March 26, 2021
The internet nearly melted, with people gobsmacked that a JPG could fetch for such a steep price. But for those ‘in the know’, eyes glowing red with emoji-laden Twitter feeds, it was inevitable.
Early participants in the cryptocurrency markets have witnessed wild conditions in the last 5+ years. We’ve experienced innovation on a level that was last seen during the Dotcom era and with these innovative products having publicly traded (24h a day across the globe) tokens attached to them, we’ve enjoyed and suffered through price-action that is minting new millionaires every day, whilst at the same time, crushing legacy fortunes.
I must admit though, NFT’s caught me by surprise and when they started their rise to the extreme top (might not be the top) this year, I couldn’t have imagined so much bullish activity wrapped into a cryptographic token that assigns ownership rights to something like a piece of digital art.
Non-Fungible Token Standard
Points to the location of the underlying asset
NFTs are Digital assets that represent tangible/intangible items, like artworks or merchandise. Think of them as certificates of authenticity for the items they represent.
Living on the Ethereum blockchain, NFTs act like other cryptocurrencies in that they can be traded, however, the tokens have unique and specific information attached to them. This unique information means the tokens aren’t fungible, meaning you can’t exchange them for another thing of equal value. To help this point sink in, let’s look at an example of a fungible item, like a bar of gold: A bar of gold can be swapped for another bar of gold that’s the same size.
Technically speaking, an NFT is a document with a hash that points to the location of the content it represents, noting that this content doesn’t live on the Ethereum Blockchain (this would be super expensive with the Ethereum blockchain in its current state) but rather, it lives on a separate platform, like Cloudinary.
There’s a number of different marketplaces popping up and with NFT’s having a big moment in mainstream culture, I’m expecting more to popup soon. The three major platforms are Rarible, OpenSea, and Nifty Gateway.
The creator retains intellectual and creative rights, however, the token owner owns the token – this token has a hash code that shows ownership of the token and asset associated with it. As previously mentioned, it points to the location of the asset.
The token owner can trade their token on the free market, with its value fluctuating depending on the demand and sentiment.
In order to answer this question, we must first understand how NFT’s and the underlying assets they are attached to, exist together.
This is a little bit complex so I’ll do my best to break it down and keep it simple.
But what about the assets they represent?
The assets sit with a Centralized Provider
NFT’s are created using Ethereum’s ERC721 token standard with the tokens being governed by smart contracts – they live on-chain and are immutable.
Now, remember, the token is basically a certificate of title that represents the asset…it’s important to note that there’s a separation between the token and the data, therefore, there may be scenarios where the data disappears but the token still exists.
Most of the time, the asset lives on a centralized provider, like Cloudinary, which is a cloud-based image and video management company that offers services to platforms like Nifty (where you purchase your NFT’s). So if either company goes out of business, say goodbye to your asset. Furthermore, there may also be situations where the URL link to the asset is changed.
Each person has their reasons and whatever the reason is, it’s certainly drawing opinions.
Some contemporary art collectors have criticized the recent mania surrounding NFTs.
The co-founder of Cryptopunks, John Watkinson, has a different view.
Something that tends to evade ‘no coiners’ is the reality that vast amounts of wealth have been generated by nameless individuals who spend most of their time on crypto-twitter, communicating in memes. These same individuals will drop 4,222ETH ($7.6M) on the below digital art:
Founded in 2014 by Robert Dermody, Adam Krellenstein, and Evan Wagner, Counterparty allowed asset creation on a decentralized exchange. Specifically, users would create and trade new types of digital tokens.
Their native token, XCP, was used for decision-making and to pay for smart contract execution.2014
Spells of Genesis (SoG) is the 1st blockchain-based mobile game ever made. Interestingly, they were the first company to launch an Initial Coin Offering (ICO) when they funded game development through the sale of their BitCrystals. These tokens can be used as currency within the game.2015
Force of Will is a Japanese fantasy series offering users a trading card game, and story articles. In 2016, the group decided to enter the cryptocurrency markets by issuing their own currency called, 'Willcoin'.
Selling a total 20,000 'Willcoins' in four batches of 5,000, the token sale was significant because the company was already established in the North American market - they were ranked 4th by card game sales.2016
2017 was a breakout year for Ethereum and it wasn't long before Pepe made the jump to the Ethereum Blockchain in the form of a decentralized marketplace called, Peperium.
Peperium had its own tradeable token called, RARE, with the main functionality being around meme creation and for paying listing fees.
Cryptopunks Total Value of All Sales (Lifetime)
"CryptoKitties is a game centered around breedable, collectible, and oh-so-adorable creatures we call CryptoKitties! Each cat is one-of-a-kind and 100% owned by you; it cannot be replicated, taken away, or destroyed." - CryptoKitties
CryptoKitties rise in 2017 came at a time when crypto markets were experiencing a bull-market to remember and so popular was the game, it brought the Ethereum Blockchain to a standstill. Users trading the tokens were making hundreds of thousands of dollars and it wasn't long until news reached major outlets like CNN.2017
Web 3 wallet functionality improved dramatically during this time, making it a seamless experience to connect your wallet to such marketplaces - that, along with another crypto bull-run has taken us to the point where some NFT's are selling for millions...the best example of this is the piece by Beeple.
His piece 'Everydays: The First 5000 Days' sold at auction for USD$69M.2018
Recently, there’s been a lot of attention regarding Bitcoins energy usage, and other blockchains like Ethereum have been caught up in the mix.
Digiconomist have captured some interesting data on this issue.
To understand the environmental impact, we must first understand ‘Proof-of work’ (PoW).
Both the Bitcoin and Ethereum blockchains are secured by the PoW consensus algorithm;
This algorithm solves the ‘double-spending problem’, an issue in the digital cash economy where the same set of funds are sent to two recipients at the same time.
When transactions are sent between users, the decentralized ledger collects these transactions into blocks and miners then compete to validate the transactions using PoW. The first miner to solve the mathematical equation then posts the result to other nodes in the network and if the transaction receives approval (the nodes reach consensus), the block becomes validated and is added to the blockchain. For the computing power used to solve the problem, the miner receives rewards.
The computing power required to solve these mathematical problems has increased, as such, more energy is being consumed and it’s caught the attention of climate activists.
Tying this back to NFTs – The craze surrounding these tokens has resulted in an increase in transactions on the Ethereum blockchain, and as a result, more computing power is being used to validate transactions, thus causing an impact on the environment.
The debate will rage on in this regard, with opponents arguing that NFTs offer no value and thus anyone supporting it, is supporting the destruction of the environment, whilst proponents of Cryptocurrency will point out that many other industries, and bodies, like the U.S. Treasury, consume far more energy for their activities, like printing USD.
I’m not sure how long this NFT run will last but nonetheless, it’s fascinating to see.