Only a year ago, non-fungible tokens (NFTs) were mostly known to only a closed circle of crypto enthusiasts and gamers. In the recent months, several events like the sale of the Nyan Cat meme and the first NFT sale by Christie’s, have made news in the mainstream media, and a much wider audience has begun to discover these assets. With the growing popularity and expanding market volumes, the NFTs are a phenomenon to watch out for as a crypto investor.

Fundamentals

Non-fungible tokens (NFTs) are digital assets based on blockchain technology. Each NFT represents some unique digital object – an artifact in a game, a piece of digital art, or even a virtual property in a virtual world. Historically, most NFTs have been built on Ethereum, with some of the more recent ones using other blockchains, like Flow.

The key characteristic of a non-fungible token is its uniqueness. In contrast to cryptocurrencies, NFTs cannot be simply interchanged as they represent unique objects with different values. The value of a non-fungible token depends on the perceived value of the underlying object. But as with a real-world painting, that value is often subjective and depends on the taste and personal preferences of the owner, or a potential buyer. Similar to real-world collectibles, it can also be associated with the scarcity of an object.

An NFT is an immutable asset, whose uniqueness is secured by the blockchain. These properties are important to secure and protect the ownership of an NFT. Thanks to blockchain technology, it is also easy to verify the authenticity and provenance of an NFT, so that the owner can be absolutely sure to have an authentic and unique object.

The first NFTs were launched in 2017 by Larva Labs, an Ethereum-based project CryptoPunks – with a collection of 10 000 unique digital characters. CryptoPunks are still actively traded: in the last year, more than 10,000 sales were conducted, with the average price of a character at $10,000. An important step in the popularization of the NFTs was CryptoKitties. – a digital game by Dapper Labs where players can collect, breed, adopt and sell unique cat characters. The Internet loves cats, and CryptoKitties became so popular so fast that it even congested the Ethereum network on which it was built. Since 2017, the NFTs market has expanded significantly, and now includes assets in digital art, gaming, music and even DeFi.

Uses

Non-fungible tokens started as a nascent blockchain standard. They are quickly developing into a new widespread application for the entertainment and art industries.

The original use case for NFTs was gaming and digital collectibles. The gaming industry has experienced tremendous growth in recent years, and in 2020 the worldwide market value was estimated at $160B. Many games involve collecting some kind of artifacts, virtual properties, or even experiences, and NFTs offer a well-suited tool to ensure fair and transparent transactions in a gaming environment. The entertainment industry and sporting world are also embracing NFTs. For instance, NBA is issuing NBA’s Top Shot Moments – officially licensed digital collectibles, which to date have accumulated almost $230M in sales, and StarTrek star William Shatner has recently presented his NFT cards.

Another use for NFTs is digital art. In recent years, the interest in digital forms of creative arts has increased significantly. Some artists see it as a trend towards the democratization of art, making it more accessible to a wider audience. Nevertheless, the concept of ownership can characterize digital art objects similar to real-world art. Here, NFTs provide a convenient and reliable way to establish proprietary rights and authenticate a piece of digital art. To facilitate the creation and trade of the digital art, several platforms such as OpenSea, Nifty Gateway, and Rarible offer a marketplace for NFTs.

Thanks to their characteristics of immutability and uniqueness, non-fungible tokens can find further applications in areas like digital identity, DeFi, and yield farming. Yield farming implies crypto owners locking their assets in a DeFi application to earn rewards. The NFTs in this setup can represent unique properties of yield farming strategies.

Outlook

Non-fungible tokens without a doubt represent a curious phenomenon in the crypto world. Despite their novelty and lack of established valuation metrics, NFTs are quickly growing in popularity among investors and users. The market for these assets to date is estimated at about $355M, with an average token price of $66.

The growing gaming industry, rapid development of new tech in gaming including VR, and exploding popularity of digital art are among the factors that can accelerate the adoption of NFTs in various industries. One sign of NFTs going mainstream is the very recent sale of an NFT art piece by the digital artist Beeple by one of the world’s biggest auction houses – Christie’s.

At the same time, the long-term outlook will depend on how well the technology will pass the test of time, if the infrastructure can keep up with the growing popularity, and how well NFTs will balance the scarcity and convenience to adapt to user demand.