What are NFTs? And should you be investing in them?

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In recent years, blockchain has become an increasingly popular tool for entrepreneurs, businesses, banks, and government institutions – and its most recent form that has become popular in 2021, is an NFT. But what is it? Business Leader investigates.

What does NFT stand for?

An NFT is Non-fungible Token – and is a form of blockchain.

What is blockchain?

To first understand an NFT, it is important to understand its roots in blockchain.

Blockchain is a specific type of database or storage of data. Created in 2008, it is unique in the way it stores information.

Unlike a typical database, it collects data in ‘blocks’ that are then chained onto the previous ‘block of data’. Once new data is received it creates the next step in the chain, keeping everything in chronological order.

Although in theory it can used to store a wide range of information, it is typically used as a ledger for transactions online.

A database in its historical digital concept is a collection of data that is stored electronically on a computer system – which can be accessed, analysed, and edited by multiple users. Large databases do this with large and numerous amounts of digital storage facilities. Blockchain operates in a similar way.

It collects information on blocks, then moves onto the next one – and the process continues. However, blocks have certain storage capacities and once full a new block is needed.

A database stores data in tables – blockchain stores data in blocks. Each block receives a timestamp. This means that blockchain allows digital information and transactions can be recorded and stored – but never edited.

This has since been developed into cryptocurrencies, such as bitcoin.

How does this link to NFTs?

Non-Fungible Tokens or NFTs as they are colloquially known are the newest trend to come out of the blockchain sphere. NFTs are one-of-a-kind digital certificates that prove ownership of a digital asset. The authenticity of such assets are verified through the blockchain mechanism giving way to a whole new realm of digital collectables.

In economic jargon, a non-fungible asset is a non-tradeable asset and is considered one-of-a-kind. In essence, owning an NFT means you own an original of whatever digital asset. While the digital asset can be replicated many times by anyone, only the owner of the NFT for that asset is the true single owner of that asset. The authenticity of each NFT is verified by the Blockchain ledger mechanism.

NFTs can be any digital asset but can be broken down into six major categories; Metaverses, Art, Gaming, Sport, Collectibles and Utility.

A ‘fungible’ token is an item or currency that has an equal value somewhere in the world for it. However, something that is ‘non-fungible’ means that the item has a unique value.

NFTs market cap experienced compound annual growth rate of 187% from 2018-2020

Blockchain’s recent innovation is raising some eyebrows, as the value of NFTs has grown significantly over the last few years. According to data presented by Trading Platforms, the market cap of NFTs increased by 138.8% year-on-year in 2020 at a compound annual growth rate (CAGR) of 187.28% from 2018-2020.

NFTs market cap reachers $338m

NFTs are a relatively new trend in the blockchain world, with many pinpointing its origins to 2014’s Colored Coins. Since then the digital tokens have grown in prominence with recent eye-catching transactions worth millions of dollars.

According to a report by Nonfungible.com the market capitalisation of NFTs has exploded in the last few years. In 2018 the market cap of NFTs was calculated at just under $41m. By 2020 that number had risen to just over $338m for a CAGR of 187.28% from 2018-2020.

Total revenue from NFT transactions in 2020 was $55m

Revenue from NFTs in 2020 amounted to an estimated $55m. Metaverses had the biggest share of this revenue with a total of $14.02m or 25% of the total. In terms of the number of NFT transactions, the gaming category had the largest in 2020 with almost 630,000 transactions or 47% of all NFT transactions in 2020.

Notable NFT Transactions

The topic of NFTs was recently trending because of some notable transactions. Notable in their nature because of their price or for their significance.

As of March 16, 2021, the largest NFT sale was for a digital art titled Beeple Everyday: The First 500 Days which was sold for over $69m on March 11 2021 at auction by the historic Christies Auction House.

Jack Dorsey, the founder of Twitter, recently auctioned off the platform’s first-ever tweet made by himself from 2006 which reads ‘Just setting up my twttr’.

The NFT was on the market for two weeks and sold for just under $3m on March 22, 2021.

Is it a fad? Or are they here to stay?

NFTs have become a hot commodity lately, with everyone from artists, musicians, sportspeople, and even entrepreneurs making millions trading them. Piplsay, a global consumer research platform, conducted nationwide surveys in the UK and the US this week to find out what people think of this new emerging concept.

  • 33% of Britons believe NFTs are just a fad, while 59% of Americans believe they will be the next big thing
  • 40% of Britons think NFTs may not be safe as compared to 33% of Americans
  • 49% of Britons feel celebrities should act responsibly given cryptocurrency’s contribution to global warming

Growing NFT Interest Hints at Long-Term Adoption

Digital asset trading remains under the spotlight as NFTs are taking the financial sector by surprise. The record-setting $69.3 million sale of Beeple’s digital artwork and the world’s first purchasable NFT house are the latest examples of the ongoing hype — but is it a trend that is going to stick around?

NFTs are blockchain-based records that represent pieces of digital media like art, videos, music, games, text and other. The code within an NFT identifies the uniqueness of it as well as the history of its ownership, this way proving the item’s authenticity and putting a value on it.

Some might see NFTs as another bubble, predicting it’s oncoming rapture, but Vytautas Zabulis, CEO of H-Finance, a company which offers 100% regulator compliant digital asset trading for financial institutions and Fintech companies, believes NFTs have unique potential for long-term adoption.

“Yes, the NFT bubble will eventually pop, but the broader impact it’ll make will remain,” stresses Mr. Zabulis. “Just like any new technology, which is changing the way we live right now or in the future—similarly what we’ve seen with other digital assets like Bitcoin—as the initial hype evaporates, the prices level out and wider adoption begins, though the process can be lengthy.”

A few weeks back, NBA Top Shot, a blockchain-based trading card system, generated over $230m in gross sales, helping to make the idea of an NFT more popular for the masses.

Zabulis sees this as a key moment — NFTs have changed the whole concept of how some unique digital assets are sold and traded. Art is another example impacted by the NFT trend — cutting out the central platforms from the selling infrastructure, it allows artists themselves to sell their works, track sale records and always get a share of profits.

“NFTs could essentially eliminate such platforms like eBay, Facebook or Spotify, by creating a direct economic relationship between the digital asset creator and the buyer. What we see now is just the infant stage of what could become a new trade market, eventually mingling with traditional finance. For the time being, NFTs are a part of the decentralized finance (DeFi) movement, where an NFT could be compared to a financial instrument, since NFTs could be mortgaged, loaned, sold or bought in parts, acting as a derivative,” comments Zabulis.

“We are thinking of integrating NFT trading platforms into H-Finance’s API to make it accessible for crypto trading clients. There is certainly a lot of interest and buzz in this early adoption stage.”

While it is too early to really say how exactly NFTs will develop further down the line, the impact of the enthusiasm around the latest digital asset trend might be something to keep an eye on as it continues to show the versatility and adaptability of blockchain technology.

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