NFT’s are blockchain verified, programmable digital assets that are helping to shape our digital culture. Sounds confusing? Read on.
The basic principle behind NFTs is actually quite simple. The NF stands for non-fungible and the T stands for token. Non-fungible means non-exchangeable, or unique, and token, at least in this case, means a digital thing or asset. So, in their most basic sense NFTs are unique digital assets.
NFTS are “non-fungible” because they cannot be replaced by another identical item. It’s the opposite of fungibility, or interchangeability. A $5 bill is a fungible item because it can be replaced by another $5 bill which is worth the same, as is an unopened iPhone. Most items in our world are non-fungible, such as a pet, person or painting. These things can never be traded exactly one for one, making them non-fungible.
Digital goods such as art, song files, video clips, tickets and legal documents can be turned into NFTs which can be bought, sold, or traded using cryptocurrency. What’s special about an NFT, as opposed to the art in your home, is that an NFT is created (or “minted”) on a blockchain, making it completely digital, trackable and unique.
The blockchain is the magic behind preserving the authenticity and verifiability of an NFT. What’s important to note here is that blockchains are a public record of transactions containing important data such as date of creation and transfer of ownership. This ensures that NFTs are verifiable and guarantees that there can only be one official owner of an NFT at any given time.
How do NFTs work?
How does a digital asset transform into a verifiable, blockchain-backed NFT? The process is known as minting, which initiates the creation of a new block that is validated and recorded on the blockchain. This block is the genesis block for that NFT, and this minting process is irreversible.
As NFTs are bought and sold and ownership changes, new blocks are added to the blockchain and act as a record. When an NFT is purchased the ownership will be transferred to the buyer's wallet proving their ownership. The token’s history will show the public key of the content’s creator for authenticity purposes.
Selling and trading NFTs is not tied to any single platform. While popular marketplaces such as Opensea attract a lot of attention, there are many other NFT marketplaces to choose from, depending on your preference.
Some NFTs simply represent a piece of art or music, while others include utility that provides the investor with real world rewards such as unreleased content, exclusive experiences and limited-edition merchandise. This is all made possible by the genius of smart contracts, the core of blockchain technology and NFTs. Smart contracts follow automated conditional actions, meaning if X event occurs, Y will be performed. Although this seems simple and perhaps even obvious, this feature allows for brands and artists to connect with and provide value to their audiences like never before.
But can’t I just Right Click & Save?
Although it is commonly argued that one can simply right-click and save a JPEG image of an NFT and therefore own it, such action is akin to taking a picture of a painting and saying you now own it, or better yet, wearing a fake Rolex. Possession of a digital asset and ownership of a digital asset are two separate things. NFTs provide publicly verifiable authentication of digital asset ownership, and also entitle the owner to full access to the conditions and extras provided within the smart contract that backs a particular NFT.
What’s the point of NFTs?
For artists, NFTs provide a direct link to their audiences, largely removing the need to sign with record labels and other intermediaries. This allows artists to keep the rights to all their music, retain creative control, and receive a much larger chunk of the financial pie. It provides a way to raise funds, access a new market and build and nurture their community like never before.
The benefits for brands are much the same. NFTs provide a means to connect with and maintain a community the likes of which social media has never been able to facilitate. Having the ability to raise funds, provide value and give an asset automatically is something that brands will learn to harness and utilise in coming years. NFTs also provide a means to data that would otherwise not be available with such micro transactions, meaning that top followers can be recognised, rewarded and ascended within the brand, increasing their lifetime spend and making them the perfect vehicle for ongoing brand evangelism.
For investors, NFTs provide a means of investing in a brand or artist that they love or believe in, and the opportunity to be financially rewarded if the brand accumulates success along the way. Think about the potential if a fan could own a part of Post Malone before he got big. They provide a way for the investor to engage with their artist or brand of choice, become a part of their story, and connect with others who have the same interests.
How does trading work?
NFT’s can be traded and sold via the secondary market. In January 2022, Opensea, a leading NFT secondary sales marketplace, saw its monthly trade volume in Ether (ETH) exceed $3.5 billion, breaking all previous records (Dune Analytics). This has opened a unique opportunity for NFT collectors to buy, trade, and sell their NFTs for profit. Investment into NFT projects should be cautioned, however, as trading NFTs, like any asset class, requires skill, experience and up to date knowledge of the market.
As apex projects deliver more value to their holders, floor prices of NFTs rise, driving demand for often scarce supplies. This allows communities and creators to grow their project value and reward their holders. The best part is all profit and royalties from secondary sales go directly back to the creator and communities without a middleman.
Are there risks involved when investing in NFTS?
As with any investment, risk taking is involved. It is important to understand and evaluate your own personal risk tolerance and decide whether an investment is right for you. When compared to a more traditional investment such as stocks, NFTs are riskier. This is largely due to their infancy and therefore instability. The market is very small, reactive, and in our opinion, inflated. However, we believe these risks will begin to subside as the market matures and more mainstream adopters and investors move in.
There are also a variety of scams and issues to be aware of when trading. More on how to navigate the market safely coming soon.
The Wrap Up
NFTs present a new and exciting way of owning a digital asset that was not possible before. The explosion of interest in this space is leading to a rapidly evolving ecosystem that brings many opportunities to creators and collectors alike. Safety and security are paramount in these early days, and as with any new technology, there are those who see vulnerabilities and opportunities to cheat and scam the system.
NFTs are in their infancy and very complex, which brings challenges and problems to be solved. The responsibility is with the builders, making sure that the space is diverse, equitable, accessible and sustainable. We are here to continually educate our followers and help onboard artists, brands, builders and investors into the ecosystem with these principals at the core of our strategies. Stay tuned.