Fungibility is what defines the ability of an asset to be traded at its market value. It is for this reason that the currencies have a universal within a given time frame. But there are also those assets that are non-fungible like baseball cards, artwork, collectibles, and even a banana taped to a wall. Anything can determine their value, but in most cases, these assets are rare, are hyped up by speculation and rumor, or hold value within a community.
Many investors, like art collectors, take advantage of these assets when the asset price appreciates with time. Nowadays, non-fungible assets are picking up in the crypto world, aided by NFTs.
What are NFTs?
Non-fungible tokens (NFTs) are digital certificates that are used for verifying digital assets. The way that they work is that they record the value of the asset and the owner as it gets traded in the online world. This technology is enabled by smart contracts that reside on the blockchain. Once an NFT is created, there is no way to replicate or counterfeit it, as the blockchain serves as a network where each node verifies these transactions, and cryptographic functions ensure proof of ownership by making them immutable.
The Ethereum blockchain is one of the pioneers in this technology due to its ERC-721 smart contract standard. As a result, NFTs have gained mass popularity in the past couple of years, and currently, many investors are looking to take advantage of them. But, what's driving this craze?
Why are NFTs so Popular Right Now?
NFTs are certainly not new. Their first instance can be seen on the Bitcoin blockchain in 2012 with Colored coins, but the phenomenon didn't really pick up due to compatibility issues with Bitcoin's scripting language. In 2017, when Bitcoin experienced its first bull run where it reached almost $20,000, the Ethereum blockchain was experimenting with other financial derivatives, including NFTs. The token gained popularity in crypto gaming when players started trading in digital cats on the Cryptokitties platform.
Since then, many investors and crypto enthusiasts have started looking at the asset as a worthy form of investment because of the current buying phase surrounding it. It has been particularly helpful for the digital art world, where many digital artists are lining up to sell their work online via platforms such as OpenSea, Rarible, SuperRare, Bitcoin Era and Nifty Gateway. Artists get to list their work on one of these platforms for a processing fee. If it gets sold, they can bank the profit. Additionally, they can charge a royalty fee every time their artwork gets traded.
In December last year, a digital artist by the name of Mike Winkelmann gained fame for his work and sold his collection for $3.5 million in exchange for their NFTs. Later, Christie's sold the collection for $69 million. The news made headlines, and many are now jumping the bandwagon to rake in huge billings.
Will NFTs Remain Popular?
The crypto community is unsure whether the NFT craze is just a bubble of overhyped and overvalued items. Most think that the ability to have this facility is driving up the craze behind it where most people just want to invest in fear of missing out. Some hold the view that speculation and rumors surrounding the uber-rich art community are another influence behind the craze with little to no benefit for unrenowned artists.
At this point, it may be difficult to say how popular NFTs will be in the future, but it looks like a credible asset as long as the blockchain remains functional. It will definitely serve to valuate other digital assets like images, photos, viral clips, in-game items, or anything that gains value by virtue of the internet. We forget that the internet is a big place where buyers and sellers can find each other easily. As long as someone or some community sees the value of an item, they will determine how it gets traded.