A simple guide to NFTs

What is a non-fungible token?
Wikipedia’s answer:
“A non-fungible token (NFT) is a unit of data stored on a blockchain (a digital ledger) which can represent a unique digital item like art. An NFT is a cryptographic token, but unlike cryptocurrencies such as bitcoin and many network or utility tokens, NFTs are not mutually interchangeable, i.e. not fungible.”

An NFT is created by uploading a file, such as an artwork, to an NFT auction market, such as KnownOrigin, Rarible, or OpenSea. This creates a copy of the file recorded on the digital ledger as an NFT, which can be bought with cryptocurrency and resold. Although an artist can sell an NFT representing a work, the artist can still retain the copyright to the work and create more NFTs of the same work.

The buyer of the NFT does not gain exclusive access to the work, nor does the buyer gain possession of the “original” digital file. A person who uploads a certain work as an NFT does not have to prove that they are the original artist, and there have been numerous cases where art was used for NFTs without the creator’s permission

How did it come about & grow in popularity?
(a) How did it come about?
NFTs aren’t exactly new. CryptoKitties, a digital trading game on the cryptocurrency platform Ethereum, was one of the original NFTs, allowing people to purchase and sell virtual cats that were both unique and stored on the blockchain.

(b) Growth in popularity
It’s popularity is in part driven by the fact that anybody can tokenise their work to sell as an NFT but interest has been fuelled by recent headlines of multi-million-dollar sales. On 19 February, an animated Gif of Nyan Cat – a 2011 meme of a flying pop-tart cat – sold for more than $500,000. A few weeks later, musician Grimes sold some of her digital art for more than $6m. It is not just art that is tokenised and sold. Twitter’s founder Jack Dorsey has promoted an NFT of the first-ever tweet, with bids hitting $2.5m. Christie’s sale of an NFT by digital artist Beeple for $69m (£50m) set a new record for digital art.

How do NFTs work, and how do you prove NFT ownership?
Traditional works of art such as paintings are valuable because they are one of a kind. But digital files can be easily and endlessly duplicated.

With NFTs, artwork can be ‘tokenised’ to create a digital certificate of ownership that can be bought and sold. As with crypto-currency, a record of who owns what is stored on a shared ledger known as the blockchain. The records cannot be forged because the ledger is maintained by thousands of computers around the world. NFTs can also contain smart contracts that may give the artist, for example, a cut of any future sale of the token.

What’s stopping people copying digital art? Nothing. Millions of people have seen Beeple’s art that sold for $69m and the image has been copied and shared countless times. In many cases, the artist even retains the copyright ownership of their work, so they can continue to produce and sell copies. But the buyer of the NFT owns a “token” that proves they own the “original” work. Some people compare it to buying an autographed print.

It’s for that reason why being able to prove NFT ownership is so valuable, but also tricky. Now with the integration of the HUMAN Protocol DApp hCaptcha within MetaMask there is a robust solution: “Using the DApp, the consumer is prompted to solve an hCaptcha through Metamask. The hCaptcha API subsequently produces an authorization for the successful completion of the captcha. HUMAN Protocol applies the authorization to the blockchain.” In other words, by hooking up hCaptcha with MetaMask and Chainlink’s oracle service, you can successfully prove human ownership of NFTs. To try a demo of this ‘Proof of HUMANity’ go here.

How is it linked to bitcoin/ blockchain?
The vast majority of NFT tokens were built using one of two Ethereum blockchain token standards (ERC-721 and ERC-1155) – blueprints created by Ethereum that enable software developers to easily deploy NFTs and ensure they’re compatible with the broader ecosystem, including exchanges and wallet services like MetaMask and MyEtherWallet. Eos, Neo and Tron have also released their own NFT token standards to encourage developers to build and host NFTs on their blockchain networks.

How is it similar/ different from bitcoin/other digital assets?
Non-fungible tokens, or NFTs, are pieces of digital content linked to the blockchain, the digital database underpinning cryptocurrencies such as bitcoin and ethereum. Unlike NFTs, those assets are fungible, meaning they can be replaced or exchanged with another identical one of the same value, much like a dollar bill.

NFTs, on the other hand, are unique and not mutually interchangeable, which means no two NFTs are the same. Think of Pokémon cards, rare coins or a limited-edition pair of Jordans: NFTs create scarcity among otherwise infinitely available assets — and there’s even a certificate of authenticity to prove it.

What then makes NFTs valuable?
Like all assets, supply and demand are the key market drivers for price. Due to the scarce nature of NFTs and the high demand for them from gamers, collectors and investors, people are often prepared to pay a lot of money for them.

Some NFTs also have the potential to make their owners a lot of money. For instance, one gamer on the Decentraland virtual land platform decided to purchase 64 lots and combine them into a single estate. Dubbed “The Secrets of Satoshis Tea Garden,” it sold for $80,000 purely because of its desirable location and road access.

Do NFTs offer liquidity?
Instant tradeability of non-fungible tokens will lead to higher liquidity. NFT marketplaces can cater to a variety of audiences—from hardcore traders to more novice players—allowing for greater exposure of the assets to a wider pool of buyers. In the same way that the ICO boom of 2017 gave birth to a new asset class driven by instantly liquid tokens, NFTs expand the market for unique digital assets.

NFTs also help to expand the market of collaterals in DeFi lending. A DeFi lending and borrowing platform require collaterals. These collaterals are generally the crypto-holdings. With the introduction of NFT, one can now put other types of assets as collateral. For example, an artwork or a real-estate property can be tokenized as NFTs and put up as collaterals.

Can NFT become a hedging asset similar to bitcoin/gold?
At the top end of the market, where there is already investment in fine art as a hedging asset, then the case could indeed be made for NFTs. Digital art was an early use case for NFTs, because of the ability of blockchain technology to assure the unique signature and ownership of NFTs.Digital artwork by Beeple sold for US$69.3 million in 2021.

Auction house Christie’s made news in the auction industry by selling Beeple’s Everydays: The First 5000 Days for that amount. However, for now most of the action is in collectibles, rather than high end art. Think of Pokémon cards, rare coins or a limited-edition pair of Jordans: NFTs create scarcity among otherwise infinitely available assets – and there’s even a certificate of authenticity to prove it.

But an infinite amount of NFTs can be created, how then can the value of an NFT increase? Who/how do you sell an NFT?
Like all assets, supply and demand are the key market drivers for price. Due to the scarce nature of NFTs and the high demand for them from gamers, collectors and investors, people are often prepared to pay a lot of money for them.

Essentially, any digital image can be purchased as an NFT. But there are a few things to consider when buying one, especially if you’re a newbie. You’ll need to decide what marketplace to buy from, what type of digital wallet is required to store it and what kind of cryptocurrency you’ll need to complete the sale.

NFTs are also sold on marketplaces and the process can vary from platform to platform. You’ll essentially upload your content to a marketplace then follow the instructions to turn it into an NFT. You’ll be able to include specifics such as a description of the work and suggested pricing.

What is the timeframe people who bought NFTs are looking to hold for?
It’s difficult right now to say how long people will hold NFTs as investments, as many of them are held by fans and users, who are committed to their gaming community. NFTs are still early, and will evolve.

Their utility will increase as digital experiences are built around them, including marketplaces, social networks, showcases, games, and virtual worlds. Someday every internet community might have its own micro-economy, including NFTs and fungible tokens that users can use, own, and collect.

Is NFT a speculative asset?
NFTs are also quite new and will likely be very volatile going forward. “I would agree that the NFT climate feels similar to that of cryptocurrencies a few years ago. But cryptocurrencies have traded with lots of volatility over the last few years and continue to do so. There’s also no guarantee that NFTs will run the same course as cryptocurrencies. Remember, some NFTs are intended to mimic tangible assets like sports trading cards, a market that has soared up and down wildly for years. I would continue to advise extreme caution when investing in NFTs right now.”

Will there be or is there already a bubble?
A day before his record-breaking auction, Beeple – (whose real name is Mike Winkelmann) – told the BBC: “I actually do think there will be a bubble, to be quite honest. “And I think we could be in that bubble right now.”

Many are even more sceptical. David Gerard, author of Attack of the 50-foot Blockchain, said he saw NFTs as buying “official collectables”, similar to trading cards. “There are some artists absolutely making bank on this stuff… it’s just that you probably won’t,” he warned.

Are people in Asia cashing in on NFTs? Why/why not?
At the other end of the belief spectrum from the critics, is Singapore-based “entrepreneur, coder and angel investor” in blockchain technologies named Vignesh Sundaresan is likely Metakovan, a mysterious buyer that spent US$69m worth of cryptocurrencies on a piece of digital art, who won Christie’s auction for Beeple’s Everydays: The First 5,000 Days.

Together with his partner Mr Anand Venkateswaran they stated “The point was to show Indians and people of colour that they too could be patrons, that crypto was an equalising power between the West and the Rest, and that the global south was rising.”

NFT costs

Where should I drop my NFTs?

How does it compare globally?
After the CryptoKitties bubble in late 2018, the number of unique accounts interacting with NFTs has grown slowly but steadily, from ~8,500 accounts in February of 2018 to over 20,000 accounts in December of 2019. The market seems to be driven by a core group of power users.

Many brands are also jumping on the bandwagon – is that an opportunity for investors?
Leading investor website Motley Fool reported that shares in Chinese companies such as the online art platform Takung Art Co also appear to be rising on news or speculation regarding NFTs. Shares of the Chinese classical music platform Kuke Music Holding (NYSE:KUKE) climbed more than 11% on 23 March, while shares of the artwork e-commerce company Oriental Culture Holding (NASDAQ:OCG) rose more than 24%. None of these companies are involved in the NFT space, but investors are betting that their current business models could allow them to easily make the transition.

What are the NFT sales we should avoid?
Because NFTs can involve copies there are already reports of NFT art scams, to be aware of. For example artists like Derek Laufman have had their work minted as NFTs and listed for sale without their permission; and as in that case, platforms that host stolen art only seem to moderate if the artist finds out and posts about it on social media.

Tales From The Loop author Simon Stålenhag found his art on Marble Cards, another NFT site, and Giphy has warned that people are turning user-created GIFs from its site into NFTs.

Because the NFT system doesn’t require people to actually own the copyright to something to mint it, it’s a market ripe for fraud.

What should investors take note before buying NFTs?
The whole system is predicated on the understanding that the people minting NFTs are who they say they are. Would you buy a GIF of a cat for $560,000, for example, if the creator of the meme wasn’t the person who was selling it as an NFT online? Because anything can be tokenized on the blockchain — where, by the way, the record is immutable — anything can end up as a NFT, even if the creator of an artwork isn’t the person selling it online for Ethereum.

Expert NFT sources:

1. NFTs and a Thousand True Fans, by Chris Dixon
2. What the Heck are NFTs? Let’s Ask Beeple. by Kate Swisher
3. Non-fungible token. Wikipedia
4. The Non-Fungible Token Bible: Everything you need to know about NFTs. OpenSea
5. What Are NFTs and How Do They Work? by Ollie Leech
6. NFTs, explained by Mitchell Clark
7. Singapore-based buyer unmasked in claim to US$69m NFT by Kelly NG
8. Crypto investor Vignesh Sundaresan: ‘It’s the NFT that changed the world’ by Stefania Palma
9. What is an NFT? Non-fungible tokens explained by Jazmin Goodwin
10. What are NFTs? – Their Role in DeFi by Nick Avramov
11. What are NFTs and why are some worth millions? BBC
12. Jack Dorsey sells his first tweet ever as an NFT for over $2.9 million by Taylor Locke
13. Non-Fungible-Token Market Booms As Big Names Join Crypto’s Newest Craze by Lawrence Wintermeyer
14. NFT Speculation Has These Stocks Roaring Again by Bram Berkowitz

Credit: This article was originally produced as a PR briefing for Anndy Lian, to support his appearance on Channel News Asia in April 2021.

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