Non-fungible tokens: What are NFTs and why are they creating such a stir?
A growing number of people are spending a fortune on things that can’t be seen or felt in real life, from artwork and GIFs to clothing, thanks to a frenzy for non-fungible tokens (NFTs).
As the world continues to shift to all things digital, this unique, one-of-a-kind crypto asset enables collectors to authenticate, own and trade original authenticated versions of special digital goods using blockchain technology.
They can be anything digital from drawings and paintings to music, but they can also be applied to a physical item such as coins or a stamp.
In economics, a fungible asset is something with units that can be readily interchanged, like money. You are able to swap a £10 note for two £5 notes and it will have the same value.
However, if something is non-fungible, it has unique properties so it cannot be interchanged with something else.
When an NFT is bought, the person purchasing receives a certificate secured in blockchain technology, which makes them the owner of that specific digital asset. Specifically, NFTs are typically held on the Ethereum (ETH-USD) blockchain, but other blockchains support them too.
This cannot be replicated or substituted, and it can only have one official owner at any given time.
NFTs are transparent and no one is able to modify the record of ownership or copy/paste a new NFT into existence.
Due to this unique quality the NFT market has become popular over recent years, drawing in a number of wealthy consumers since their creation in around 2014.
Watch: What is an NFT? Here's why some are paying millions for digital art
In March, digital artist Mike Winkelmann, better known as Beeple, sold an NFT of his work for $69.3m (£50.5m) at Christie’s in New York, putting him among the top three most valuable living artists. It became the most expensive NFT ever sold.
Elsewhere, even digitally created horses with unique algorithms have been sold. Zed Run, a company which launched in early 2019 with horses selling for as little as $30, recently sold a stable of digital racehorses for more than $250,000.
On its platform, owners pay an entry fee to race their horses against others for a prize pool.
The viral internet clip known as ‘Charlie Bit My Finger’ was also taken down from YouTube earlier this year, selling as an NFT for more than £500,000.
Meanwhile, Jack Dorsey, chief executive of Twitter, sold his first tweet as a non-fungible token for over $2.9m in March. The tweet, which says, “just setting up my twttr,” was first posted on 21 March 2006.
just setting up my twttr
— jack⚡️ (@jack) March 21, 2006
Dorsey said that all proceeds from his NFT sale would be converted to bitcoin and donated to GiveDirectly, a charity giving cash to people living in poverty. Dorsey’s gift will specifically go to its Africa COVID-19 response.
The craze for NFTs has also extended into fashion, where digital shoes and dresses sell for couture prices. In March, a streetwear-focused brand RTFKT sold $3.1m worth of digital sneakers in just seven minutes in a collaboration with 18-year-old artist Fewocious.
“As we spend more time in virtual worlds, we will care just as much about our digital sneakers and handbags as we do our physical ones,” Jon Lai, an investor in RTFKT, tweeted in May.
Read more: NFT mania hits the stock market with £35m London listing
According to a study from NonFungible, the total value of NFT transactions quadrupled to approximately £178m ($244m) last year. The number of digital wallets trading them doubled to over 222,179, the report said.
The website tracks NFT marketplaces, and the average price for NFTs went from $142 in October 2020 to $4,000 in February 2021.
However, similarly to cryptocurrencies, which are generally encoded with the same underlying software, NFTs can be volatile, and have been criticised for generating more emissions every time it’s bought or re-sold.
How to buy or sell NFTs
A digital wallet that allows you to store NFTs and cryptocurrencies is required to buy or sell them.
The wallet will need to be funded by purchasing cryptocurrency, which will be dependent on what currencies the NFT provider accepts. Most exchanges charge at least a percentage of your transaction when you buy cryptocurrency.
“NFTs are risky because their future is uncertain, and we don’t yet have a lot of history to judge their performance,” said Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council. “Since NFTs are so new, it may be worth investing small amounts to try it out for now.”