NFTs, or non-fungible tokens, are taking the digital world by storm — and raising fresh concerns about asset bubbles — more than three years after they were first conceived of as a way to authenticate ownership of an asset.
Recently, Jack Dorsey, who is the CEO of Square
announced that he was auctioning off his first tweet as an NFT. The current bid stands at $2.5 million, according to news reports. Dorsey said he would convert the winning bid to bitcoin and donate it to charity.
That news comes after the NBA’s Top Shot, an online-only marketplace where users can buy, sell and trade digitized NBA highlights as they would sports trading cards and other memorabilia, recorded over $200 million in transactions in the five months since its launch.
All these sales are based on NFTs, which have exploded in popularity in recent weeks and serve to highlight both the promise and the risk of blockchain technologies that underpin digital assets like ethereum
The asset that is often credited with being the forefather of the modern non-fungible token was created back in June of 2017, when software developers Matt Hall and John Watkinson of Larva Labs created CryptoPunks, digitized images (and rather pixilated ones pictured above) of charatacters ranging from aliens to monkeys and zombies. But it is perhaps best to think of NFTs as digitized Beanie Babies for the older set.
CrptoPunks have sold for millions and are enjoying a renaissance, but Watkinson never imagined that NFTs achieve such mainstream attention, he told MarketWatch, in a Tuesday afternoon interview.
“Obviously, we had no idea it was going to get here and was going to be such a mainstream news item,” he said.
“I would say there is something fundamental that has been unlocked there…and NFTs unlock a lot of potential,” commercially speaking, Watkinson said.
In Watkinson’s view, an NFT is a “digital cryptographic token that represents something…a piece of art, or a collectible, rather than a generic currency.”
Like CryptoPunks, NFTs tend to be written atop the ethereum blockchain, which is known for its utility for smart contracts. So-called smart contracts allow specific instructions to be written atop their digital protocol.
Unlike tokens, NFTs are intended to be unique and aren’t meant to serve as a means of exchange. Fungibility refers to the interchangeability of one unit of a thing for another. A troy ounce of gold
for example, is theoretically interchangeable with an equal weight of jewelry made entirely of the precious metal.
An NFT is different. Exchanging one for another would be tantamount to exchanging one Ken Griffey Jr. rookie card from Topps for another of the baseball great from, say, Upper Deck.
NFTs offer a unique use case, authentication.
“The underlying thing that you’re buying is code that manifests as images,” Donna Redel, who teaches crypto-digital assets at Fordham Law School, was quoted as saying by NPR. “You’re buying a different format of art.”
From an asset perspective, one bitcoin is equal to around $54,000, at last check Tuesday, the same value as any of the roughly 18.6 million bitcoin that are currently in circulation, according to CoinMarketCap.com. Put another way, you can mint, or mine bitcoins, which serve as the reward system for verifying transactions on that blockchain, but you can only create a single NFT code.
Though NFTs can be sold as a unique asset, the value is determined by the “community,” Watkinson explains.
Originally, there were some 10,000 CryptoPunks and Watkinson says that he and his Larva Labs partner held on to 1,000, though they have sold hundreds and bought hundreds over the past three years.
Watkinson views the CryptoPunks as the first NFT.
Transacting in NFTs is fairly simple. An asset can be transferred to a user’s digital wallet, with the funds changing hands via the underlying crypto platform, which in most cases is Etherum.
Watkinson said that CryptoPunks has a simple decentralized trading platform written into the code of their NFTs and when a “bid” is placed for a “Punk,” that amount in ether tokens is attached to it. When and if the offer is accepted, the tokens and the NFT are swapped. “The [NFT protocol] acts as an escrow for the transaction,” he said.
“Yeah I would say that we were the first before anyone used the term [NFT],” he explained.
“There were some precursor projects on bitcoin…but it is fair to say we were the first modern incarnation of what are now NFTs,” he said.
“It’s been surprising to see how quickly it is grown,” Watkinson said.
The co-creator speculated that there are three reasons why NFTs have surged in popularity.
- The COVID pandemic
- An increased focus on digital technologies
- Validation from the NBA’s Top Shot, which he said helped to amplify attention toward unique digitized tokens
Still, it is unclear where NFTs are headed because the rapid run-up in attention has drawn parallels with the ICO, or initial coin offering, the crowdfunding craze of 2017 that ended with organizations attempting to one-up each other in raising increasingly larger sums of money purportedly for cryptographic projects.
Some $12 billion in ICOs were raised in the first half of 2018, despite worries about fraud and a precipitous tumble taking shape in the value of bitcoin at the time, Bloomberg News reported. Many of the ICO-related projects failed; and, ultimately, the Securities and Exchange Commission cracked down on the trend.
Watkinson says he can’t speak to the values being exchanged for NTFs or CryptoPunks for that matter. “That’s just beyond my understanding.”
However, he truly believes that the technology has tremendous utility, hinting that he and Hall were fielding inquiries from companies and organizations aiming to enlist their services in engineering bespoke applications for NFTs.
“A lot of artists or even large companies are asking us ‘what is the right way to operate in this space’,” Watkinson said.