What is an NFT? Short for “non-fungible token”, an NFT is essentially a digital representation of a physical product, artwork, etc. or a digital file that contains a digital artwork that has no actual physical component. NFTs can be music, video, or any other thing that is represented by the NFT.
What NFTs are NOT? They are not cryptocurrency itself, but rather something you buy-sell-or-trade in exchange for crypto.
According to many sources, most NFTs are associated with Ethereum but that does not necessarily mean they are exclusive to that currency or the platforms that support it. You could mint your own NFTs using any platform that supports your tech, your end result, etc. But much of what’s discussed is offered by those who choose to trade in Ethereum.
What Is An NFT?
As mentioned above, NFTs are considered “goods” rather than currency. There are real-world equivalents to this that can help you understand the nature of an NFT and why it’s currently so popular to make, sell, and buy them.
NFTs are a digital version of Pokémon trading cards in a way. There’s another pop culture reference many will understand; viewed through a certain lens NFTs are also quite similar to Magic: The Gathering card decks and their associated collectibles.
Not all Magic gaming cards have the same value to collectors, but there’s no real, fixed “face value” for these cards either. You won’t find a $20 card but you may find collectors willing to pay that amount for that card.
NFTs = Pokémon?
The value is essentially based on market enthusiasm, and that’s true for NFTs as well as Pokémon or Magic: The Gathering.
If you think that NFTs, like these trading cards, have no actual inherent value on their own but rather rely on their uniqueness and collectability for the value.
And as we all know, one day a Beanie Baby is worth $10K on eBay because that’s what someone was previously willing to pay. But whether or not someone is willing to pay the same amount of money TOMORROW remains to be seen.
That is why both Beanie Babies and NFTs can be referred to as speculative investments. A speculative investment is basically what you do when you buy artwork–you purchase assuming or hoping that the art will rise in value over time. But it will only do that if enough people are willing to participate in the buying and selling of the art at that price.
The Nature Of NFTs
Each NFT must be created or minted, and each is 100% unique. That means that if you created an NFT with a piece of your own digital art, that NFT is an original, “first edition” type work. (“First edition” is our term, not a bit of NFT jargon.)
Each NFT is trackable on the blockchain, and each can represent either a digital file or a real-world physical object.
At press time, the Ethereum official site reminds that as we currently use the technology, NFTs can only be “owned” by one person at a time. Ownership is proven by the token’s ID and metadata.
NFT identifier tokens are totally unique, and those created on assets owned by Ethereum is specifically associated with one Ethereum address. NFTs are, under Ethereum, not “directly interchangeable” which means there may be a sliding scale of value for a given NFT–they are not all assigned the same value (the way virtual currency is) but rather the value is determined by how rare or common the NFT proves to be.
The creator of an NFT is free to sell it, trade it, and even earn royalties under the right conditions.
How NFTs Gain Value
Remember our discussion of Magic: The Gathering and Beanie Babies above? The same kind of buyer enthusiasm responsible for those items being worth far more than your typical shopper might be willing to pay is also at work in the world of NFTs.
NFTs are a new thing and it’s not entirely clear whether they are just a fad, a former fad starting to gain real traction in the space, or a “sleeper” feature that winds up creating its own powerful market share over time.
But whatever the outcome, it will depend greatly on how much people are willing to buy, sell, and trade the NFTs.
Some NFT creators understand about creating value through uniqueness and scarcity. If you mass-produce 10,000 NFTs with the same art and the same appeal, you can wind up lowering the overall perceived value and demand for the item.
But make the same thing a one-of-a-kind offer that nobody else can have besides the lucky buyer who got there first and you have a recipe for potentially creating a huge market due to scarcity of the NFT.
The Future Of NFTs
At press time, there is discussion among American lawmakers about what to do about cryptocurrency in terms of possible federal regulation and other measures.
This has the potential to greatly affect the future of NFTs–things that are selling for outrageous sums of virtual currency today may be worth half the value of those sales and trades if the government decides to step in and begin regulating the industry.
That’s why it is a very good idea to play a wait-and-see game with NFTs, especially those who use them as art speculation-type investments.
The artwork or digital products worth so much today might find owners struggling to sell the NFTs for a break-even sum if the market decides it’s “over” certain aspects of the industry due to federal involvement.
One important aspect of future planning in the world of non-fungible tokens? How they might fit into gaming platforms. There is already a huge market for digital goods and services related to video games, especially multi-user networked titles that have parties of players searching for treasure, level-ups or power-ups, etc.
NFTs in a gameplay context could represent a major shift in how games operate–what if NFTs suddenly have more real-world selling or trading power due to a surge in popularity over one unique use of them or another?
This is all pure speculation about the coming year or years, but it’s worth noting that virtual currencies have been in use in online gaming for a very long time, it just took some time for those outside gaming communities to see the elevated potential. With NFTs, that discovery process may be taking far less time.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.