A $69 Million Artwork You Can’t Hang: What Are NFTs And Why Are They So Expensive?

Image credit: Beeple / ArtStation

Creating digital formats of real-world assets is one of the many innovations blockchain is bringing to the world. From buildings to entire estates and more recently, art, blockchain is gradually altering the current protocols of ownership as well as identity. 

Proving ownership of an asset with blockchain is a million times easier than the existing ways. With such levels of immutability owning, the rights to something just got a lot easier. 

Normally, owning assets such as estates and gold require a ton of paperwork and even the physical presence of both parties or representatives. With the help of cryptography, real-world assets can be represented as tokens on a blockchain network and be exchanged as easily as buying something online. 

NFTs or non-fungible tokens is one way an asset can be digitized. In essence, NFT is where blockchain meets the real world.

So what are NFTs?

NFTs are simply non-fungible tokens. Bitcoin is a fungible token, meaning there’s several of that same Bitcoin. It’s like a five  dollar bill. There’s an unlimited amount of five dollar bills in America but a unique five dollar bill is created, where only one person can own it, that is a non fungible five dollar bill. 

NFTs are cryptocurrencies that run on a blockchain network that supports smart contracts. In 2017, they started running  on the ethereum blockchain (although other blockchains have their versions). They now run on ERC-721 tokens, which allow each token to be unique. 

While NFTs are cryptocurrencies, they work very differently from the regular cryptocurrency. They  are currencies that are used to represent an asset. They work differently from normal crypto like BTC or ETH because they carry additional information. 1 BTC in a wallet address is the same 1 BTC in another wallet address. But with non-fungible tokens, it’s different. There’s only one and it is used to verify ownership. 

What are NFTs used for?

NFTs are currently used to sell digital items online. From tweets to digital art and even stickers. Jack Dorsey, Twitter CEO, recently auctioned his first tweet on twitter as an  NFT. The tweet was sold for $2.5 million. 

Does that mean no one has access to the tweet? No, anyone can, in fact, see the tweet, take a screenshot and even print out a copy but only the owner of the NFT can be verified as the true owner of the tweet. 

Although NFTs have been said to be a great way of making real life assets digital, they are still mostly used to verify ownership of digital assets. No one has bought an estate in NFT but with the level of high profile sales seen recently, NFTs could start breaking new grounds. 

Who keeps the $62 million art ?

NFTs don’t provide sole ownership of things like digital art. The $62 million art by Beeple is readily available on the internet for anyone to see. While the buyer of the art gets no kind of copyright to the art, people are willing to pay a lot of money to be verified as the owner though all they have is a token. 

Interestingly, NFT is a growing market, in 2020 the value of the market grew by 299%. Valued at $250 million by 2020, the 2021 valuation will rise significantly with big sales recorded already. 

Can anyone sell NFTs

Credit: CZ Binance / Twitter

Just like cryptocurrencies anyone can buy and sell non-fungible tokens. All that is needed is an application or software that helps you interact with other facets of Ethereum such as DeFi or decentralized applications. Metamask, a browser extension offers these services. Just like regular cryptocurrencies, a wallet is needed to store the NFT. 

What determines the value of an NFT, are they good investments? 

Some people value an NFT based on how they feel about it. How much they love it determines how much they are willing to pay for it. However, paying for $62 million for a digital art means the artist is a reputable one. The owner of the tweet will also be factored in before selling for $2.5 million. 

Ultimately, people buy an NFT based on how they feel about it. Those who are using it as a means of investment however, factor in more variables than feelings. 

Determining if an NFT is good investment cannot be based on a technical or fundamental analysis. Unlike regular cryptocurrencies that are being traded regularly, experts can predict where the price will be at a particular time. With tweets and digital art, it is based solely on guts. 

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