theory, this increase in demand should push the meme’s price up, and generate more money for its creator, but since the supply of a viral meme can be increased by making a copy for free, the creator can’t take advantage of the popularity of their work and charge more for it. NFTs changed that.

Think of it like Van Gogh’s Starry Night. You’ve seen it everywhere. On wall prints for your house, postcards, mugs, you name it. And all of those knock-offs don’t decrease the value of his original oil on canvas, but rather, they increase it. The more people that recognize it, the more priceless it becomes.

NFTs could make the same possible for meme creators and other digital artists. When a meme goes viral now, the creator can sell the original copy as an NFT at a high price tag. If free copies of that meme keep circulating on the internet and generating more popularity, the original work will continue to increase in value, and the artist can capitalize on that.

On top of being able to sell their original work for top dollar, digital artists selling NFTs can also receive a royalty on all future sales because they maintain the copyright to their work. This is similar to how musicians receive royalties on their songs and albums well after their original release. NFTs make it possible for visual artists, writers, and others to continue earning money on one piece of art for years or decades after its first sale. 

In addition to the perks for digital artists, NFTs have also created a new market for art investors. Since the value of digital art can now appreciate, NFTs can be used as investments. This is what’s driving the price of the pieces selling for millions. It’s the same concept as a rich person buying a million-dollar work of art to hang on their wall in the hopes that years later, they can sell it for double the price. While the prices being paid for NFTs seem wild right now, investors expect these works to continue increasing in value, which means they can sell them at a profit in the future. But like with all speculative investments, the future value of NFTs is unknown. 

Will it Last?

Here are my predictions

  • Rich people gonna rich! Rich people will continue creating million-dollar valuations for digital art so they can invest in it and trade it amongst themselves, just like famous paintings and sculptures. For retail inventors like you and me though, I don’t see a great investment opportunity. When they start selling fractional shares of NFTs and create mutual funds for them, then we can get in on the action. Until then, us normal folks will be priced out of using NFTs as investments and will just keep stealing free digital art “prints” and won’t care at all about having the certificate of authenticity. 
  • If musicians start selling exclusive tracks as NFTs, it’s only a matter of time before we start using a platform like LimeWire to illegally download them for free. We’ve become accustomed to free music and I don’t see that changing, whether it’s fair to the artist or not. 

There have been several artists that have complained about the tiny cut musicians receive from streaming platforms like Spotify, but I just don’t think most people care that artists like Taylor Swift want several million more dollars. I do think original copies of heavily downloaded songs could sell at high valuations just like visual art NFTs currently are but I’m less certain about how this will affect the music industry.

  • The most beneficial thing for smaller artists will be the transparency behind the compensation other artists receive for creating content for big brands. NFT transactions hide nothing, so more artists will be able to see the rates other artists charge brands to use their content, which could increase the earnings for smaller creators. 

This transparency may also make it harder for brands to steal marketing content. Nowadays, if an artist claims that a brand stole his/her content, it’s pretty much a he said she said battle. Since small artists often can’t afford top-notch attorneys to compete with a brand’s legal team, it’s hard for them to prove a brand stole their content and seek compensation. This isn’t the case when it comes to NFTs, though. NFTs have a highly transparent ledger of ownership, so if a brand uses a creator’s content without authorization, the public could quickly look in the NFT ledger and see that the brand stole the artist’s work, which would be a PR nightmare.

  • These transparent and secure NFT transactions could also be used to streamline the buying and selling process of everyday one-of-a-kind items, like houses and cars. Using NFTs for these transactions would allow ownership to easily be established and transferred during purchases.

So I think it will be a while before NFTs become good investment opportunities for regular Joes and Joanns, but I also think their use of blockchain technology could start benefiting us immediately in other ways. They could provide a means for more digital artists to earn income, their traceability and transparency could help prevent billion-dollar brands from stealing small artist’s work, and they could streamline the buying process for other asset classes. Overall, I think NFTs are here to stay, but as for whether Beeple’s NFT will sell for more than $69 million in the future, I have no idea.

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