NFTs: Boom or Bust?
Would you pay $2.9 million dollars for the first tweet ever posted on Twitter? How about $200,000 for a LeBron James top shot highlight clip?
If this notion sounds ridiculous to you, then you may simply just be behind on the latest blockchain-related trend: NFT’s. But what is an NFT? The Wall Street Journal best summarizes it in the video below.
So what is an NFT or a “non-fungible token” and why would anyone waste their money on it?” To break down what this really means we can substitute the word ‘fungible’ with ‘replaceable,’ such that the tokens purchased are completely unique. NFTs are part of the Ethereum blockchain and essentially work in a way that allows users to purchase the rights to digital ‘tokens’ (which can include digital art, videos, memes, or even tweets). The transaction gets validated through all other users verifying all other transactions on the blockchain. If a user has enough money on the blockchain, then he or she would be able to verify it with all other users, and that user would officially own the rights to that digital token. The CNN article below describes NFTs and how they work.
“So why would a digital token be valuable if I could consume it for free?”
Imagine purchasing the original Mona Lisa but still leaving it in the public Louvre museum for everyone else to see. That would be different from being a visitor of the museum and admiring the painting as a part of the exhibit. Both parties would technically consume the art in the same way even though one party is the actual owner of the art. NFTs work in a similar way for the digital world.
In terms of NFTs, Jack Dorsey’s first tweet on Twitter is the Mona Lisa while the rest of Twitter can be compared to the museum visitors simply consuming the art. Similar to collecting pokemon cards or keeping a sentimental rock collection as a child, the only reason NFTs have value is because we have assigned it such, even if it isn’t exactly a tangible item.
When you own an NFT, you are now holding the claim to ownership of this NFT, which means you also hold the right to exclude others from claiming ownership of this NFT. This also does not mean that if you purchase an NFT, you will own the copyright to it — unless you explicitly purchase the copyright as well.
There are many upsides to the rise of NFTs, such as the opportunity it provides to many digital artists, as many do not traditionally get paid much for the work that they put out on the internet. For example, a Dublin-based artist who chooses to go by Jay, has been creating vintage video game-styled pixel art under the name Genuine Human Art. He sold over 20 unique pieces for around $4000-$6000 in cryptocurrency. This is just one example of how the rise of NFTs could potentially help smaller artists make a living.
However, as the initial hype of this technology starts to die down, you have to wonder: are NFTs simply in a bubble waiting to be popped? If the only reason blockchain enthusiasts are willing to drop half a million bucks on a Nylon Cat GIF is because we suddenly deem it valuable, how do we know that it won’t just as quickly lose that same value in the future. Purchasing an NFT essentially means that you are placing a huge bet on a future where blockchain is a dominant basis for many of our transactions going forward. We still don’t know whether the initial large valuations set on many digital pieces really set a precedent strong enough to justify such a high-value market in the long run. The NFT market will be just as volatile — if not more — than the crypto market.
According to recent data analyzed by Protos, NFT purchases peaked on May 3rd of this year, when over $102 million worth of digital tokens were sold in one day. However, within the past week, only $19.4 million in sales were processed, highlighting an approximate 90% collapse since the initial NFT hype.
Additionally, there are a few other constraints that may cause problems for the NFT market in the long run. One of the biggest ones is the sheer amount of energy that NFTs use and the impact it may have on the environment. NFTs are on the Ethereum blockchain, and this cryptocurrency-like most major ones- are built on a “proof-of-work” system, where third parties are solving complex problems or “mining” in order to verify transactions (thereby adding a new “block” of transactions that are verified to the decentralized ledger or ‘blockchain’). This type of system uses up a lot of computing power and electricity, 33 terawatt-hours of electricity to be more precise (close to the same amount of energy as the country of Serbia). The article below goes far more into depth about the environmental cost of NFTs.
There are also many potential legal issues that come into play with the sudden popularity of the NFT marketplace. Many creators online are dealing with copyright issues, where other parties are taking their digital art and turning them into NFTs and making a profit without their knowledge or permission.
With all this being said, there are still many people betting on NFTs in the long run. Many NFT marketplaces such as CryptoPunks and NBA TopShot are still circulating many transactions, with many NFT enthusiasts willing to trudge it out for the long haul. Some believe that this is only the beginning and new digital mediums like music will be next. Additionally, with the eventual rise of VR/AR, there are many in the crypto-space who believe that NFTs can play a big role in the development of immersive virtual worlds (which you can read more about in the link above).
In the short term, there is also a high possibility that many of these ‘silent crashes’ could actually just be a reflection of the influx of NFTs that possessed very little value but sold for inflated prices. Following the initial hype of NFTs, many companies did not want to miss out on the potential profits from selling NFTs, so they minted as many NFTs as possible to capitalize on the market. Thus, the decline in NFT value may not necessarily mean that the NFT market is a bust but rather simply stabilizing to a market more reflective of the actual value of the digital tokens being bought and sold.
There are also more and more use cases for NFTs developing, such as the platform Async.Art, which is a programmable art and music platform that allows NFT holders to manipulate certain parts of artistic pieces that were bought online. The applications for NFTs continue to grow in industries such as pharmaceutical, luxury, textiles, shipping, Supply Chain Management, ICT, and IoT. Ultimately, only time will tell whether the NFT market is here to stay or if purchasing million-dollar tweets will become just another 2021 fad.
