What Are NFTs? Is It the Future Or Just Another Crypto Fad?

A new cryptocurrency called "NFTs" or "non-fungible tokens" made waves online as Logan Paul sold an NFT worth $5 million Feb. 22, with a digitally drawn version of the Youtube star replacing the face of George Washington seen on dollar bills.

In February alone, 150,000 tokens that take the form of multiple media were sold for an estimated $310 million - five times its worth last year. According to Nadya Ivanova, the chief operating officer of BNP Paribas-affiliated research firm L'Atelier, they see a new generation of traders within the growing NFT market. This could be driven by digitally native people looking for digital-native asset classes outside of established asset markets.

What exactly are NFTs?

NFTs are digital assets traded on a blockchain, often in the Ethereum network, that are unique from one another. Compared to the famous Bitcoin, which is indistinguishable and similar to a dollar, no two NFTs are ever the same. Two entities cannot be directly exchanged with one another, replicated, or divided up into smaller denominations (Bitcoins fraction into satoshis).

Moreover, NFTs source their value from their scarcity. Each NFT requires a secure certificate of ownership over a digital object.

Dealing is made easier with any platform such as Opensea, Rarible, SuperRare, Atomic Assets and Known Origin. Users can upload their works, mint them, and wait for offers until a buyer can store them in digital wallets as collectors' items.

The profits do not end there. The creator is assured of a percentage of value every time an NFT is sold and resold.

When did these start?

Cryptokitties, a collection of cartoon cats traded as collectibles, introduced this idea of valued tokens associated with digital art in December 2017. Trading on Ethereum, each digital feline now sells for more than a hundred thousand dollars.

Big brands like NBA Top Shots have joined the bandwagon. Recently, the company sold a video highlighting Lebron James for $208,000. On the other hand, Christie's, the renowned auction house, is at the near-end of their 14-day online sale of a work by Beeple, a digital artist.

What should you consider before trading NFTs?

Caty Tedman, head of partnerships at Dapper Labs that led the NBA Top Shot project, says that NFTs are here to stay.

Apart from revolutionizing the world of digital currency through its non-fungible nature, NFTs have formalized ownership of digital artworks. The power control over crypto art is given back to the artists from internet thefts who can take screengrabs of their pieces.

Moreover, sellers can set up a recurring revenue stream. Ivanova explains, "People who have amassed reputation and wealth and want to invest it in purely virtual assets like NFTs." Therefore, the single sale of an NFT can provide a seller with years-long financial capacity.

Nonetheless, like any other market, the NFT marketplace is volatile. It is bound to produce excesses in profit but also losses. The structure of NFTs keep them out of regulations that other cryptocurrencies follow. Any purchase remains unprotected by the intellectual property law and consumer law protection. Fake accounts can also come about and tamper with the bidding process, as already seen on other bidding sites like eBay.

Since NFTs are only three-year-old, financial and art experts are still debating the consequences in the long run. As per Vincent Harrison, a New York gallerist, what is certain is that the rising trend of NFT-trading is simply the beginning of a long-awaited cultural transition.