On 11th March 2021, Beeple (a.k.a. Mike Winkelman) witnessed auction of his NFT called “Everydays: The First 5000 Days”, which is nothing but a collage of 5,000 digital artworks he has crafted since year 2007. The auction started from $100, went up to $1 Million within first 10 minutes and finally sold for a little over $69 Million. This NFT holds record for the most expensive NFT ever sold !!
This auction was carried out by Christies which is one of the Oldest & Traditional auction houses in the world, following is the tweet by Christies on 16 Feb 2021
Dogecoin NFT which is the original photo of famous Shiba Inu dog, which featured in legendary Doge meme from 2010 sold for record price of 4 million dollars in June 2021
This NFT has been divided into 17 billion pieces by art collector PleasrDAO and sold as ERC-20 tokens, it is traded live as Doge NFT
On March 21st 2021 Co-founder and CEO of twitter Jack Dorsey auctioned his first ever tweet as an NFT for $2.9 Million.
People are spending millions of dollars for purchasing digital rights for these things!! NFT has reached sales up to $25 billion in year 2021. From Art, Paintings, Music, Tweets to toilet paper these digital assets are selling in billion dollar volumes.
Few questions arise in our mind when we think about such transactions
Why would someone buy for an Image or Audio when it can be just downloaded and saved into our device?
What are such digital assets?
How can we buy or sell such NFT’s?
What is the technology behind NFT’s that makes them so secure to copyright?
Let’s first understand few terminologies before we can understand what NFT is,
Non-fungible, Blockchain and Digital asset. These three combine to create NFT (Non Fungible Token)
1) Non-Fungible
It means this art form is unique and cannot be copied or replaced with something else. Non-fungible items are rare, unique, irreplaceable and collectible. Items like Dollar, Rupees, Gold, Bitcoin, Cloths are fungible. We can change one thing with the other while few things like Mona Lisa painting by da Vinci or JK Rowling’s handwritten copy of Harry Potter or your first flight ticket don’t have any alternative and are non-fungible in real world.
But what about digital world, how can digital copy of something be non-fungible. We need to understand concept of Blockchain to really understand further
2) Blockchain
Blockchain, also referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through use of decentralization and cryptographic hashing.
A simple analogy to understand Blockchain technology is a Google Doc. When we create and shared a document on Goggle Doc, document itself is distributed instead of copied or transferred. This creates a decentralized distribution chain that gives access to the document at the same time and all the modifications are being recorded in real-time making changes transparent.
Blockchain stores things in the form of Blocks and chain together to form a secure way of bookkeeping. All the data is shared with multiple copies of it across the entire network. This reduces ability of data tempering and makes system trustable
3) Digital Asset
A digital asset is anything that exists in a digital format and comes with right to use. It can be anything Images, Audio files, Videos, Memes, Gifs, Art, Sports, Games etc. Digital asset can be anything in any format that provides value to the owner.
As we are becoming more digital, meaning of ownership is changing. People are buying digital gold in form of gold bonds, Digital currency in form crypto currency, most of financial transactions are happening online via UPI. Similarly using concept of NFT it is possible to make digital assets unique and have their ownership.
As we have understood what is Non-fungible, Blockchain technology and digital assets are we can put them together to define NFT’s
NFT is a Non-fungible (Unique) digital asset that can be traded online using Blockchain technology
To add new data, we have to add new block to blockchain network
Step 1 – A trade or transaction is recorded with details and with digital signature from each party. This creates a record. This basically creates a cryptographic puzzle.
Step 2 – Record is checked by the network. The computers in the network called ‘nodes’ check the details of the trade to make sure it is valid.
Step 3 – The records that the network accepted are added to block. Each block contains a unique code called a hash. It also contains hash of previous block in the chain.
Step 4 – The new block is added to the blockchain. Unique hash code connects blocks together in a specific order. Hence once block is added with unique has it cannot be changed or altered. To change single block entire network of blocks and chains has to be changed
How do NFT’s work?
On larger scale, most NFT’s are part of the ethereum blockchain. Ethereum is a crypto currency just like Bitcoin or dogecoin. But blockchain of Ethereum also supports these NFT’s which store extra information that makes them work differently from ETH coin. Even other blockchains have capacity to implement their own versions of NFT’s.
All the transactions of NFT’s happen using Ethereum (ETH) coins. As more people were transacting on the blockchain, it became hard to keep track of all these different contracts. Standards like ERC-721 & ERC-1155 solve for it and help create traceability, verifiable ownership, all with zero human intervention. Set of rules help to ensure interoperability and compatibility with exchanges operating in Ethereum ecosystem while blockchain network provides the security for transactions and ownership.
An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including:
- Art
- GIF’s
- Videos, Clips
- Collectibles
- Paintings
- Music and Audio clips
- Digital content (can be posts, tweets)
- Video game skins, Avatars etc.
Owner of NFT gets exclusive ownership rights. NFT can have only on owner at a time. Unique data and identity makes it easy to verify their ownership and transfer of tokens between owners.
What are NFT’s Used for?
It presents unique opportunity for artists and content creators to monetize their wares using Blockchain technology. Artists no longer have to rely on galleries or auction house to sell their art. Instead they can sell their art directly to consumers as an NFT, which lets them keep more of the profit. Artists can also program in royalties to receive a percentage of sales whenever their art is sold to new owner.
Digital art
NFT art market has boomed in 2021, it went up 800% from $52 Mn in Jan 2021 to $490 Mn in Apr 2021
Collectibles
Collectibles are essential application of NFT’s. E.g. CryptoKitties is a game developed on the Ethereum blockchain. It allows players to purchase, breed and sell virtual cats. There will only be 50000 Gen-0 kitties hence scarcity to own them.
Sports
NFT is getting traction in sports field. E.g. NBA Top Shot platform, it allows fans to buy, sell and trade official video highlights, within year this platform had more than 12 million purchases with $750 Mn sales.
Even brands like Charmin and Taco Bell have auctioned off themed NFT art to raise funds for charity.
It is just matter of time before areas like Finance, Music, Real estate etc. use NFT’s
Why do people pay for NFT’s?
Why people pay for NFT’s when it can be downloaded with a single click
1) Psychological Aspect
As we go up along Maslows Hierarchy of Needs we need more to satisfy our esteem and self-actualization needs. People need status and recognition by owing something unique. This aspect of human psychology is slowly moving from real world to digital world via NFT’s.
2) Pride of ownership
Owing something unique brings a sense of pride and gives owner a bragging right to own that that thing. E.g. people are buying land on moon or gifting or naming stars after them. It doesn’t mean anything in real world but beings sense of pride to owners
3) Speculation
All NFT transactions happen on cryptocurrencies. As cryptocurrency itself is first level speculation and trading NFT’s using crypto makes it to second level. It gives people thrill to own something in this digital world using two levels of speculation.
How to Buy or Sell NFT’s
In order to buy NFT’s we need digital wallet that will allow to store NFT’s and cryptocurrencies. NFT’s can be bought using cryptocurrencies like ether which NFT provider accepts or using credit card platforms like Coinbase, Kraken, eToro, Paypal even Robinhood.
NFT Marketplaces
Once digital wallet is set up with funds there are many marketplaces to shop for NFT’s. Following are the few largest NFT marketplaces
OpenSea.io – This is peer-to-peer platform bills itself a purveyor of “rare digital items and collectibles”. We have to create an account to browse NFT collections.
Rarible – Similar to Open Sea, Rarible is a democratic, open marketplace that allows artists and creators to issue and sell NFT’s. RARI tokens issued on platform enable holders to weigh in on features like fees and community rules
Foundation – Here artists must receive up votes or an invitations from fellow creators to post an art. The community’s exclusivity and cost of entry ensures higher calibre artwork.
Putting it all together,
It is undeniable that Non-fungible digital asset is a game changer and has inherent capacity as a particular type of digital asset that enables ownership for users. It removes the middle person between creator and consumer, distributes the value of goods in digital form through secondary markets and is transparent.
NFT’s are giving us new perspective about digital ownership of the content but there are problems like how to validate ownership? How to verify authenticity in digital context? How to avoid things like selling same NFT’s of different blockchain network or another platform? How to prevent someone from making similar copies of same art form? There needs a regulatory framework and proper copyright or similar agreements between owner and seller.
NFT helps us to bridge gap between virtual and physical world. Everything is turning virtual from currency to art forms. Day is not far we have to lead two lives one is physical world we live in and second is virtual world, Metaverse. It might happen that in future we will be spending more time in virtual world buying assets (already there), have virtual relationships and living in alternate virtual reality. Down the line NFT may turn out to be just bubble or it might be the start of new age of virtual world.