What are NFTs?
Rebecca Cattlin March 31, 2021 7:30 AM
NFT stocks have taken the market by storm recently, as a growing number of companies are using the cryptographic tokens as a means for users to buy and sell digital assets. Discover what non-fungible tokens are and why they’re growing in popularity.
What does NFT mean?
NFT stands for non-fungible tokens, which are one-of-a-kind digital items. They’re comprised of a unit of data stored on a blockchain that represents the underlying asset.
When something is fungible, it means it can be exchanged with something else. For example, a standard bitcoin token is fungible, because it can be traded for an identical bitcoin of the same value. When something is non-fungible, it is completely unique. So, if you traded it for something else, you’d have a completely different item, worth a different amount.
Although NFTs are bought by an individual, the digital asset will still exist for other parties to see for free.
Why buy NFTs?
A lot of people have questioned why you’d buy an NFT if you can’t restrict who can view your asset, but you’re still buying something that cannot be replicated: the ownership rights to this asset.
For the buyer, an NFT has the same function as a lot of collectibles and gives you the bragging rights that you own the underlying asset. But they can be used to speculate too – you can buy an NFT in the hope that it rises in price and you can sell it on for a profit at a later date. Currently, the NFT market is relatively new, so there are only a few exchanges that facilitate the exchange of NFTs.
For the seller, using NFTs instead of selling work through more traditional means can create a market that isn’t otherwise available. For example, the creators of digital art or even emojis have had very few ways of selling their products. Plus, most NFT contracts will enable the seller to get a percentage of the sale each time the NFT changes hands.
There have been attempts to sell NFTs for physical items, but for the most part, the verification process isn’t as smooth.
How do non-fungible tokens work?
Non-fungible tokens work using proof-of-work (PoW) blockchain, which is a process in which one party proves to others that a certain amount of effort has been expended toward a goal.
PoW is the same method used on bitcoin’s blockchain – in which each new miner has to show their contribution to a cryptographic equation in order for a transaction to be verified and added to the ledger.
For the most part, NFTs exist on the Ethereum blockchain, where smart contracts can be created to digitally exchange ownership of assets. A common example of Ethereum NFTs in use is the app CryptoKitties, which enabled users to buy and sell digital kittens. One such kitten sold for over $17,000.
Once an NFT transaction has taken place it becomes a secure part of the blockchain, making it harder to steal than a physical asset would be. Like other cryptoassets, NFTs are held in digital wallets.
Non-fungible tokens use cases and examples
NFTs are being used to commodify digital assets – such as art, music, videos, collectibles and in-game assets. They can represent basically anything that exists as code.
Perhaps the most famous recent example of NFTs in use is the digital artist Beeple who sold a piece of artwork for $69 million, and Twitter founder Jack Dorsey who sold his first ever tweet for $2.9 million.
Neither the artwork or the tweet are tangible assets, they both only exist in the digital space. The drawback of NFTs is that there’s no real way to take ownership of a digital asset, because once something is on the internet, it’s there for everyone to see.
So Beeple’s artwork or Dorsey’s tweet are both still available for the public – despite people having paid millions to ‘own’ them.
What are NFT stocks?
NFT stocks is the term that’s being used to describe the companies getting involved in non-fungible token projects. These projects are growing in popularity as many people believe they’re the future of collecting – whether that’s art, music, etc. As the trend grows, these company's shares have seen increased speculation, both bullish and bearish.
As NFT is a relatively new technology, a lot still remains unknown about what the transactions will mean long term and what the true value of an NFT is, which is causing the volatility.
The most notable price move has been Hall of Fame Resort and Entertainment’s (HOFV) share price following its collaboration with Dolphin Entertainment (DLPN). The partnership would produce football-themed content NFTs for users to buy and sell. A similar venture by NBA Top Shot has seen upwards of $500 million worth of transactions, which is potentially fuelling the interest in HOFV and DLPN.
NFTs and climate change
PoW is often criticised because it requires a far larger amount of energy usage than other blockchain methods, namely proof of service (PoS). This means NFT has a high carbon footprint per transaction. In fact, the greenhouse gas emissions for NFT transactions have been so high that there are cases where people have decided against selling their assets that way for fear of the effect it could have on the planet.
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