Non-fungible tokens (NFTs) are the latest craze to sweep the cryptocurrency world with artists and celebrities raking in millions of dollars worth of ether (Ξ, or ETH), the native fungible token of the Ethereum blockchain.
“Fungibility” refers to the ability to exchange two different tokens or assets that have exactly the same value.
A physical analogue of a non-fungible asset are natural diamonds. You can’t simply exchange one diamond for another and retain the same value, as several factors determine how much a diamond is worth.
An example of a physical fungible asset is a R5 coin. You can exchange one coin for another with no gain or loss in value simply based on the number printed on the face of the coin.
The recent “sale” of Twitter CEO Jack Dorsey’s first tweet for $2.5 million and the successful Christie’s auction of a collection of work by NFT artist Beeple for over $69 million has ignited a frenzy in NFTs.
Decrypt reported that Google Trends data shows that search traffic for NFTs is nearing the same levels as initial coin offerings did in 2017 — at the height of Bitcoin’s last bull run that fuelled wanton speculation in the cryptocurrency space.
Blockchain-based NFTs are not a new concept, but the maturity of applications to support widespread minting and auctioning of NFTs is a relatively recent development.
CryptoKitties, a collectible cat breeding game which runs on Ethereum, achieved great success during the height of the last cryptocurrency boom in 2017. CryptoKitties helped lay the foundations of the NFT craze currently sweeping the crypto community.
In 2018 the sale of a CryptoKitty called “Dragon” raised eyebrows when it attracted a price of Ξ600 — worth about $172,000 (R2.5 million) at the time. Nowadays that same amount of ether is worth much more, around $958,914 (R14 million).
The Dragon CryptoKitty sale price is chump change by today’s standards, though.
NFT artist Mike Winkelmann, who goes by the alias Beeple, recently sold a collection of his work through well-known auctioneer Christie’s.
The most expensive was a collage of 5,000 pieces titled Everydays: The First 5000 Days, which sold for $69,346,250 (over R1 billion).
Much like CryptoKitties, CryptoPunks are collectible characters with proof of ownership stored on the Ethereum blockchain.
Unlike CryptoKitties, there are a fixed number of CryptoPunks. Only 10,000 will ever exist.
“Originally, they could be claimed for free by anybody with an Ethereum wallet, but all 10,000 were quickly claimed. Now they must be purchased from someone via the marketplace that’s also embedded in the blockchain,” explains the website of CryptoPunks developer LarvaLabs.
“No two are exactly alike, and each one of them can be officially owned by a single person on the Ethereum blockchain.”
Several other CryptoPunks currently feature in the top 10 most expensive NFT sales to-date.
Even before the successful auction of his “First 5000” collection through Christie’s, Beeple had already made a significant amount of money by selling his art as NFTs through platforms like Nifty Gateway.
Crossroad is a series of three animations and a NFT that experimented with the concept of programmable art.
The piece was sold days before the 2020 US Presidential election for $66,666.60 (R1 million) and would transform into one of two animations depending on the outcome.
just setting up my twttr
— jack (@jack) March 21, 2006
The fifth most expensive NFT sold to-date is the very first tweet posted by Twitter CEO Jack Dorsey on 21 March 2006.
This NFT boggles people’s minds because it is not necessarily unique and does not appear to be art. By minting an NFT of his tweet Jack Dorsey has not sold over control nor, arguably, his intellectual property. Nothing stops him from creating another NFT based on exactly the same tweet a year from now.
Rather than thinking of all NFTs as representing unique artworks, in the case of Dorsey’s tweet it is better to think of them as a signature on a piece of memorabilia.
Like if you take a normal ball to a cricket, rugby, or soccer match and ask one of the players to sign it. When the player signs the ball they turn an ordinary object into a collectible.
In this instance the NFT does not represent Dorsey’s tweet itself, but a signature on that tweet.
Is that worth the Ξ1630.5 ($2.9 million / R43.5 million at the time) paid for the NFT?
The buyer, Bridge Oracle CEO Sina Estavi thinks so.
“This is not just a tweet,” Estavi said (on Twitter, naturally) in response to reactions of disbelief at the price he paid.
“I think years later people will realize the true value of this tweet, like the Mona Lisa painting”.
As for the R43.5 million raised through the auction, Dorsey said he would convert the proceeds to bitcoin and donate it to the GiveDirectly Africa Response fund.
Hashmasks earned developer Suum Cuique Labs $16 million (R240 million) in January 2021 from the sale of the 16,384 unique digital art pieces created by 70 different artists, Vice reported.
The first buyers purchased Hashmasks blindly, only learning on launch day what the art they bought looked like. They also received bonus Name Changing Tokens — enough for two name changes.
Each Hashmask is nameless to begin with. Only a Hashmask’s owner can change its name by spending 1,830 Name Changing Tokens.
Hashmasks accumulate 10 Name Changing Tokens per day, allowing its name to be changed roughly twice per year. In just under ten years from now, on 26 January 2031, Hashmasks will stop generating new Name Changing Tokens.
According to a report from Flipside Crypto, Hashmasks became the most traded NFT on the secondary market within a week of their initial release and earned owners $8.9 million (R134 million) in profits.
Seeing Stars Challenge 1 expires Monday, March 29 at 10am PDT ⏰
Collect all 1️⃣2️⃣ required Moments & score this exclusive reward of Kevin Durant crossing up his defender & attacking the rim for a two-handed finish 💪🏼
— NBA Top Shot (@nbatopshot) March 25, 2021
NBA Top Shot is a blockchain-based digital collectible card platform developed by Dapper Labs, the creators of CryptoKitties, where the cards showcase videos of basketball highlights — “top shot moments from NBA history”.
New Top Shot packs have sold for as little as $9 each (R135), with each pack containing three cards.
Cards that feature specific highlights have been resold on the platform for as much as $200,000 (R3 million).
CNBC reported that NBA Top Shot has generated over $230 million (R3.5 billion) in sales.
While most of this sales volume is made up of transactions between collectors, Dapper and the NBA do earn fees from these peer-to-peer transactions that use the Top Shot marketplace.
Massive hype causing high Ethereum transaction fees
NFTs are not the only development promising quick riches that has people in another cryptocurrency-related speculative frenzy.
The advent of “yield farming” has also seen many investing their ether into smart contracts with the promise of massive returns — from experiments in savings products that offer a reasonable 4% to 15% per annum, to red-flag raising returns of thousands or even millions of percent per year.
Yield farming has been brought about by the proliferation of Decentralised Finance (DeFi), with distributed applications powered by Ethereum offering ways to take out or offer collateralised loans, provide liquidity for decentralised exchanges, or even buy the equivalent of exchange-traded funds.
All of this has resulted in skyrocketing transaction fees, called “gas prices”, on the Ethereum blockchain.
A single basic transaction could cost more than $10 (R150) in ether, while more complex transactions involving several smart contracts could cost over $50 (R750).
As a result, NFTs, DeFi, and yield farming on Ethereum have become playgrounds for the rich.
Those of more modest means who are interested in exploring the burgeoning DeFi and NFT space have been left to find alternative platforms such as the Binance Smart Chain, Tron, or Tezos, and various “Layer 2” projects.
“Layer 2” is a short-hand for several different approaches to reduce transaction fees for applications on Ethereum, which broadly boil down to running a system in parallel to Ethereum.
Projects like Avalanche, Polygon, and Conflux are already offering some DeFi and NFT services, while platforms such as Optimism.io are still in the works. CryptoKitties developers Dapper Labs have their own blockchain project called Flow, which they have used for NBA Top Shot.
The Ethereum developers have also worked on relieving some of the scaling problems with the network in the short term through an update called EIP-1559.
Set to take effect in July 2021, EIP-1559 aims to make a significant change to how transaction fees are handled and help make gas prices more predictable.
Under EIP-1559 a fixed portion of transaction fees will be “burned”, reducing the overall supply of Ether tokens in circulation. This, the argument goes, will make Ether a deflationary cryptocurrency, like Bitcoin, and cause its price to increase.
Many Ethereum miners remain unhappy with this proposal and there was talk of staging a protest on 1 April. In the meantime, a proposal has been made to counteract the effects of EIP-1559 for two years as a compromise with miners.
Ethereum’s developers have made it clear that the ultimate goal is to eventually switch away from proof-of-work (“mining”) to validate transactions on the blockchain and adopt an approach called proof-of-stake.
This transition to “Ethereum 2.0” has already begun and it is estimated to be completed in 2022.