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The ABCs of NFTs:

A Guide to Non-Fungible Tokens, the Cryptomedia Trend Bringing Ownership to the Internet

Like a digital collectible, an NFT draws its value from its cultural cachet

In recent months, non-fungible tokens (NFTs) have skyrocketed in popularity, leading a digital flower to sell for $20,000, a looping video clip for $26,128, a sock for $60,000 and a LeBron James clip for $99,999.

You can be sure where there’s this level of hype in consumer behavior, brands are keen to get in on it.

February has been explosive for NFTs. In the span of two days, online personality Logan Paul made more than $5 million selling NFTs, according to online video blog TubeFilter, and rapper Post Malone has hopped on the NFT bandwagon, adding a signature twist to the trend by offering fans who make a purchase the opportunity to play beer pong against him. In the music world more broadly, musicians have sold more than $4 million in NFTs, according to industry analyst Cherie Hu. And just last week, Christie’s became the first major auction house to offer a fully digital work.

These tokens, which have been around since 2015, are enjoying a recent surge of interest thanks to a variety of factors. The normalization of cryptocurrency, combined with advances in blockchain technology, a sense of consumer FOMO following the r/WallStreetBets episode and an evolving understanding of how ownership works on the open internet have all contributed to the rising popularity of the NFT market.

While the technology at play and the value system behind NFTs can appear complex, the factors fueling the market ––fandom, royalty economics and the laws of scarcity––are themselves age-old propellers of consumer behavior. As Hu wrote, “NFTs help close the stubborn gap between the emotional value and market value of art in a digital world.”

Want to know more? We’ve created a primer on NFTs and the brands, like Nike, that are already exploring them.

What is an NFT?

Put simply, an NFT is a record that shows who owns a unique piece of digital content, similar to the way a vehicle title shows who owns a particular car. In theory, any piece of digital content can be minted into an NFT, from songs, photographs and works of digital art to tweets, memes, published articles and podcasts.

When someone “mints” an NFT, they create a file that lives on the blockchain, which means it cannot be copy and pasted, edited, deleted or otherwise manipulated.

Investor and cryptomedia analyst Jesse Walden compares NFTs to a “digital passport,” in that they follow the media across the internet, bearing information that can be updated but never destroyed.

An NFT is non-fungible because it is not interchangeable; each NFT is distinct and has a unique ID.

While many associate blockchain with Bitcoin, NFTs use a different kind of cryptocurrency called Ethereum. To buy an NFT, you must first buy Ether. Then you can shop for NFTs on a handful of platforms.

SuperRare, a marketplace for digital art, has grown from $1 million in gross sales in October to a forecast topping $10 million in sales in February, said co-founder Jonathan Perkins. NBA Top Shot allows you to buy NFTs of NBA clips, and Zora, which looks a bit like the cryptomedia version of Tumblr, lets users browse through a variety of NFTs.

Why buy an NFT?

When you buy an NFT, you gain ownership of the content in question, but it can still travel freely across the internet, be viewed, listened to or saved by anyone who wants to do so. At first, this might sound like it reduces the value of an NFT: What good is “ownership” of a work of digital art if everyone has equal access to it?

In reality, the more a file is shared and seen online, the more cultural value it accrues. Walden, the technologist, uses the work of Andy Warhol as an example.

Here’s the cool part, though: When you buy an NFT through an online platform, which is known as a primary market transaction, the platform takes a percentage cut––between 3% and 15%––and the creator takes the rest of the revenue. Then, if you decide to sell that NFT to a new buyer, which is known as a secondary transaction, you receive 90% of that revenue, but the original creator also gets a cut, generally 10%.

This continues… forever.

“Artists are literally waking up to an email that says, ‘You just got $10,000 because this collector sold your artwork to another collector,’” Perkins said. “It creates a really powerful dynamic.”

The media and marketing industry

Brands have already begun experimenting with NFTs, using the tokens to unlock a new class of digital goods, new distribution models and new ways of monetizing digital ownership.

In 2019, Nike patented the concept of shoes as NFTs, called CryptoKicks, which incorporate the digital ownership concept of non-fungible tokens with the appeal of customized sneakers.

Similar to digital ticketing, NFTs are also emerging as a way to grant access to exclusive experiences. In February, Microsoft launched a game that celebrates women in science and rewards players with NFTs that unlock secret games inside Minecraft.

Fan economics and an extension of the creator economy

As a result of their digitally enhanced royalty system, NFTs are a natural extension of the creator economy and the emerging world of fan economics that powers platforms like Patreon.

When an artist mints an NFT, they are giving their superfans another way to express their affinity for their work. Like tour merch from a legendary Grateful Dead concert, an NFT is valuable because it is a one-of-a-kind artifact from a creator.

Unlike a traditional memento though, when you buy an NFT, you not only put money in the pocket of that artist immediately; you also give them an untold number of future opportunities to make money down the road, all off one piece of art.

Environmental concerns

Critics of NFTs point out that the trend is not without its faults. Most urgently, the process of minting an NFT is incredibly energy-intensive, to the degree that the rising prominence of cryptomedia poses a significant risk to the environment. Currently, most Ethereum is minted using a proof-of-work system, which has a significantly larger carbon footprint than the alternative proof-of-stake system, though the latter is not yet available for widespread use. Experts in the subject suggest that in one to two years, proof of stake could become standard practice for minting Ethereum.

There are also significant issues surrounding accessibility, according to industry analyst Hu. Given that minting an NFT costs a minimum of around $70, baseline prices for the commodities often start at around $100, which makes them inaccessible to many fans.

Platforms have also struggled to enforce copyright infringement policies that prevent unscrupulous dealers from minting NFTs to works of digital media that they don’t have the rights to. Despite these concerns, the prospect of convenience, quick cash and emotional gratification make for a nearly irresistible combination. Indeed, industry members believe cryptomedia and NFTs are here to stay.

Perkins of SuperRare cited interest from billionaire entrepreneur Mark Cuban, Sotheby’s auction house and musician deadmau5 as evidence of the staying power of NFTs. “This is not speculation,” he said. “The fundamentals are all there.”

Author: Mark Stenberg

Image by: Pierre Borthiry

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