What are NFTs and Why are they so Valuable?
The NFT ecosystem has entered a new phase in recent weeks, with some projects selling items for tens of millions of dollars, and trade volume on platforms like OpenSea breaking all kinds of records.
These numbers have understandably baffled a lot of people outside the crypto community, and even some folks within DeFi itself. This article will introduce the topic of NFTs, how they work, and explain why we are all collectively so enthusiastic about NFTs in the crypto space. Hopefully this piece can shed some light on why someone would be willing to pay millions of dollars for a JPEG of an alien punk in a headband—and why such a purchase could be a savvy investment.
What is an NFT?
Put simply, a non-fungible token (NFT) expresses ownership of a unique digital asset. NFTs distinguish themselves from fungible tokens because they are one of a kind, and are implemented using the ERC-721 smart contract standard, whereas other tokens are implemented using the ERC-20 standard and may be identical to the other tokens implemented with the same smart contract. Like all assets built on the blockchain, NFTs are secure, immutable, and easily integrated into the broad ecosystem of decentralized finance and blockchain technology.
What Does the NFT Ecosystem Look Like?
The most common use of the ERC 721 standard to create NFTs is to develop a series of one-of-a-kind collectible art pieces. Pieces from the same series will all have a similar aesthetic and be created using the same process, but true NFT projects ensure that each piece from a series is completely unique in some way. Some projects will code a set of visual attributes that will be randomly combined to create unique NFTs—Cryptopunks are an example of this style of NFT. Other artists might turn individual pieces of digital art into an NFT to sell to collectors online. Works by the artist Beeple are famous examples of this type of NFT
While these two examples are important touchstones to demonstrate what is possible in the NFT ecosystem, they by no means capture the depth and richness of creativity taking place in the NFT community daily. Successful NFT projects require the artist and developers to have an extremely broad skillset, from creating the actual artwork to building the smart contracts and digital mechanisms for deploying the project. The best projects are also underpinned by sophisticated creative and conceptual frameworks. And all of this intellectual work is visible on the blockchain, so artists in the NFT ecosystem can take inspiration from each other and push the boundaries of this technology with each new project.
But isn’t an NFT just a JPEG?
For those who have read this far, hopefully it is evident that NFTs are much more than “just JPEGs,” which is a common way that NFT projects and artists are dismissed by critics of cryptocurrency and the blockchain. NFTs are also more than just a “digital certificate of ownership” which is the more generous, but still reductive, description sometimes given by writers introducing the topic to readers unfamiliar with the space.
Here are some ways to understand why so many in the crypto community are so “bullish” about NFTs.
NFTs are a powerful onboarding tool.
As DeFi, the principles of decentralized ownership, and Web3 expand and become more sophisticated, there will be a need to bring more people outside of the tech and finance industry into the community. There are a lot of folks who might not have any interest in learning the ins and outs of finance or technology, but who have a strong interest in art, games, and collectibles. NFTs and the projects that are built around them are going to be essential for making a connection with these types of people, and getting them excited about our decentralized future.
NFTs are a revolutionary new income model for artists.
DeFi and crypto-based projects aim to make finance more accessible and access to wealth more equitable for ordinary people from all backgrounds. This includes the artists and creators who are the driving force behind the NFT boom. Artists have the ability to integrate royalties into the smart contract they build for their project, plus they have the option to retain ownership or be an early buyer of assets from their NFT projects, offering them an income stream that does not exist in the traditional art industry. Additionally, because of the decentralized nature of the blockchain, artists don’t have to rely on a middleman to facilitate such royalties. This means that NFT projects and blockchain technology have the potential to eclipse the exploitative practices of streaming services.
NFTs are intricately linked with the construction of digital identity.
As more and more time is spent online and in the metaverse, people inevitably look for ways to express their personalities and represent their values through visual branding on digital platforms. This has been a trend since the early days of the internet, and the drive to establish digital identity and share that identity has been the force behind the success of platforms like Facebook, Twitter, and TikTok. Since social platforms built on Web3 will adopt the principles of decentralization and privacy enabled by blockchain, people will have the option to experiment with new ways of building digital identity, including different degrees of anonymity. Currently, NFTs are a huge part of the way digital identities are expressed in DeFi and crypto, and we can expect that trend to expand exponentially as more people make the switch from Web2 social platforms.
NFTs are a portal to what is possible for the future of Blockchain technology, cryptocurrency, and DeFi.
What is most exciting about NFTs and their potential is the same reason the Blockchain, DeFi, and cryptocurrency are collectively so exciting—we have not even scratched the surface of the potential of these technologies.
NFTs are showing us that the way humans understand and define value is shifting dramatically every day. We know that human beings are collectors, and that the value we attach to objects increases as historical, cultural, and social significance accrue in objects. NFTs were here at the beginning of a seismic shift in our cultural understanding of value—and if you are reading this, you are too! Investing in an NFT project and hodling a few NFTs that you feel passionate about might just be the best way to get started in DeFi and crypto.
For more on how we think about NFTs at Zapper, check out this recent Twitter thread by our CEO Seb Audet. The future of finance is going to be wierder than we can possibly imagine. Happy collecting!