NFT stands for “non-fungible token,” but what does that mean? Many people’s exposure to NFTs may have been through a weird cartoon monkey or lion, but the range of NFT possibilities is far broader than you may have originally expected.
Due to their sudden rise to fame and somewhat obscure nature, you can be excused for not really knowing what NFTs are, let alone how they’re created and used in a personal or business context. The social discourse around NFTs is packed with passionate people, either desperately insisting that NFTs are the future of investing, or mocking investors about buying into an environmentally harmful scam.
But what are NFTs, objectively speaking? What can businesses or individuals achieve through trading NFTs? What are the benefits and risks of investing in NFTs? How bad is their impact on the environment? All of this and more will be answered below, so read on if you’re interested in taking the plunge into the NFT world.
What Are NFTs?
NFTs are closely tied to cryptocurrencies – the digital, decentralized currency systems that individual online investors love to promote. To put it simply, a cryptocurrency is a digital payment option that is intended to be entirely exempt from government regulation. Like standard money, there’s no intrinsic value connected to cryptocurrency – any value is purely socially perceived.
Each cryptocurrency is made up of something called a “blockchain,” which is a digital ledger stored on every device associated with it, meaning that cheating this system is borderline impossible.
Now, cryptocurrency blockchains are made up of identical units, which makes each bitcoin a fungible token (the definition of fungible being “replaceable by another identical item; mutually interchangeable”). Under this system, one Bitcoin will always equal one Bitcoin. But what if these tokens were non-fungible?
Making these tokens non-fungible means that they each develop their own worth, becoming one-of-a-kind pieces that, in theory, cannot be replicated. Because of this, the NFT market is often compared to the art world, wherein each piece is unique and individually valued.
An NFT can technically be anything. You may be used to seeing them in the form of cartoon animal portraits, but any image (or even other file types) can be registered and sold as an NFT. If a digital artist were to make a piece that they wanted to sell, they could post it on OpenSea (an NFT trading site), and sell the ownership rights for a certain amount of Ethereum cryptocurrency (the most commonly accepted NFT currency).
So, in a sentence, NFTs are unique images, gifs, or other forms of media that come with a certificate of authenticity representing an individual’s ownership of that token, much like a certificate of authenticity and ownership for a painting.
History of NFTs
You might think the history of NFTs to be quite brief, as they’ve only really taken off over the past year. However, they have been around for a lot longer than you’d think, with the first documented NFT surfacing on May 3rd of 2014. This NFT is known as Quantum, an iTunes visualizer-esque pulsating octagon valued at around $7,000,000.
NFTs were inspired by a crypto concept known as “colored coins,” which originated from Bitcoin in the early 2010s. These tokens are basically certificates of ownership over real-world objects, like cars or gold. This sparked the idea that crypto units could be used to represent ownership of various objects that you wouldn’t or couldn’t keep in your own home, like rare jewels, real estate, and – eventually – digital files.
NFTs were only just simmering for the next few years after Quantum, until the genesis of Cryptopunks in 2017. Cryptopunks is the first collection of what people widely consider to be NFTs: a collection of 10,000 small pixelated character images, each of which is unique. Nowadays, Cryptopunks are still among the most frequently traded NFTs.
Cryptopunks laid the groundwork for most NFT collection templates. For example, if we made a collection called “Dodgy Dogs,” we could allow 10,000 dog images to be generated. For each image generated there is a 50% chance the dog will have brown fur, a 30% chance it will have black fur, a 15% chance for white fur, and a 5% chance for rainbow fur. These chances would also apply to other aspects of the dog, like its expression and headwear, so that every NFT generated has a small chance of being particularly rare, like a trading card.
In the three years that have elapsed since then, NFT collections exploded in popularity, with collections like the Bored Ape Yacht Club being responsible for tens of millions of dollars worth of trades every week. However, while collections are often thought to be the main product associated with NFTs, there are some other common uses too. Digital artists have started listing their existing work as NFTs, allowing them to sell pieces without needing to pay a third party a portion of their revenue.
Business Examples of NFT Usage
There is currently a lot of money in the world of NFTs, and wherever there’s money, you can always find people trying to make more. Such is the case with NFTs, as multiple businesses have pounced on this prospect for various reasons.
Some investment firms, like Meta4 Capital, intend to use NFTs and blockchain technology purely as a business venture, investing in and selling NFTs as a way to make money. However, other businesses are experimenting with the various ways that NFTs can be used as a business tool rather than an investment. The main use cases have been:
- Digital marketing – Businesses can use the novelty of NFTs to attract interest in another product, service or event
- Avoiding third party fees – Creative service businesses can now trade digitally-made art and media, digital replicas, or proof of ownership for traditional artwork without sacrificing a commission
- Raising funds – Businesses may also attempt to generate capital for their company or a charity partner by creating attractive digital artworks
Here are some examples.
McDonald’s and Taco Bell
Food might not be the first industry that comes to mind when you think of NFTs, but multiple fast food chains are getting in on the craze. McDonald’s brought back the famously discontinued McRib sandwich in NFT form, offering a trading card-esque image of the sandwich to 10 lucky winners of their retweeting contest – an effective marketing stunt.
i present to u the most important NFT. RT for a chance to win one of ten exclusive #McRibNFT
Meanwhile, Taco Bell did a similar sweepstakes, “minting” 30 taco-themed NFTs that sold out within the hour. Taco Bell said that the proceeds went toward the Live Más Scholarship, and that the original buyer would get a $500 gift card to Taco Bell.
— Taco Bell (@tacobell) March 8, 2021
NFTs can work well as part of a brand’s social media strategy, with large film studios creating promotional NFTs to raise awareness of their upcoming films. One such example is Ghostbusters: Afterlife, the director of which announced the “12 Days of Afterlife” event in anticipation of the film’s upcoming release.
During this promotional event, various vignettes were uploaded to OpenSea on a daily schedule. These vignettes feature the iconic Ghostbusters Stay Puft Marshmallow Man doing various short animations, like spinning an umbrella or cooking itself onto a smore. The cost for ownership for these NFTs has so far hovered around two ether, which is equivalent to around $9,500.
These NFTs have been officially licensed, released, and promoted by the film’s director and studio, which does lend some legitimacy to the entire format and idea of NFTs. In effect, these little vignettes are similar to the promotional posters and toys we used to find in cereal boxes – small collectibles that remind people a film is on its way.
Electronic Arts (EA)
Few industries are as closely entwined with tech advancements as the gaming industry. Virtual reality, 3D modelling advancements, and even compression methods – gaming relies heavily on these technologies, and helps to advance them in turn. And with the introduction and success of NFTs, industry giant EA wants a piece of the pie.
EA CEO Andrew Wilson believes that NFTs are going to be the future of gaming, and of the FIFA series specifically, stating that “[players] want more modalities at play inside the game, which go beyond just straight 11-on-11 football. They want more digital experiences outside the game – esports, NFTs, broader sports consumption – and they want us to move really, really quickly.”
Despite this confidence, Wilson wasn’t able to say exactly what form these changes would take, saying that it’s a bit too early to figure out the specifics. EA likely isn’t the only gaming business looking at NFTs, however, as Ampere gaming industry specialist Piers Harding-Rolls believes that NFTs, and the blockchain in general, are a “new disruptive force.”
A business doesn’t need to be a massive household name to be worthy of engaging in the NFT market. Some smaller independent artists have created their own NFTs in order to sell without the use of a third party auction house or broker.
One example is artist Amrit Pal Singh, who created various toy faces and toy rooms – basically, plastic-looking people and settings based on famous individuals that evoke feelings of a childish simplicity. Over a nine-month period, these NFTs netted Singh over $1 million worth of ether, purely based on their perceived artistic value.
However, not all professional artists have positive attitudes about NFTs. Professional monster artist RJ Palmer, best known for his work on the Detective Pikachu film, has been particularly vocal on Twitter about his distaste for them, citing the capacity for rampant theft of artists’ work, and immoral creation of NFTs that don’t belong to the original creator.
For example, Palmer himself has found much of his artwork for sale on NFT markets, a practice that he explicitly condemns. Meaning that people have been stealing his art and uploading it as NFTs. This has also happened to people’s nude photos, which are obviously intended to be private, or at least heavily controlled, meaning that people’s explicit material is being sold without their consent.
For those that dont know: An NFT is basically a unique bitcoin with an image attached, a tweet in this case. They can be sold and resold by speculators hoping to make money.
Now people can sell your tweets all without your permission. — RJ Palmer (@arvalis) March 9, 2021
Does Your Business Need to Know About NFTs?
This really depends on what your business does. For example, if you’re a graphic designer or artist, you might benefit from selling your art through a system in which commissions don’t need to go to brokers or auction houses.
You may also benefit from creating NFTs if your business benefits from its own specific imagery. For example, if you have a mascot or visually distinct product, creating NFTs of that product or mascot is a path toward promoting your business by posting these NFT releases on your social media channels. We can’t promise that your NFTs will sell, but it’s another way to get your name out there.
Considering the various ways businesses have used NFTs, most are promotional – as a new channel to get extra eyes on their services and products, on top of their more traditional promotional material. As an investment, however, we really can’t endorse NFTs. The market is far too volatile, and regulations are starting to stir, so unless you’re playing with cash that you know you can afford to lose, it’s better to watch from afar.
The introduction of regulations may mean that the very purpose of cryptocurrency and NFTs might be somewhat invalidated, as a lack of government control is one of the main appeals of the whole system. The government may start investigating transactions, taking substantial cuts from transactions, and making the whole system unrecognisable.
To provide a fair assessment of every NFT angle, we have to look at the negative realities of NFTs. The two most commonly cited issues (aside from the decline of the very concept of visual art) are their environmental impact, and their susceptibility to crime.
This is less of an allegation and more of a fact. NFTs cause a massive amount of environmental damage, with the average NFT estimated to generate 465 lb of carbon emissions. A single bid on an NFT produces 50 lb of CO2 emissions, while a sale emits a further 112 lbs of CO2.
This output is due to the strain that blockchain technology puts on the power grid. We won’t get into the technical reasoning behind this process, but needless to say, that is a lot of carbon emissions for a single piece of digital art. And keep in mind that this process happens every single time an NFT transaction takes place.
Arguably, it's unwise, or even immoral, to invest in something that causes such significant environmental destruction. It’s far from the most environmentally destructive human practice, but the sheer amount of carbon is still massively harmful, and when considered alongside how unnecessary NFTs really are in the grand scheme of things, it’s hard not to view them in a devastatingly negative light.
Many people believe NFTs to be a vessel for laundering dirty money that was originally acquired through less-than-legal means. Money laundering can be deeply complicated, but to give a brief overview, we’ll once again liken NFTs to physical artwork like paintings.
Imagine we had a professional assassin who wanted to dip his toe into the world of private art collecting, planning to buy the Mona Lisa from its home in the Louvre gallery in Paris. Obviously, the majority of his wealth would have been obtained through the unwholesome method of professional murder – so if he were to publicly approach the gallery with this idea, tax officials would be called, an investigation would be opened, and he’d likely be imprisoned if they discovered the truth.
However, say our assassin was to somehow approach the museum curators anonymously, assuring them that the money was guaranteed. The curators could then simply take the money and leave the painting where requested – and if asked, state that it’s not their job to investigate their customers, and that the money was fine to take as far as they were aware.
Now, in real life, the museum would probably have some legal obligation to report such a massive deal to the appropriate authorities. However, on a trading website like OpenSea, where most NFT transactions take place, the lack of an official governing authority means that no one is responsible to report anything, despite the large amounts of money being handled.
This lack of accountability, coupled with the absolute anonymity offered by blockchain technology, makes it the perfect medium for laundering money. For example, let’s say our hitman had little regard for art, but had millions of dollars that he wanted cleaned. He could set up two OpenSea accounts, then generate an image and register it as an NFT. He could then use account A to purchase the NFT from account B with $1,000,000 worth of Ethereum cryptocurrency.
This process in itself is entirely legal, and he is now free to cash out his ether. As long as account A isn’t traced back to him, he isn’t responsible for knowing where this massive sum came from.
While this process obviously isn’t the most morally sound, it’s just one of many ways that people have been using NFTs, so it shouldn’t sully the entire idea for someone who’s otherwise interested.
The Possible Future of NFTs
No one can truly predict where NFTs are going to go. NFT investors will tell you with 100% certainty that they’re first in line for the next level of virtual investing. Could this be a desperate attempt to convince themselves they’ve made the right choice? NFT skeptics will insist that they are a passing fad at best, and a destructive pyramid scheme at worst. But are these skeptics experiencing a “sour grapes” moment, envious that they missed out on the initial wave? As with most investments, there’s no bulletproof way of predicting the trajectory.
NFT sales don’t seem to be slowing down. Within the last 24 hours at the time of writing, there have been thousands of NFTs traded within the 15 most popular collections listed on NFT Stats, and several thousand more have likely been traded between smaller collections. These transactions can range from anywhere between the “cheaper” $10,000 mark, up to a few million dollars.
In November 2021, an NFT from the “CryptoPunks” collection is claimed to have sold for $535.2 million worth of Ether. However, this transaction was a bit strange, involving multiple steps, “flash loans,” and a frankly obscene cost that could give the impression something else was going on. Without knowing exactly who owned the various accounts, there’s no way to tell if this was an honest transaction or a publicity stunt to artificially inflate the worth of NFTs overall.
No one can be so stupid.
The most logical explanation is he/she bought it from himself (“wash trade”) to create ilusion of value “If one cyberpunk traded at $500m then surely other cyberpunk at 500k$ is cheap…” The search for GREATER FOOLS continues…#Ponzi #Antibubble — Diego Parrilla (@ParrillaDiego) November 1, 2021
That being said, this was just one outlier of multiple NFT transactions, with the rest of the CryptoPunks pieces having far more “reasonable” price tags, usually selling at around $400k–$500k. In fact, Larva Labs, the creator of CryptoPunks, is making efforts to stop unusually high transactions like this from happening again.
PSA: This transaction (and a number of others) are not a bug or an exploit, they are being done with “Flash Loans” (https://t.co/Q5bDL1QkWP). In a nutshell, someone bought this punk from themself with borrowed money and repaid the loan in the same transaction. 1/2 https://t.co/EgS7aiga3j
— Larva Labs (@larvalabs) October 29, 2021
And it’s not just transactions of existing NFTs that are taking place. New NFTs are being generated every day, with new series of NFT images or GIFs being produced regularly.
Again, since it’s such a new concept, no one really knows what’s going to happen with NFTs. These expensive transfers may be the work of a select few individuals trying to give the impression that these images are worth something. But the concept of artists being able to sell their work in a marketplace free of third-party leeches is definitely worth consideration, and the idea of owning a piece of digital media may genuinely be a future aspect of the art industry that is simply going through some weird, monkey-related growing pains.