In a new series for Mouthy Money, crypto guru Milo Larkin will be looking at some of the most popular cryptos, explaining what they do, how they work and whether they offer any utility in the ‘real world’.
What are NFTs?
Non-fungible tokens, or NFTs, are ways to represent something uniquely on a blockchain platform. They are tokens, that are cryptographically secure (like bitcoin), which certify ownership of something digital.
These tokens are usually traded on a blockchain such as Ethereum, but Solana and Cardano have also emerged as platforms for NFTs.
What does this mean in practice? It means that whoever owns an NFT of something, for example a piece of digital art like such as this CryptoPunk (recently sold for 111ETH, or $419,000) is certified as the unique owner of it.
If an individual asset is ‘fungible,’ it means it is interchangeable with another individual asset. An NFT is an asset that is not interchangeable with another, and is fundamentally unique.
What do they do?
Essentially NFTs simply work to verify ownership of an asset to somebody, through an unforgeable digital signature secured on the blockchain.
Apart from that they offer a sense of authenticity to their owners who know that, according to the blockchain, they are the sole owner of that asset.
Why have NFTs increased in popularity?
Last year saw the beginning of a boom in NFTs, with a whole range of NFTs increasing in price as interest in them skyrocketed. Since then the market subsided, but in the past six months we’ve seen another increase in interest.
Some of the most recent headlines include a scammer selling a fake Banksy NFT for $338,000 before returning the funds, the creators of CryptoPunks signing with a Hollywood talent agency, and NBA legend Stephen Curry buying his own NFT for $180,000.
The recent end of summer bull run in crypto could be driving the interest in NFTs, as investors in the space look to diversify their portfolios away from just bitcoin and Ethereum.
But artists, musicians and other content creators have also recognised that NFTs are a way of being financially rewarded for their artistic endeavours.
Rock band Kings of Leon made headlines earlier this year when it announced that in conjunction with the release of an album will come a release of NFTs. It was reported that the band made $2m in the first week.
NFT criticisms – scams and ‘rugpulls’
Over the last few weeks, there has been some justified criticism levied at the NFT sector.
Firstly, NFT digital marketplace OpenSea was heavily criticised following the news that the platform’s head of product had been insider trading NFTs to scoop a tidy profit on the pieces of artwork he knew were going to be on the homepage.
Find out more: How to avoid falling for a scam
Secondly, the owner of a fake crypto project called Evolved Apes disappeared, having sold a series of NFTs for $2.7m without delivered the pieces of artwork to their owners, or paying the artist.
This ‘rugpull’ again brought the topic of security and regulation to the forefront of the crypto space. Investors therefore need to continue to act carefully, and understand that a nascent sector such as crypto leaves consumers with fewer protections than in other investment areas.
Whilst it is easy, and tempting, to sneer at those spending sometimes upwards of a million dollars on a single .jpeg of a piece of artwork, ultimately an NFT is just a way of expressing ownership of something.
In the same way that someone might wish to collect an original Rolex Daytona, NFT enthusiasts would prefer to own their own unique piece of art or media.
There could be other functions or applications for the technology behind Non-Fungible Tokens, such as the tokenisation of non-digital assets like property, which could increase liquidity (how easy it is trade an asset) in a sector with lots of illiquid assets such as real estate. But that has not yet come to the fore.
As with all crypto, the technology moves forward quickly, so it may be a space worth watching.
If you’re interested in investing in NFTs or buying something through this method of technology, be aware that it carries risks with it. You shouldn’t use any money you cannot afford to lose.