Once shunned, speculative assets are now driving early investors and collectors to pour money into the digital economy. They’re taking a once-in-a-lifetime gamble: adopt cryptocurrency, NFTs, and other derivatives of blockchain technology now, or lose out in a possible future opportunity. Of course––there’s no guarantee that they’ll merit any returns or if these DigitalAX will last more than a few years at all. But like how the stock market grew from speculation in the 1900s to an investment standard today, some are banking on the idea that virtual assets will power tomorrow’s economy.
All the hype over digital asset ownership began in 2017 when a site called CryptoKitties prompted users to spend millions on limited-edition, one-of-a-kind PNGs of cats. Today, the NFT scene has expanded into a 250 million dollar––and quickly growing––industry, fueled by the likes of Beeple and other digital content creators. While some are vying for a spot at the six-digit art sale frenzy, others wonder whether there’s room for NFTs to exist in the future.
What is an NFT?
The term NFT is short for a non-fungible token, which, by definition, means that it’s an item that can’t be replaced or interchangeably valued with another.
To illustrate, if you own two $5 bills, it doesn’t matter which one you use to pay for a cheeseburger. While they’re two bills, they both hold the same value, and the fast-food store really wouldn’t care which of the two they receive. That makes fiat money a fungible asset. In contrast, NFTs are non-fungible assets, which means that NFT A can’t hold the same value as NFT B. That value is not derived from its monetary equivalent because it doesn’t technically have one. Instead, the value of an NFT lies in its uniqueness––a one-of-a-kind, limited-edition collectible, like how there’s only one real Mona Lisa painting in the world.
This technology is revolutionary––there’s nothing else in the world that guarantees ownership over digital assets. For years, iconic artwork, like the Nyan Cat meme, circulated the internet and was sold as merch by any company without regulation. But now someone has purchased the meme for $600,000, and while you can still save the GIF on your computer, licensing rights now belong to an individual.
NFTs Are Minted On Blockchains––The Same Technology That Mints Cryptocurrency.
These three concepts relate to each other in more ways than one. But to simplify, NFTs are created and stored on a blockchain and sold and purchased for cryptocurrency. The cryptocurrency-in-question is usually Ether (ETH) because it’s the coin that corresponds to the Ethereum blockchain, where most NFTs are created. Not all blockchains support NFT creation, which is why most of the market uses ETH.
ETH comes into play whenever you need to shell out gas––another term for processing fees. Putting up an NFT on a marketplace will cost ETH, so there’s a capital cost on the content creator’s end. Likewise, buyers will also have to pay the gas price for purchasing NFTs, which can mean a total spend of $90 for a $30 illustration. The price varies depending on the blockchain congestion, and because Ethereum is so widely used, gas fees can be pretty high.
NFTs Are Revolutionary––But Also Risky
It’s rare for anything, at all, to bring financial leverage to digital artists and the internet folk while disrupting the rigid, culturally sensitive, uptight, and sometimes ridiculous art industry. And that’s why NFTs are so important. Royalties and licensing have become simplified with transferable copyrights in digital asset ownership, and the opportunity to earn big bucks through digital art, music, gifs, mods, and more is no longer a pipe dream. But NFTs are not without issue, causing concerns about their longevity.
The Earth Isn’t So Happy About The NFT Craze
Ethereum is the leading blockchain for minting NFTs, but it’s currently relying on a mining model called Proof-of-Work (PoW). In a nutshell, Ethereum is decentralized, allowing people to be involved in the network by handling transactions in a process called mining. However, PoW is a very power-hungry process that consumes 26.5 terawatt-hours per year, or almost as much as the entirety of Ireland. As a result, NFTs are, quite literally, overheating the environment.
However, it’s important to note that Ethereum has launched its beacon chain, also known as Phase 0 of its new and improved Ethereum 2.0. The Beacon chain introduced the less power-hungry Proof of Stake algorithm to Ethereum which will drastically decrease Ethereum’s carbon footprint, secure the network, and promote a healthier ecosystem.
Is it a Bird, is it a Plane, is it a Bubble??
In economics, a bubble is defined by a massive spike in an asset’s value. Historically, it’s succeeded by a plummet or contraction in price––better known as bursting the bubble. In 2017, there was a huge cryptocurrency bubble where the likes of Bitcoin spiked by over 1,000%––from $4,000 to $20,000––only for it to pipe back down to $4,000 a year later. NFTs are a similar asset class to cryptocurrency as they both minted on blockchains, and the former is experiencing the same astronomical growth that disrupted the industry in 2017.
NFTs have only recently graced the spotlight, and the average value of these tokens is already decreasing rapidly. Experts fear that NFTs cannot sustain their market position, and the bubble may burst sooner than expected.
The Challenge of Sustaining the Market
NFTs are currently being seen as a quick way to make money, yet these tokens have more potential than just providing an income stream to designers. The fact that people are willing to shell out money for digital collectibles is a sign that there’s a real attachment to virtual products, which means that there’s potential to bridge the gap between reality and the digital world by offering a life-like ownership experience online.
People have brought up the idea of digital fashion, an industry that NFT can help grow. Digital fashion marketplaces like DIGITALAX already exist, proving that there’s interest in this niche. There’s also a huge opportunity for the gaming industry to adopt NFTs to bridge the real and virtual economy, as people have, time and time again, demonstrated that they’re willing to shell out money for in-game assets. A real-estate company is already selling virtual land, and the popularity of the sandbox genre is likely to help this idea grow.
If the NFT bubble does burst, it doesn’t necessarily mean the end of all non-fungible assets. They have massive usability in the fashion and gaming industry and may even retain a higher-end digital art market after the current hype dies. So while there is a future for NFTs, only time will tell how it will look like.