The Booming Rise of Non-Fungible Tokens (NFTs)

By Byron Wu

We are currently living in a world where everything unimaginable becomes reality. From Pokémon Card prices skyrocketing, to the striking rise of Cryptocurrency. Non-fungible tokens (NFTs) have sought to bring these two momentous worlds together, allowing ownership of specialised, digital tokens. 

In recent months, the revolution of NFTs has seen immense amounts of money being spent; a Nyan Cat Meme sold for roughly US$580,000, a unique video clip has sold for US$6.6 million, consumers have spent many millions on NBA collectibles and YouTubers like Logan Paul have made US$5 million selling their personalised digital tokens. The list goes on and it is truly astonishing to see such growth. 

With all this glamour and glory however, it is important for investors to understand the basics of NFTs – what are they, why they have become so popular, and how to purchase them. 

What is an NFT and how do they work?

Non-fungible tokens are scarce digital content represented as tokens, which can take up any form in the digital sphere. Whether it be audio clips, GIFs, collectible sports cards, and even digital sneakers and real estate, each is a limited-edition version. All NFT data is stored on the blockchain via smart contracts – essentially bits and pieces of computer code that store vital information. This makes NFTs easily verifiable and enables easy tracing to the original issuer. 

Why have NFTs become so popular?

The NFT industry has grown exponentially and it is showing no signs of slowing down. In 2019, the NFT industry grew by 17% and it was forecasted to grow by 50% in 2020. This level of market capitalisation is astounding as it created over US$200 million in gross value in less than two years. The 2020 market capitalisation value ended up exceeding US$550 million, which shows how popular this industry is becoming. 

Though NFTs have been around as early as 2015, they have only since received a surge of retail interest due to the following factors: the rising normalisation of cryptocurrency, advances of blockchain technology and the COVID-19 pandemic stay-at-home restrictions. With a significantly greater portion of time spent at home, people were more likely to spend money online. 

What are the benefits of NFTs?

Unlike physical assets which face the risk of replication, the blockchain technology, where NFTs are stored, (which is also behind Bitcoin) acts as an absolute certificate of authenticity. Every single NFT on the market has an unmodifiable ledger of its history of ownership, which CoinDesk explains “cannot be destroyed, removed or replicated”. Whilst a physical painting can be stolen, replicated, and sold in the black market, NFTs cannot. 

Furthermore, NFTs are indivisible. Unlike a $10 note or a bitcoin, which can be easily exchanged/divided, NFTs represent a niche phenomenon in that no two NFTs are the same. They exist exclusively as a whole and single item. No two NFTs are identical even if they exist in the same platform, game or even in the same collection. These digital collectibles can’t be copied, and that’s where the value and attraction comes in. 

Additionally, ownership of NFTs is immutable – purchasers/collectors are the ones who actually possess these tokens, not the companies that create them. This is in direct contrast with examples like buying music or movies on the app store where users merely purchase the licence to view the products. It is this sense of ownership that provides NFTs with such a competitive edge in the market and explains why some of these are selling for such extreme prices. 

Practical uses of NFTs

On top of the collectibles side, individuals can buy in-game assets in the form of NFTs. These assets provide gamers with the ability to create and monetise structures like casinos, racecourses and theme parks in virtual worlds. For example, one investor spent more than $200,000 to purchase a segment of a digital racing track in the F1 Delta game, allowing the owner to receive 5% dividends from all subsequent races taking place on it. Thus, in addition to the capital appreciation of tokens, there are other practical uses which exist. 

How do people buy NFTs?

NFTs are bought and traded in the market just like other cryptocurrencies, albeit predominantly traded with Ethereum. There is a plethora of marketplaces that investors can visit to explore the different tokens on offer; Nifty Gateway, MarkersPlace and Decentraland, just to name a few. There are some sites such as NBA Top Shot which also accept payment in USD. 

The reason why NFTs are primarily traded with Ethereum is because they are mostly built using the Ethereum token standards of either ERC-271 or ERC-1155. These are essentially blueprints created by Ethereum that enable software developers to easily deploy NFTs and ensure they’re compatible with the broader ecosystem, including crypto exchanges and wallet services. 

As we can see, NFTs are complex and difficult to grasp. Before making purchases in such an asset class, investors should fully understand the basic fundamentals and reasonings behind its surge in popularity. 

Sources: CoinDesk, CNBC, Financial Review, Forbes, Chain Clash, Decrypt


Disclaimer
The authors of this publication are not qualified to provide financial or investment advice and as such the content provided should not be construed in this manner. All information is intended purely for educational purposes and is provided for the personal interest of UNIT members. The opinions expressed within the article do not reflect those of UNIT as an organisation, its partners or its sponsors.