This is the first in our series about Non-Fungible Tokens (NFTs). Part 1 starts with the basics for those who have just learned about the existence of NFTs. If you already know what NFTs are and how they work, you might be more interested in skipping to the second article in this series: “How your company can benefit from creating an NFT collection”.
NFTs are unique digital assets that are registered on the blockchain. By using blockchain technology, all registered transactions (irrespective of the status) are public and cannot be altered.
Most people know about blockchain technology because that’s what cryptocurrencies are built on, for example Bitcoin and Ethereum are widely known because of the hype around their blockchain-based coin tokens. Coins/tokens are like the fuel of a blockchain. They are intertwined and connected to each other. On the Ethereum blockchain, the ether (coin/token) is essential for operating its distributed applications, while on other blockchains crypto coins are a currency to trade and execute smart contract applications. These crypto coin tokens are a Fungible asset a person can own.
Ethereum is a distributed application platform that executes applications (smart contracts) explicitly as programmed without any possibility of downtime, fraud, censorship, or third-party intervention. At Springbok, we like to call them unstoppable apps. These apps (code) run on a traditionally built blockchain, which gives it a huge, powerful, and global database foundation that can move market prices and represent the ownership of equities. This allows developers to create markets, collect registries of debts or promises, transfer funds in agreement with instructions given in the past, and much more, without interference from a third party or a counterparty risk.
This brings us to Non-Fungible assets: this means assets that are not interchangeable. For example money: if you have two fivers and your friend has a tenner (of the same currency), you would probably swap without any hesitation because both have equal value. The same goes for a bitcoin you own and a bitcoin your friend owns, both offer exactly the same value. This is called a Fungible asset.
NFTs are Non-Fungible because of their uniqueness. To put this into practical terms, we could compare NFTs to a brick-and-mortar house. Every house in your street may look the same from the outside, but each house will have a different exact value due to minor differences like the size of the back garden or an extension that gives your neighbour a bigger living space. How are NFTs unique compared to one another? This could be as simple as the artwork or the different levels of utility given to different tiers within one collection. But in practice, an NFT is always unique due to its registration in the blockchain as a unique token. Some people will value the first or last (or any specific number or token id) in a collection more than the rest and, so are willing to pay more for what is, in essence, the same NFT.
2 NFTs of Meerkats, each unique in the way they are put together (colour / accessoires)
For example, in a collection of NBA superstar James Lebron, the token id 23 is worth a lot more that the same James Lebron NFT but token 30. This because James Lebron wears #23 on his jersey and demand for this id is much higher than the supply, hence the price goes up.
Currently we see a lot of NFT projects launched as characters in PFP format (picture for proof or Profile Picture) which is basically a square image containing a character (or thing). A character can be anything from an ape to a banana or from slot machines to bitcoin miners. Anything can be used to create a collection. In other words, it doesn’t need to have a face to be a character. In fact, one famous collection of Ether Rocks is said to have reached the price of a million dollars (in Ethereum).
Previously, most NFTs were just PFPs, showing that you are part of a specific community. Today NFTs are front loaded with much more depth, such as specific utilities or add-ons in the community or around a “In Real Life” (IRL) product. These perks and different rarity levels determine the value of a NFT for a collector.
NFTs have a certain value as the hype around them grows and their supply in a collection remains limited. Following economic theory, if the buzz around a collection increases, demand will grow leading to an increased value or floor price for this collection. Most bigger collections contain 10,000 or more unique images. At time of writing, one of the largest collections is Otherdeed for Otherside by BAYC. This collection comprises of 100,000 unique land NFTs. These are minted and held by 34,289 unique owners, with a total market cap of $475 million.
Each NFT has different traits with its own rarity. In turn, this rarity gives an NFT its value compared to other NFTs in the same collection.
Currently there are a couple of big names in the NFT landscape that dominate the market in terms of hype, price, and followers:
Crypto Punks (ETH)
Fluf World (ETH)
Clone X (ETH) (has been bought by Nike)
Did you notice ETH and SOL behind these names? These are the currencies in which the NFTs are traded and match the blockchains that these specific NFTs are registered on (in other words, where these NFTs live). Ethereum (ETH) and Solana (SOL) are currently the biggest NFT blockchains around, but this could change in the future.
# Do NFTs Impact the Environment?
Everyone likes a clean environment, including us. NFTs use digital networks, which means that electricity is needed to create and sustain them. There have been stories about how NFTs affect the environment through their power consumption, but this is changing and evolving. For example, one mint using the Proof-of-work method, could use as much power as the average American household uses in 9 days!
However, when using different validation methods like Proof-of-stake or even developing new ERC standards (contract formation), substantially less power is needed to create, mint, transfer, or sell NFTs.
The Solana blockchain is known for having a lower environmental impact when minting or transferring NFTs. On Solana, a single transaction costs about the same as 2.5 google search queries and minting a Solana NFT only needs five times that amount, which is almost nothing compared to blockchains like Ethereum or Bitcoin.
# Starting with NFTs for your business
This was our introduction to NFTs. In the next article in this series, we will cover how your company can benefit from creating NFTs. If you have any questions about NFTs for your business, don't hesitate to contact us, we’d love to help you out!