Non-Fungible Tokens (NFT): What they are and how people are making money off them

NFTs (non-fungible tokens) have taken the world by storm ever since the year started, largely for the amounts of money that have been exchanged for them. An NFT representing the classic digital animation Nyan Cat was sold for 300 ETH ($706,190) on Foundation. If that’s not high stakes enough for you, how about an NFT that was auctioned off for more than US$69 million (S$93 million)?

That’s exactly what happened on March 11, 2021 after a Christie’s single-lot sale ended. A digital collage created by graphic designer Mike Winkelmann titled The First 5000 Days bore that eye-popping hammer price. And the successful bidder doesn’t even own that piece of art. That’s right, anyone can still view the original collage and download it if they so desire.

To make things worse, Mr. Winkelmann can create more NFTs to represent the very same artwork. Heck, anyone can create an NFT out of it. So, what gives? Read on and find out.

What are NFTs?

Created in 2015, NFTs are digital assets that are largely part of the Ethereum blockchain. However, other databases such as TRON and Polkadot do contain these tokens too. As mentioned above, this allows anyone to create an NFT as it’s essentially metadata.

The ‘non-fungible’ bit means that each token is unique, unlike assets such as cash or gold. Think of them as one-of-a-kind trading cards. Although the cards can be photocopied or photographed, they aren’t the real mccoy.

How do people make money off them?

Individuals and businesses use NFTs to represent pretty much anything before selling them off. No kidding. For instance, the NBA’s Top Shot platform uses NFTs to represent highlight reels before bundling them and selling them as a pack.

Yes, you’ve read that right. These are the very same video clips that can be found on YouTube for free or when you’re watching a match.

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The most expensive Top Shot pack was priced at US$230, but individual highlight reels are being resold for as much as US$250,000. To reiterate, these Top Shot NFTs just represent snippets from a single NBA game.

As you can probably guess by now, perceived value is the moneymaker for people invested in NFTs. Remember, the actual assets that NFTs represent can be easily viewed, replicated, and even owned. It’s the NFTs themselves that are unique, even if multiple tokens are created to represent the same asset.

What are the risks?

Like bitcoin before its meteoric rise, there’s nothing being pegged against NFTs right now. These tokens hinge on perceived value, much like an autographed version of a regular comic book. This causes a bubble to form, with Mr. Winkelmann himself admitting as much one day before the historic Christie’s auction.

Then there’s the environmental risks. Cryptocurrency mining has attracted criticism due to its large carbon footprint. On an annual basis, the Bitcoin network consumes as much power as Chile and produces as much electronic waste as Luxembourg. NFTs aren’t exempt because they’re based on blockchain technology.

For reference, a single Ethereum transaction consumes approximately 61kWh. That’s what an average American household consumes across two full days.

In conclusion

At the end of 2020, the market capitalisation of NFTs reached a staggering US$338 million (S$453.3 million). It’s predicted that this will more than triple once 2022 rolls around, due to the boundless nature of NFTs. However, this is a double-edged sword because of how speculative this asset is.

Experts in the cryptocurrency and auction industries have expressed scepticism, highlighting how dubious NFTs are. As mentioned several times over, when you purchase an NFT, you don’t own the underlying asset. For digital artists, this might not matter much, because NFTs are simply an additional way to put food on the table.

However, investors might want to be more cautious. Fortunately, powerhouse companies such as Nike and Louis Vuitton are starting to take a serious look at this digital asset. This represents a road to legitimacy as it encourages even more organisations to hop onto the bandwagon.