I have been following the non-fungible token (NFT) phenomenon for about a year from afar with some mystification and cynicism. I recently decided to get off the sidelines and really understand NFTs by buying one.
Caveats & disclosure
- This article is not financial advice. Do not make investment decisions based on a single person’s views in a new and risky field such as cryptocurrency.
- This article is not endorsed by my employer or by any parties mentioned in the article. The views expressed within are my own.
- I own cryptocurrency and NFTs.
What are NFTs?
Cryptocurrency tokens, like fiat currency, are fungible. A $1 currency note is exchangeable with another $1 note. The same applies to cryptocurrencies Bitcoin, Ether, etc. NFTs are unique cryptocurrency tokens that have special characteristics, which are not 1:1 exchangeable with other tokens.
The phenomenon was perhaps kicked off by CryptoPunks, a series of 10,000 pixellated computer-generated punk faces, in 2017. “They” could be bought or sold on the Ethereum blockchain and rapidly fetched high prices. CryptoKitties was a phenomenon where tokens of unique cats with various properties were released on Ethereum. A kitty called Dragon, was acquired by a collector for the equivalent of $170,000 in 2018. The kitties can “breed” other kitties, which can then be sold to other collectors. In March 2021, an NFT of a digital collage called “Everydays — The First Five Thousand Days” by artist Beeple sold for $69 million. On the same day, CryptoPunk 7804 sold for the equivalent of $7.6 million.
An important distinction has to be made here for posterity. CryptoPunks and Everydays are just digital artworks with no other properties. Sure, they have inherent history and meaning from an artistic perspective (which may give them value). CryptoKitties have additional programming that enables the “breeding” of other kitties, which makes them different from the other two aforementioned examples. I will return to this point toward the end of this article.
What do you get when you buy an NFT?
An NFT is just code on a blockchain pointing to an artwork (or something else) which is available on the internet. The cryptocurrency wallet that owns the NFT effectively owns a pointer (or a link) to the artwork on the internet. That is all. Read this paragraph again.
So if all you want is the digital artwork, look up the NFT on the NFT marketplace or on the blockchain, find the file and download it. You may now enjoy the artwork without paying for it. You also do not involve yourself in the energy consumption of the blockchain because you do not make a blockchain transaction. Here is a link to The NFT Bay (a play on The Pirate Bay torrent site) where you can download all artworks released as NFTs on the Ethereum and Solana blockchains [Note: I am not responsible for any malware you may get from the torrent].
As artworks, typically the artists retain copyrights to the art even after the work is sold as an NFT. Sometimes contracts are written granting the NFT owner the ability to display the artwork in public or monetise the artwork in a limited fashion (e.g. upto $10,000). By “contracts”, I mean legal contracts, not smart contracts on the blockchain. These do not yet have the ability to interact with the real world in a manner that checks how exactly the NFT owner is monetising the artwork.
Edit (6 Dec 2021): I came across NFTs that, when re-sold, gave the creator a cut of the resale value.
My NFT purchase
Henri Arslanian is PwC’s head of crypto and a very effective cryptocurrency educator. When he launched an NFT auction, I decided to check it out. Henri has been doing “Crypto Capsules” for about three years, with the week’s cryptocurrency news recapped in 60 seconds. I have been watching these short videos and have also been religiously reading his weekly The Future of Money newsletter for the last few months. The NFT was a video of his first Crypto Capsule from September 2018.
As a professional in this space who likes to share his own knowledge, I felt a connection that motivated me to bid for it. Henri would donate the proceeds to a charity called Code to Inspire that planned to build a coding school for girls and women in Afghanistan. The NFT was listed on the OpeaSea NFT marketplace. I started by looking at the details of the NFT on OpenSea.
Clicking on the contract address link gave me an unpleasant surprise – there were hundreds of thousands of transactions. I was expecting no more than one or two transactions which stated that the NFT was minted (i.e. the NFT was created by attaching the artwork to a token) and perhaps put up for auction.
I quickly realised that this contract address was used by OpenSea to launch a large number of NFTs that used the ERC-1155 token standard. This was cheaper and “more efficient” than the better-known ERC-721 token standard where each NFT required its own contract. ERC = Ethereum Request for Comments. ERC-1155 and ERC-721 are specific standards that, when followed, ensure that their respective tokens have at minimum, certain capabilities defined within those standards. This lets any user or code interact with those tokens in a standardised fashion, without having to study the code of each individual token. ERC-721 is the gold standard for NFTs, but ERC-1155 has been gaining popularity recently.
The problem with the ERC-1155 as of today is that it is hard for the average user to distinguish between NFTs issued by the same platform. We would need to separate them from each other using the Token ID field (see the figure Details of the NFT listed on OpenSea). I am not sure that a way exists to easily view an individual token on the blockchain at present.
After some consideration, I decided to go ahead with the auction. I set myself up with a “Web 3.0” wallet, Metamask, on my internet browser. I then transferred the amount of Ether (ETH) to the wallet address that I was willing to bid for the NFT.
I navigated to the OpenSea page where the NFT was being published and connected my wallet to OpenSea. I quickly found that I could not make a bid using ETH. OpenSea required that I bid using something called Wrapped ETH (WETH), which would enable me to bid, and then carry out the transaction at the end of the auction (if I won) with no further action on my part. I was able to buy WETH using Metamask on OpenSea. There were minor challenges: I was not sure that my conversions were carried out. I ended up converting ETH to WETH multiple times and also made two bids for the same amount for the NFT.
At the end of the bidding period, I was the auction winner and the NFT was transferred to my wallet. OK, my first NFT purchase was done. What next?
I decided to see how transferable the NFT was. I looked up a few other NFT marketplaces and connected my Metamask wallet to them. Most of them did not recognise anything. The biggest success that I had was at the Rarible marketplace, which detected that I indeed had an NFT. I was not able to actually see the Crypto Capsule video on Rarible and its title was displayed as “Untitled”
This is a major drawback on the ERC-1155 NFT standard at present. Blockchains are supposed to decentralise things, but I cannot sell my NFT on a marketplace other than OpenSea, where it was originally minted. If I buy an artwork at Sotheby’s, I can resell it at Christie’s later. If I buy a physical good on eBay, nothing stops me from reselling it on Amazon afterward.
However I am interested to see how this develops. OpenSea’s FAQ item on ERC-1155 NFTs currently states that major elements of the Ethereum ecosystem do not yet display ERC-1155 art. These include the Metamask wallet and the Etherscan site where one views Ethereum transactions. Perhaps once the ERC-1155 standard matures, various marketplaces will standardise how the token ID and metadata are implemented such that an NFT minted in one marketplace can be visible in another, as well as natively on Etherscan and Metamask.
What will I do with it?
I will keep the NFT for now. Every time I have a new idea or thought about NFTs I can now view it and experiment with it from the perspective of the NFT that I already own. The purchase experience has already been valuable.
The future of NFTs
I mentioned at the start that I had been cynical of digital art as NFTs. I still maintain this perspective with respect to traditional digital art. It is hard to see how much additional value is provided by giving someone a pointer to a digital file, to which others also have access. However I do not share the same feeling toward metaverse NFTs.
The metaverse is a hot buzzword now, since Facebook has rebranded itself as Meta and Microsoft has also announced their investment in the space. There are various ongoing efforts to build virtual worlds, in which millions of people have already been participating for over a decade. Back when I was in university, Second Life, where users created avatars and walked around a virtual world, was already a thing. World-building is huge in Minecraft, Roblox and others. 200 million people use Roblox monthly. Blockchain-based metaverses now allow users to buy and sell land and properties which they put effort into customising and developing, resulting in the increase in their value. It is fashionable to pooh-pooh at the idea of virtual worlds, but citing the Roblox figure and others, The Economist (behind paywall) suggests that this mockery does not help anyone and is easily in the wrong.
Aside from chunks of virtual land bought and sold as NFTs, the possibility exists of customised items (e.g. an avatar’s clothing and accessories, vehicles in racing games, guns in shooters, etc.) being crafted, bought and sold, and even transported from one video game to another. I do not know yet how realistic the last point is, but would not be surprised to see this in the near future.
Traditional artwork, including traditional digital art, will by some point (let’s say November 2031) cease to be of interest in the NFT area. However metaverse and original blockchain-enabled/supported capabilities the likes of CryptoKitties and Decentraland will become as legitimate as smartphones are today.
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Edit 6 Dec 2021: Added information about NFTs where the creator continues to make money upon NFT resale.
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