Episode 11 – Why The NFT Hype?
“NFTs. I’ve said it before and I’ll say it again. They’re the hip, the hop, the punk, the mask, the bit, the top, and the beep.
But why? What’s so bloody good about them? Why are people buying them for so much money? And why are celebrities jumping on the bandwagon?
These are all excellent questions. And we’ve got the answers.
Welcome to School of Block.
In Episodes 9 and 10 we introduced the idea of NFTs, but here we’re really going to get under their non-fungible skin. Starting at the beginning of course, because NFT stands for NON FUNGIBLE TOKEN.
Basically a unique digital asset that has verifiable provenance. Now this asset could be the lowest resolution image you could imagine, it could be a concert ticket, it could be a limited edition album – but whatever it is, it’s unique.
The very first NFTs were born in 2017. 10,000 individually distinct 24×24 pixel Cryptopunks were available to be claimed for free by anybody with an Ethereum wallet. They were snapped up double quick, and now they go for big money.
But why? What can you actually do with them? Well, you can use them as an avatar. Own a piece of crypto history. And for lots of people, that’s reason enough to spend tens of thousands of dollars on one.
But we’ve come a long way since 2017, and we’re still only just beginning to scratch the surface of what NFTs can do. Because they’re not just a jpg with provenance, you can build a heap of functionality into them too.
And this is one of the practical realisations that’s driving the hype – along with trends like rapid digitisation, the pandemic driving behaviour online and of course the crypto market cycle entering one of it’s mega bull phases.
Want a practical example of why NFTs aren’t just a hokey 8bit avatar?
Kings of Leon are releasing their new album “When You See Yourself” as three different types of NFT. One of them offers live show perks like front row seats for life, another gives exclusive audiovisual art. They’re the very first band to do this, and they won’t be last.
Because NFTs don’t just give you proof of ownership, they can also contain complex or rare assets and evolve over time.
So it’s not just the music industry that’s going to get tokenised – real world assets like property, shares, or documentation like qualifications, licences, birth and death histories are all ripe to drop from the NFT tree before too long.
Right now though, the big use cases are COLLECTIBLES (like the Cryptopunks), GAMING and DIGITAL ART. But VIRTUAL WORLDS and FASHION aren’t far behind.
COLLECTIBLES don’t just extend to low res images – CryptoKitties creators Dapper Labs launched NBA TopShots back in 2019, a basketball focussed collectible card trading game – but it’s only recently that the values have taken off – hitting over $230m in sales as of March 2021. With tokens using NBA highlights footage and digital artwork created on Flow, expect other sports to follow this model very soon.
And what about GAMING? Well, gamers are already familiar with the concept of value for virtual items, such as spending big money on skins in Fortnite. But now NFTs allow in game items – weapons, outfits, wigs, hats, you name it – to be tokenized and easily transferred with peer to peer trading or marketplaces. Gamers now have true ownership over their digital assets, and have the potential to earn money by building and developing them.
DIGITAL ART has suddenly appeared on the mainstream radar due to Beeple’s $69m NFT sale at Christies. And digital artists are all over NFTs, as they provide proof of ownership, authenticity and eliminate issues of counterfeiting and fraud. The very same problems that FASHION items face, and NFTs may go on to create a new method of authentication in the fashion industry. Not only that, but imagine getting an NFT with your newly purchased Louis Vuitton or Gucci bag that enables you to take and wear it in virtual worlds with you. And speaking of virtual worlds…
DECENTRALIZED VR platforms like Decentraland and The Sandbox allow users to create, own and monetize parcels of virtual land and other in game NFT items. How valuable they are is dependent on the marketplace inside the virtual world, but if a few years down the line we end up with one dominant virtual world like the OASIS in Ready Player One, then expect some of this land to become *extremely* valuable.
But, you’ve still got questions. As of course you should…
– Why are NFTs worth anything? Who would pay for them?
Well, the drivers of price in any market are supply and demand – and NFTs are by their nature unique, so limited in supply. Demand is currently high, and hence the high prices we’re seeing. And as for who would buy an NFT – bear in mind that Fortnite rakes in up to $400m a month, the majority of which comes from players buying skins, which have no intrinsic value or offer any advantage in gameplay. NFTs can do a lot more than that.
– Can’t you just screengrab it and get the same thing?
This only really applies to digital art – as a photo of a collectible clearly doesn’t have the same value as the collectible itself. But imagine I download a high res print of the Mona Lisa and put it on my wall. I still don’t have THE Mona Lisa. The value in NFTs comes from the provenance, the authenticity and the originality. The same as the value of things in the real world.
– Are current prices in a bubble?
Probably. We’re seeing a flood of money enter the space and buy anything assuming that it’ll shoot up in value the way Cryptopunks have. But once the market is flooded with similar offerings, we’ll see a lot of these speculators left high and dry. The cream will rise to the top and continue to be valuable, but don’t just buy any NFT on the grounds that it’ll go up in value.
– How can you tell the valuable NFTs from the ones that have no value?
How can you tell good art from bad art? Or good music from bad? This one is going to come down to the rarity of the NFT, its desirability and in the case of digital art, the track record of the artist. But an NFT isn’t just about art, it’s a programmable asset that can interact with decentralized finance just as easily as it can be hung in a virtual gallery in the metaverse.
– How does digital art and fashion work, if I can’t hang or wear it?
As we spend more and more time online, our digital selves become as important as our physical selves. And for some, wearing that digital fashion is as important as carrying a nice bag IRL. And the opportunities for displaying digital art in the VR world dwarf those in the real world. Wait till you’ve been inside a 3D projection of your digital video artwork. It’ll blow your mind.
– Are they just a fad, or are they here to stay?
NFTs are most definitely here to stay, although possibly in different forms and use cases than we’re seeing at the moment.
– Can they get stolen?
Well, in March one of the popular marketplaces for NFTs – Nifty Gateway – experienced a hack in which users had their NFT art stolen. Nifty Gateway managed to return the NFTs to their owners, but like with any crypto, if you leave your stuff on an exchange then you are at the whim of that exchange’s security. Move your NFT off to your private wallet and that risk is removed.
– What about the environmental impact?
So there have been some big numbers flying around, with one account saying an NFT sale on ethereum can result in the consumption of 8.7 MEGAWATT HOURS of electricity, more than twice what an average western household consumes in a year. https://www.wired.co.uk/article/blockchain-cryptocurrency-energy-use
And to some degree, this power consumption is reflected in the high transaction costs we’re seeing at the moment on the Ethereum network.
But do they actually guzzle that much juice? Well, the sale of an NFT only uses the same as a normal ethereum transaction – about 48.14 kWh [Check… is this right?]. Still a lot. But when ETH moves to Proof of Stake, the energy consumption per transaction is likely to fall to just 1% of its current level.
We’ll be digging deep into this subject in our next episode, where I experiment with NFTs on different platforms to see just how well they stack up.
What are NFTs? Tokens with a timeline. And that’s not just in terms of price, whether it goes up or down, but in terms of how they change in your ownership. What gets added to them, what gets used and the opportunities they enable. Think of them more like an app than a collectible and you’ll start to see the potential.
Are they clever just because they’re an NFT? No – they’re clever because of what the right developers/artists/musicians/filmmakers – any creator in fact – can do with them.
Should you buy the first NFT you see because you think it’s going to be worth more tomorrow? Probably not.
Should you buy one that offers you utility or pleasure that you value in excess of the asking price? Then why the hell not…”