When small, pixelated pictures began popping up all over the internet, nobody noticed. Known as NFTs, most of them looked like something you could make on microsoft paint after falling asleep on the keyboard, so they didn’t create much of a fuss. But then, these primitive images started selling for tens of millions of euros, and NFTs became a household name practically overnight.  

What are NFTs?

NFTs are digital, non-fungible tokens. Non-fungible is a term used to describe something that is unique and irreplaceable. Currency like euros are, by contrast, fungible because they are always worth the same, there’s more than one of them and are therefore exchangeable. 

Because NFTs are non-fungible, the situation changes. NFTs can be understood a bit like trading cards. Imagine you have a unique trading card. Because there is no other card like it, you can’t exchange it for something exactly the same. If you swap it for another object, you just end up with something different. 

NFTS are a way of showing that something digital is scarce, a fact that usually makes something more valuable if lots of people want it. It also makes it possible to show ownership of digital assets. These factors make NFTs innovative forms of digital art and collectibles that are playing a big role in bringing the art world online. 

NFTs are digital assets, which means that you can’t hold them in your hands or use them in the physical world. They run on something called a blockchain, which is like a huge, digital ledger that stores information and transactions. 

Why are NFTs important? 

Much like digital money, digital assets had a problem that stopped them from becoming popular: Once something was on the internet, it could be copied and shared for free. Someone could spend months crafting a staggering piece of digital art, only for someone to right click and save it as soon as it was published. For this reason, digital assets like art always had to play second fiddle to the analogue art in the physical world. But NFTs are able to change this for the first time. 

NFTs all have identifying information, such as when they were created and by whom. This means that, for the first time, digital assets have something equal to the paper documentation used to help prove the value and authenticity of physical art and collectibles.

NFTs have three important qualities that make them remarkable and valuable innovations. Each NFT is indivisible, which means that you either own one or you don’t. You can’t share or break an NFT down into fractional parts. They are verifiable, and their whole existence, from creation to ownership history is publicly available. They are also indestructible because they run on blockchain technology. Information stored in blockchains can’t be deleted, edited or otherwise tampered with. 

So what?

The reason why NFTs are a hot topic at the moment is because they have created an incredible explosion of value where, until recently, there was none. Digital art, collectibles and other online assets are now hot property with valuations that soar into the millions. 

Artists are now able to sell their work to huge new audiences and collectors can, in turn, re-sell their assets for huge profits. At first, this seems like a carbon copy of the old-fashioned art world. But here’s where NFTs have a difference: Each NFT can be programmed so that the creator of the artwork receives a percentage of the sale price. This way the collector can earn money from their investment and the artist continues to earn from their creations.

But it’s not just art that gets the NFT treatment. Social media has come to redefine the world we live in, so it is only normal that Twitter CEO Jack Dorsey’s first ever tweet was sold for over $20 million. 

NFTs are also having a big impact on the gaming industry. Many of the world’s most popular games have a business model that is free to all but involves constant opportunity for in-game purchases. Typical purchases include so-called skins, which are ways to change your playable character’s appearance, as well as weapons, tools and other accessories to give players both an advantage and a challenging gaming environment. Instead of creating digital assets that are designed to appeal to all gamers, unique products could create new sources of value and redefine game financing.

What are the downsides to NFTs?

Much like other aspects of blockchain technology, NFTs are a bit of a hard sell because they are difficult to understand at first. This is a common problem for all new technology, but the example of how cryptocurrencies have become a part of everyday finance shows that this doesn’t stop technical ideas from catching on. 

That said, the technology itself is still evolving and there will definitely be some hiccups along the way. Because the popularity of NFTs erupted in such a short period of time, we will have to see how the technology responds to such a huge user base and whether the market infrastructure is up to the demand. 

The vast majority of NFTs run on the Ethereum blockchain. The overwhelming rate that both ideas and users are being crammed into the blockchain means that it is getting very congested. This has resulted in one big problem for fair and equal access to NFTs: extremely high fees for using the Ethereum network. Sometimes creating one NFT, a process known as minting, can cost hundreds of euros. 

What are some of the most famous NFTS? 

CryptoKitties were some of the earliest NFTs. Even though CryptoKitties had their heyday before cryptocurrencies burst into the public consciousness in late 2017, they were so popular that they caused the Ethereum blockchain to reach an all-time high for number transactions. 

Cryptopunks were also released in 2017 but shot to fame only a few years later, after they started selling at record prices. Cryptopunks are pixellated images that show vaguely human forms, all with unique traits or appearance. Some punks have rarer traits than others and are consequently more valuable. Cryptopunk #3100, which shows a blue figure wearing a headband, sold for $7.58 million. 

Bored Apes are part of a set of 10,000 NFTs of cartoon apes made by Yuga Labs. The apes are more detailed than Cryptopunks or CryptoKitties, each have unique characteristics and show anthropomorphised forms of apes. Buyers become members of “Bored Ape Yacht Club” and have the intellectual property rights for images. 

NFT creators clearly realised that collectors have a soft spot for meme-friendly animal images, which could explain the instant popularity of Pudgy Penguins, a set of 8,888 randomly generated NFTs that show portly penguins in funny clothes. The whole set of NFTs sold out in 19 minutes. 

What’s next? 

Much of today’s culture comes from areas of the internet that were previously not suitable for monetization. Because NFTs make products, moments and assets digitally scarce, it’s likely that we will start to see whole new industries grow thanks to the new technology. As the technology develops, NFTs will become more user friendly, even to those with no computing or programming knowledge. 

Because they create huge opportunities for value, NFTs will also help people to create passive income by finding ways to put their NFTs to work, much like investing your savings or using a high-interest plan for your earnings. 

Blending the gap between digital and the physical could help bridge the gap between investors who are used to getting their hands on something unique and rare in the real world while also tapping into the ballooning value being created by NFTs in the digital sphere. This normally works by pairing something physical with a QR code that gives access to the minted NFT.