Have you heard about Non-Fungible Tokens (NFTs)?
They’ve actually been around for a few years but it’s only in the last year that they’ve really hit the headlines…well some of them anyway.
You won’t be surprised to hear that they operate on a blockchain (they sound like the sort of thing that would!), but they’re not cryptocurrencies. They, are, however, pretty lucrative for some!
Here’s the lowdown on what they are, why they are, and what their future is…
- What are Non-Fungible Tokens (NFTs)?
- What are the use cases of Non-Fungible Tokens?
- Are Non-Fungible Tokens a scam?
- What is the future for Non-Fungible Tokens?
Conversely, non-fungible means that there is only one thing of that value – one, unique item and can’t be changed with something else.
You can do copies of Michaelangelo’s ‘David’ but there is only one original and only one organisation owns that.
In the digital world – the blockchain-based world – there are now Non-Fungible Tokens that you can buy to show your ownership of a specific item. This could be a physical item like a property, a piece of art or a car, or it could be a digital one like a piece of digital art, a piece of music or a game.
The tokens can be bought and sold in their own right but they are really nothing more than digital certificates of ownership of another product.
There’s a pretty handy video here of what they are and how they work:
how do they work in practice?
Continuing the theme of a certificate: if you have a paper certificate with a stamp and a signature you know it’s the only one. However, if you have a digital one, maybe sent to you by email, you know that it could be reproduced several times and lots of people might think they own something with their version of the certificate.
However, non-fungible tokens are recorded on the blockchain – like cryptocurrencies are – and that means the record can’t be forged or altered because it’s on thousands of different computers around the world.
Some non-fungible tokens also have what are called ‘smart contracts‘ written into then which could give the musician or artist a commission on any future sales of the token.
The main use case for NFTs right now is in the sale of art and music in a way that the creatives can make money now and in the future. Because NFTs can include ‘smart contracts’ which can be coded in any way you want, they enable the artist or composer to earn commission on any future sales of the token, just as they would have earned royalties in the past.
However, they could also replace share certificates, property deeds and various other forms of certification of ownership of all kinds of products. Once the hype and excitement of selling rights to silly stuff is over, it’s quite possible that serious businesses will start to use NFTs in their business deals.
No…but they are pretty wild and silly money is already exchanging hands for what could be seen as little more than a digital certificate!
They’ve been used for some pretty daft things so far:
in 2017 there was a big craze for digital ‘cats’ called Cryptokitties.
These cats are built on the Ethereum blockchain as NFTs. Each one is unique and owned by a user and its value can appreciate or depreciate based on how popular it is. The ‘Kitties’ can’t be replicated (they are NFTs) can only handed over to someone else with the user’s permission. These digital cats quickly became popular because they are ‘breedable’ with their own unique DNA that produces different attributes in the kitties as time goes on.
On May 12, 2018, a CryptoKitty was sold for $140,000 (£100,000)!
£69m digital artwork
But the craziest thing that’s happened so far in the NFT world – the event that has really brought them into the eyes of the public – has been the sale in March 2021 of an NFT of a digital artwork for a staggering £69m (£50m).
The digital artwork is called ‘The First 5000 Days’ and was created by the artist called Beeple. It only exists as a computer image and can only be seen on a blockchain on a computer. Not only that but it can be (and has been) copied by anyone. However, only the holder of the NFT actually, legally owns it.
other crazy sales
In February 2021 an animated Gif of Nyan Cat , a 2011 meme of a flying pop-tart cat – sold for more than $500,000 (£360,000).
In March 2021, the musician Grimes sold some of her digital art for more than $6m (£4,3m, and Jack Dorsey, co-founder of Twitter, is offering an NFT of the first ever tweet that was published with bids currently up to $2.5m (£1.8m).
Oh and you remember that ‘Charlie Bit My Finger’ video? Well those two boys are putting it up for sale as an NFT. Good for them!
Actually it’s pretty bright.
If you ignore the craziness of paying $69m for a piece of digital art that anyone can copy or paying thousands to own daft digital cats, there are some reasonable use cases for NFTs.
Already, musicians, who have mostly lost out on the kind of money they used to be able to make thanks to the likes of Spotify and Apple Music, are working out how they could make a profit from their creations through NFTs.
The band Kings of Leon have announced that their new album ‘When You See Yourself’ will be available as an NFT. The package will include limited-edition vinyl, access to future live shows, and alternative album artwork. So far they have generated over £1.4m through the NFT.
Their special ‘NFT Yourself’ will stay on sale as an NFT until 8pm on March 19th. After that all the remaining limited edition collectible NFTs that are not sold will be ‘burned’ (i.e.deleted forever) and no more will be made.
It’s likely that other musicians and artists looking to make more money from their creations will take heart from the Kings of Leon example and follow suit.
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.