NFTs explained: what they are, and what you should know

Definition, value add, and an AMA session coming up!

Oct 13, 2021

Up until now, the crypto world has been all about infrastructure and finance. Think about it chronologically:

Bitcoin was created in 2009;
Ethereum launched in 2015, offering the infrastructure to build Decentralized projects on its blockchain;
2017 DeFi projects became the hot thing in town.
Around the same time, more blockchain platforms like Polkadot, Cardano started to emerge.

However, during this 2021 cycle, there is something more: NFTs have taken the crypto world by storm. It’s revolutionizing different areas: digital art, collectibles, online gaming... Names such as CryptoPunks, CryptoKitties, Axie Infinity are being heard more and more.

What we are seeing today though, is just the tip of the iceberg. NFTs are so much more than just arts and collectibles, they are the Internet of Assets:
They can have different parameters,
They can have different use cases,
They can be used in different industries.

This wide range of possibilities is also why NFTs can be quite confusing to understand. I’ll attempt to break all of this down for you, so let’s get started!

First things first… What are NFTs?

NFT stands for Non-Fungible Tokens:

Fungibility is an economic term used to describe things that are interchangeable with each other because their value defines them.
Example: $1 is fungible because you don’t care which exact dollar bill you get, as long as it’s $1.
Another example: a pack of pasta is fungible. When you order your grocery online you don’t care which exact pack they deliver to you, as long as it’s the brand and size you asked for.
Non-Fungible, on the contrary, means that it’s one of a kind. It’s value is defined by its unique property, and it can’t be interchangeable with other similar items.
Example: the Mona Lisa is non-fungible because it’s a unique piece of art painted by Leonardo Da Vinci.
Another example: the sweater your grandma knitted for you is non-fungible, not only because it was done by her, but also because it carries an important emotional value to you.

Therefore, Non-Fungible Tokens are the digital representation of the ownership of anything that is unique. These items can be literally anything. They can already be digital, like Jack Dorsey’s first tweet, a domain name, a collectible at an online game, etc. It can also be anything in the real world, such as property (real state), luxury products, your car, etc.

What are the different Parameters?

NFTs are created on a blockchain platform, using previously set standards. In the case of Ethereum for example, the most well-known standards are ERC-721 and ERC-1155.

These standards are important because they will allow you to set up particular parameters for your NFTs, that can be classified in 3 different types:

Single: just one unique NFT is created, for example, a piece of art.
Collection: a number of NFTs are created together, but each item has a unique combination of different traits, such as CryptoPunks.
Set: a collection where there is a number of the same item, such as card collectibles.

What makes them so special?

Let’s take a look at some of the valuable properties NFTs offer:

Unique: NFTs are non-fungible, they are defined by their unique traits that make them one of a kind, therefore making them very valuable due to scarcity. For example, each of the different characters of the CryptoPunk collection has a unique combination of a series of traits that makes them unique.
Scarcity proof: the tokens’ amount can be verified, whether it’s a single piece of art, or if it’s part of a collection. Following the CryptoPunk example, there are in total 10,000 original characters created, and this information is available on the blockchain.
Authenticity: they are fraud-proved since the origin can also be verified on the blockchain as all transactions are registered there.
Ownership proof: this is another piece of relevant data that is being captured on public record. You can see who created the token, who owned it before, and who owns it now.

Why are NFTs valuable?

There are multiple reasons why people get into NFTs, but I believe there are 3 main reasons that lay at the core.

These reasons are powerful because they offer an actual utility, which is critical to the vale of an NFT, beyond the speculation factor.

Additionally, these 3 reasons aren’t mutually exclusive, very often an NFT possesses a combination of all these values adds.

Let’s take a look at them:

1. NFTs are Unique and Rare.

Since the beginning of humankind, we have always collected rare items, from seashells, precious metals, to pokemon cards. So if you think about it, when people collect NFTs, it’s a digital representation of this same activity we’ve been doing for thousands of years.

The fact that something is unique and/or rare, gives it the value of scarcity. This is the reason why NFTs became so big in the world of collectibles.

2. They offer Real-world benefits

This is the case when the possession of a certain NFT gives you real utility, it doesn’t just sit there. This value can vary quite a lot. For example, an NFT can be the membership proof to an exclusive club, or it can be the deeds to a house.

Another example is, if you are a creator, you can retain ownership rights and claim resale royalty directly, which represents a huge advantage compared to how things happen today. No wonder why artists and celebrities have shown early interest in NFTs and started joining the trend.

3. Authenticity

This is closely linked to Proof of Ownership/History. The entire history of the creation and ownership of an NFT is registered on the blockchain, which is highly relevant on many occasions.
For example, when you are trying to purchase a piece of art, or even when your favorite celebrity is launching his/her version of NFT and you’d like to confirm that it is original, and not a scam.
Another example can be used in the supply chain industry, where it is important to ensure the origin of raw material, and where it’s been on the value chain.

My Thoughts

NFT is going through the Hype Cycle.
Emerging technology will typically go through a hype cycle during which it triggers a peak of inflated expectations. Following this trend, NFTs are experiencing a similar phenomenon, where we see a lot of noise and irrational craze and speculation.
This is a necessary step to raise awareness and disrupt the status quo in order to increase adoption and become more mainstream. With time, things will reach a more stable stage, the random projects will disappear or decrease significantly, leaving the good ones standing strong. We’ve seen the same happen with DeFi.
NFTs will play a critical role in crypto mainstream adoption
NFTs are the Internet of Assets, and there are mainly 2 reasons why I believe they are critical to crypto’s mainstream adoption:
1. It offers a wide variety of Use Cases, which I explained plenty during this article. However, these are just examples that we can relate to.
  The world is becoming more digital, exponentially. This means there are going to be opportunities and innovations that today, we might not be able to imagine or fully make possible yet.
  Have you watched the movie Ready Player One? You can get a gist there. And honestly, considering that selling digital real estate is already happening in the likes of Decentraland, with some companies and brands being early adopters, we might be closer to it than we think.
1. NFTs touch people’s feelings. We are emotional beings, and when we are passionate about something, or it is related to our identities and beliefs, we are triggered and motivated to act, to go above and beyond.
  Buying the collection launched by our favorite artist, supporting your favorite sport team in the NFL, or getting that unique PFP (profile picture), can all be very powerful incentives.
Take the example of CryptoPunks: the total value of sales, at the time I’m writing this article, is $1.47 Billion. Yes, billions. The most expensive character is valued at $7.58 Million. You find it crazy? Yes, so do I. But this doesn’t deny the fact that it’s happening.
Education is going to be a challenge
Do you remember when was the first time you had to learn about how the Internet works? Probably not, because we didn’t have to. We had to learn how to use our laptops, how to search on Google, how to send and receive emails, but we didn’t really have to understand how the Internet works.
It will take a lot more time till we can be in the stage where NFTs reach a maturity level such that we will be using NFTs without knowing we are actually doing so.
While we move towards that direction, educating and helping people understand the benefits offered by crypto and NFTs is going to be the biggest challenge.

Talking about education, we finally have a date set for our first AMA session! This is EXCLUSIVE for the subscribers of Crypto Explained!

Sign up HERE and join us on October 23rd at 11am SGT (GMT+8). Let’s all share some coffee and discuss crypto!

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