NFTs! What Are They?
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Images of pixelated apes—better known as non-fungible tokens (NFTs)—are the new crypto craze on social media. Over the past year, their trading volume has increased by an estimated 800 percent on marketplaces like Opensea. Generating about $25 billion in sales in the previous year, the collectibles have created a new, highly volatile market.
Though the tokens have been around since 2014, it was only after the growth of Ethereum—a public ledger that stores transactions and contracts—and meme culture that a “trading card” marketplace for digital art developed. In early 2017, creators John Watkinson and Matt Hall created cryptopunks, 10,000 uniquely generated pixel characters. These “punks” introduced the idea of unique art generated and traded on the Ethereum blockchain. Later in the year, Axiom Zen released CryptoKitties, a game where users could purchase, collect, and breed virtual cats. Shortly after, though the hype was short-lived, NFTs went mainstream and people flipped and traded the tokens for profit. It was only years later in January 2021 that NFT popularity exploded again as a result of the circumstances of the COVID-19 pandemic, combined with the growth of Bitcoin and the release of NBA Top Shot, an NFT marketplace for the National Basketball Association.
NFTs are traded on the Ethereum blockchain, based on the Ether cryptocurrency. By mining, the process of expending computational power to solve complex problems, computers are able to produce blocks, or references to transactions. They are verified by the PoW protocol, an underlying algorithm that validates blocks and sets mining difficulty, and are rewarded Ether. NFTs are traded using Ether and all trades are recorded on the blockchain. Smart contracts that represent agreements between parties in computer code are also stored alongside unique NFT metadata. The decentralized nature and blockchain technology that utilizes the ERC-721 standard for non-fungible tokens ensures NFTs are secure and distinguishable from one another.
An NFT itself is any digital content or piece of “art” with interchangeable static components that can create unique NFT tokens. Digital creators and artists create multiple components assigned to different seeds—random computer-generated numbers. These traits can also be given a percentage denoting their rarity. When these seeds are stacked in unique combinations, an entire NFT collection is generated.
NFTs differ from cryptos like Bitcoin and Ether from them being non-fungible, meaning they cannot be exchanged for other currencies like dollars or pounds. Each NFT is unique and distinguished by identification codes and copyrights written on the blockchain. A token is also not equivalent in value to another token and minted rather than mined. By “tokenizing” these assets, they can be bought, sold, and traded more efficiently while reducing the chances of fraudulent transactions.
The process of creating or minting an NFT involves converting a digital file into an asset on the Ethereum network. A seller must first create a wallet, an application that displays blockchain transactions. This is commonly done using the Metamask chrome extension, which provides a key vault that then provides access to the wallet containing private keys or passwords to cryptocurrencies. Most NFT marketplaces, such as OpenSea and SuperRare, can then connect to the wallet and automatically convert uploaded content into tokens. The process, which requires a unit of gas, or service fee, runs code to enter the token into the public blockchain. Afterward, the NFT is listed and available for sale on the marketplace.
Though NFTs can potentially contribute about $1.76 trillion to the global economy, the market is considered to be in an economic bubble. With NFT collections like CyberPunks and Bored Ape Yacht dramatically increasing, prices are very unstable. The concept of NFT ownership itself is speculative in that it assigns imaginary ownership. By claiming art that is accessible to the public, many doubt the hype surrounding NFTs. Unjustified prices and no actual intrinsic value add to the uncertainty in creating or investing in the tokens.
With some tech giants like Twitter allowing users to showcase their NFT art as user profiles, the cryptos will continue to gain massive publicity. Companies like Meta and Twitter are working on allowing users to mint and display NFTs and developing a market to trade them. Such actions benefit NFT popularity and the nebulous concept of a virtual metaverse. In the future, more creative collections and a wider audience will bring greater appeal to the digital tokens, yet turbulent and new markets still call for caution toward a currency backed entirely by public sentiment. For now, however, NFTs remain a burgeoning craze.