Not Just JPEGs
On March 11, 2021, a digital photo collage by the artist Beeple sold for $69.3 million at Christie’s, making it the most valuable NFT ever minted. But this sale wasn’t an anomaly. It was like a canary in a coal mine, signalling to the world that NFTs had finally entered the mainstream.
Since March, NFT sales have gone off the charts, rising from $55.5 million at the beginning of the year to $5.6 billion by November. That’s an incredible run for a category of assets that most people didn’t even know existed a year ago. And while more people seem to be jumping on the bandwagon every day, there are still a lot of questions and confusion surrounding NFTs.
But the most common question about NFTs is always the same: How can a JPEG be worth that much money? Where do these digital files get their value?
What are NFTs?
To answer those questions, we first need a better definition of NFTs. You see, NFTs aren’t just JPEGs. They can be almost anything, from images or music to videos and text. If you can digitise it, you can turn it into an NFT. And while much of the buzz around NFTs has centred on artwork, that’s only the tip of the iceberg.
So, what makes NFTs different from regular digital files?
NFT stands for non-fungible token. But if you’re going to wrap your mind around this, it’s probably better to start with the idea of fungibility.
Fungibility, Non-Fungibility & Why It Matters
If both of us have £10, we could swap those notes and it wouldn’t make a difference in the value we’re holding. That’s what it means for something to be fungible. Bitcoin and most other cryptocurrencies work the same way. Every individual bitcoin is worth the same amount. So, it doesn’t matter whether you’re holding the first one mined or the most recent one.
If something is unique and can’t be replaced evenly by something else, it’s non-fungible. Think of trading cards or motorcycles or pieces of property. There’s only one of each of those objects out there. You might be able to find one that’s similar but finding and trading an identical copy of something that’s non-fungible is practically impossible.
Physical goods are, by their nature, non-fungible. But traditionally, digital objects haven’t been. You can copy and paste text or images or video. So, NFTs are digital assets that are stored on a blockchain along with a record of ownership and other pertinent details. This makes them unique, since each one can be owned by only one person at a time. You might think of it like owning an autographed or numbered print of a photograph or painting. Only one print will have that number or the artist’s signature in that precise position. And in the same way, someone who buys an NFT has proof that theirs is the original. People may be able to copy it, but only one person can genuinely own it.
What gives NFTs their value?
Like most other things, an NFT’s value depends on supply and demand. The more people who want a thing, the higher the price will go. But simply creating a piece of artwork and listing it for sale on an NFT marketplace (think Droplt, OpenSea etc. probably won’t lead to much demand.
That’s why people who are interested in the potential of these digital assets need to think long and hard about how they can make the most of their NFTs. The future of NFTs isn’t just collections of digital artwork. That’s only the tip of the iceberg. The real value in NFTs lies in increasing their utility.
Making NFTs that Work
Since NFTs can be any kind of digital data, utility can be added to them in millions of ways. We’re already starting to see this take place through play-to-earn games and offering special benefits to NFT holders.
NFTs & the Future of Gaming
The NFT game, Axie Infinity, has exploded in popularity recently, increasing the value of its development company from nothing to $3 billion over the past three years. In the game, players can purchase unique characters and other digital assets in the form of NFTs. Then, they can use those NFTs to play the game, earning more valuable ones in the process.
Obviously, an NFT that gives you the ability to play a game and earn other NFTs has a greater utility than a simple JPEG that includes you as its owner in the blockchain. And this is even more evident when you consider the fact that the global gaming market was valued at nearly $175 billion in 2020. In other words, people are already spending billions of dollars on video games. Introducing NFTs into gaming will simply give them another way to do what they’re already doing — with even greater benefits.
Moving Beyond Gaming to the Metaverse
Another way to further boost utility for NFTs would be to make them compatible with multiple games, platforms and applications. Imagine purchasing an NFT avatar that you could use on dozens of video games. Or consider the potential of the metaverse.
In the future, someone may be able to take those same NFT avatars and goods from their favourite video game and use them in a digital home or office space. An NFTs value and utility will go up with each additional platform that’s compatible with it.
The Perks of Being an NFT Holder
But this isn’t the only way that NFTs can be used. Some companies are using them as badges of membership and identity. For example, a business could offer unique, branded NFTs that give owners special perks. They might get a discount on certain products or have access to a members-only portal. Businesses could even partner with one another, allowing NFT holders of one business to enjoy benefits from the other. The possibilities here are endless. And this is yet another way that NFTs could offer greater utility and value.
The Future of NFTs
What we’ve seen here barely touches the surface of what’s possible with NFTs. Thanks to smart contracts, another blockchain-based innovation, it’s possible to make NFTs do all kinds of things. In other words, NFTs aren’t just JPEGs. They’re so much more. They’re a way for consumers and fans to engage with the brands and content creators they love in a more personal way. And they allow those brands and consumers to build bigger, more dedicated platforms.
As more entrepreneurs and innovators explore NFTs and their possibilities, we’ll continue to see more applications and uses. And as that utility increases, NFTs will inevitably gain more and more value.