NFTs Explained

NFTs (Non-Fungible Tokens), meaning assets unique and verifiable on the blockchain, have been a hot topic this year, but a common response I get when it comes up in conversation is that it makes no sense. I understand this perspective and it’s a common one to have if you haven’t done some research into the space. I mean, the news that reaches the mainstream media is usually about the sale of a Jpeg for millions of dollars. This makes it even harder to wrap your head around what NFTs are because people’s immediate reaction is that it’s a bubble. But if people are willing to spend this amount of money on these NFTs then it’s valuable to someone. I’m sure you’ve seen the news articles about a picture of a rock selling for $1.3 Million, a Bored Ape Yacht Club selling for the same price (400 ETH) and 101 of them being auctioned off by Sotheby’s, or Visa buying a CryptoPunk for $150k which is nowhere near the most paid for one. These are the big sales, and this news is bringing more and more people into the crypto space, which is exactly what we want.

For crypto to change the way we hold and manage our money mass adoption is necessary. Some people thought DeFi (decentralised finance) was going to be the cause of mass adoption, but it seems like NFTs is the space that’s going to do it. The NFT space is not just the buying and selling of Jpegs, there’s so much more to it and I’m certain that all the possible use cases haven’t even been thought of yet. I’m going to try and explain the demand behind this Jpeg/pfp (profile picture) mania and speak about the other uses of NFTs. If some of these use cases don’t excite you, then I don’t know what will. 

OpenSea

Before I go into the different ways NFTs can be used, I wanted to talk about the crazy growth of OpenSea. OpenSea is the biggest marketplace to trade NFTs and it has been exponentially growing in trading volume since they were founded in 2017. This last week it hit $1 Billion in weekly sales and a total of $2.93 Billion in sales just for the month of August (2021). On their site, you can filter your NFTs by Art, Music, Domain Names, Virtual Worlds, Trading Cards, Collectables, Sports and Utilities. That just shows the vastness of this space and the potential for unique ownership. They currently have 37 employees managing all this trading volume and are desperately looking to hire more people. 

Profile Picture Mania

So many projects are launching every day trying to get a piece of the Jpeg pie. Most of these projects rely on the community to give them value, but there are a lot of buyers and projects out there trying to make a quick buck. This means that hundreds of projects go to zero and you end up owning an overpriced Jpeg. Most projects are using CryptoPunks as a blueprint and release 10,000 unique images usually randomly generated with different traits. The traits vary in rarity, which gives it a luck-of-the-draw aspect. The rarer your traits the more expensive your image will be. CryptoPunks gave them out for free in 2017, but today most projects sell them for between 0.04-0.1 ETH ($130-$320). It seems that the blind buying and selling of these Jpegs have calmed down a bit and buyers are looking for projects that offer a bit more utility and that look after their community.

Most Expensive CryptoPunk

After scouring the internet and the many dodgy projects, I found one that I believe brings a bit more to this space than just a new profile picture.  The project is Dogs Unchained and they are the most organised and loyal project I’ve seen to date. Firstly, they rewarded all of their early Discord members with a chance to buy as many ‘Proof of “Steaks”’ as they wanted. A ‘Proof of “Steak”’ (PoS) is basically an unopened pack of Pokémon cards. From the project launch, the PoS can be redeemed for a dog at any time. They then allocated the rest of the 10,000 dogs to their Twitter followers and connected your reserved dogs to your Metamask wallet. This reservation system meant that there were no gas wars when they launched. A gas war is basically when a project launches and a bun fight over the released NFTs ensues. To get the miners to make your transaction of minting your NFT go through, you can decide how much you want to pay in fees. This means that people with a lot of money usually win the gas wars and so they get all the popular project NFTs. This wasn’t the case for Dogs Unchained, because you had secured your NFT, and you could mint your dog within 36 hours. Another great feature is their Boom Boom Room which enables owners of more than one dog to combine them and pick the traits they want to keep from each of them. One of the dogs is then burned (destroyed) and this makes the project deflationary. On top of all these great ideas, they gave buyers the option to donate 0.01 ETH (±$30) when minting their dogs so they can get a 50% chance at rarer traits. They ended up raising 134.24 ETH ($450,400) and are using it to build a 3000+ Square foot dog park for Berkley Animal Care Services.

My Dogs Unchained Dog

A Proof of “Steak”

So why do some of the pictures have so much value? CryptoPunks is believed to be the first NFT created back in 2017. So, it’s not just a pixelated picture, it’s a piece of crypto history, a prediction of where this market was going. CryptoPunks actually wasn’t the first project like many believed it to be, but I think it was the first one of this nature. That’s why people are searching far and wide for these projects and that’s why that rock sold for so much. That’s the beauty of the blockchain, there’s always proof of when it was originally minted.

These newer projects have a different kind of appeal, and the two main reasons are clout and community. This is very similar to the expensive clothing that people wear today. A lot of the time these clothes aren’t even nice-looking, but everyone knows that they cost a lot of money (Balenciaga shoes). People are willing to spend a lot of money to show off that they have money. As the price of these pictures increases, being part of this club becomes more sought after. By making your Twitter profile picture a Bored Ape you are signalling that you either found a gem NFT very early on (smart) or you’re signalling that you’re rich. You feel a part of the club that only 10,000 people can be in.

One of the Apes to be auctioned off by Sotheby’s

Unique Art and Music

The NFT space is changing the way artist make money and look after them in the process. Throughout history, there have been horror stories of artists who sold their work for pennies and later became famous. Making the owners of the pieces very rich and leaving the artists with nothing. NFTs are changing this. For example, an artist can now attach a 5% cut on every sale of their art in perpetuity. They can decide the amount, and this will be built into the contract of the NFT so no one can dispute it. This art can never be forged as there is irrefutable proof on the blockchain and it’s easy to transfer to the buyer. 

Digital artists are being recognised by fine art establishments for their amazing work. Auction house Christie’s auctioned off a piece by the artist Beeple (Mike Winkelmann) for $69,346,250. Beeple’s art brought a lot of attention to the space right at the beginning of this NFT mania. He’s a digital artist who made original artwork every day for 5000 days (over 13 years). The piece that was auctioned was a collage of these 5000 pieces. Beeple became a millionaire overnight and once he saw the value of his art, he tried to help other people make money too. He began to give away individual pieces through a raffle system that would instantly make their owners thousands of dollars and he has a lot of his work free to download in the creative commons. He was just awarded GQ Artist of the year.

In the music industry, there’s a lot of talk about underpaid musicians and record labels exploiting artists. NFTs get rid of this and enable musicians to sell directly to their fans. The possibilities are endless, they could sell event tickets as NFTs with unique 1/1 art to remember the event, they could release their album as an NFT, they could release stems of their tracks that only a certain number of fans can own, they could give certain NFT holders a meet and greet, and they couldn’t even sell the rights to some tracks if they wanted to. There’s so much an artist can do to have a more intimate relationship with their fans. This obviously isn’t limited to musicians, and it enables people to monetize more of their personal brand.

Tokenised Ownership

With some of this art being sold for millions of dollars, it seems that the normal person can’t participate in these markets. This isn’t true, the owner of these expensive pieces can turn their million-dollar NFT into fractionalized ownership NFTs. They can decide how many pieces they want to divide it up into, and they can then sell the fractions as their own NFT. Meaning anyone can invest in these artworks and it creates a community around the artwork and it holding its value.

Gaming

This is the area of NFTs that I think is the most important for mass adoption. The barrier to onboarding new users is extremely low compared to some of the other uses of NFTs. Gamers already game, and gamers already spend thousands of dollars on in-game purchases. Although Fortnite is a free-to-play game, they made $1.8 Billion from in-game purchases in 2019. Now imagine the players can own everything they purchased or unlocked in the game and sell it for a profit if it’s believed to have value. This is a no-brainer for any gamer, and I think they will start moving over in their droves when the games become good enough. This is a win-win for both players and the gaming industry. Most games make their profits from sales of the game and that’s it. Now they could consistently make money by running a marketplace for the in-game assets and take a small cut from each exchange.

At the moment the games are pretty basic but are already making people a lot of money. Players can make $50 a day playing Axie Infinity, a game where you breed, battle and trade digital pets. The collection of Axie’s (the digital pets you play with) is the most expensive NFT collection with $42 million in sales for June 2021. Axie Infinity made a lot of players wealthy when its token price shot up from $3 in June 2021 to around $70 today.

People in countries with a low cost of living are making more money playing these games than they would make in a normal job. This creates an opportunity for the worldwide income gap to shrink. Think about it, if someone in the US values their time more than someone in a 3rd world country it will take a lot more money to incentivise someone from the US to play. This means that once they’re playing, the 3rd world player will have already been playing and his assets will increase in value as the game gains popularity. There are also projects like Wormhole Labs creating ways that social media and NFTs from different platforms will be able to interact with each other. There is so much exciting growth in this space. This is the way things are headed and as soon as you can own your skins in Fortnite or own, buy and sell any asset you win in any game, everyone is going to be playing, maybe even as your job.     

An Axie

Virtual Worlds

If you’ve seen the movie Ready Player One, then you will have an idea of what a virtual world is all about. It’s basically a digital world where users control avatars to roam around the world and interact with one another. The reason why this hasn’t been that popular until now is ownership. A virtual world without ownership doesn’t give people enough of an incentive to keep coming back. Now, with the combination of ownership and like-minded human connection people are flocking to these virtual worlds.

Most of the land has been scooped up and you can only buy it on the secondary market. It’s not that expensive for now, but I can imagine the value of the land only increasing as these worlds gain users. The amazing thing about these worlds is that that’s exactly what they are, a world. You have complete freedom and control of your character in the world. You can go up to and talk to other people, you can build anything you’d like on your property and even host virtual events. People are already making money in these worlds like the designer Hiroto Kai who sold Kimonos in the virtual world of Decentraland. He made around $20,000 in three weeks and these garments can be worn by players in the Decentraland metaverse. Each item of clothing is unique and acts as an NFT, so it can be sold to whoever is willing to pay the asking price.

There’s a variety of virtual worlds that each cover something slightly different. The one’s leading the industry at the moment are Decentraland, Sandbox, Cryptovoxels and Somnium. They differ in use cases, graphics and land, the number of users and the value of the in-game currency, but they are similar in the sense that you have the freedom to create and interact as you wish. The cheapest parcel of land I could find on all four of the platforms is about 1 ETH (±$3800). It is a bit pricey if you want to be a landowner, but this shouldn’t stop you from trying it. They are all very easy to start playing, all you must do is connect your Metamask wallet and create your character. Have a walk around, go shopping, look at some art, or talk to people.

Art gallery inside Somnium

Trust is easily broken

The amazing thing about the crypto space, in general, is that everything is based on trust. You own your funds, and you can do with them what you please. There are many competitors all offering similar services and they’ve got to work as hard as they can to acquire and then keep your business. If at any point you’re unhappy with the project and what they’re offering, you can take your money and use it somewhere else in a matter of minutes. This applies to yield farming and DeFi, social tokens, and of course NFTs. This idea is very different to what we’re used to. We complain about our banks or memberships that we’ve committed to for longer than we’d like. It’s different in the crypto space and that’s what drives this innovation. The code of projects is usually public and so they’ve got to go above and beyond to keep their customers.

I spent a lot of time on the pfp because I think that’s where most of the disconnect takes place. The use cases in other types of NFTs are easier to understand and to get on board with.  I didn’t even talk about legal protection and proof of IP being stored on the blockchain, but there are just too many use cases already. This space is so exciting, and I can’t wait to learn about all the interesting ways people provide utility to NFTs. This space is already changing the way we’re going to live and interact, and I’d suggest learning a bit about it and even playing some of the games. Please let me know if you didn’t understand anything because I’d like this post to be as understandable as possible. I’d also like to know if I made any mistakes and if you’d like to just speak about the space in general, then contact me.