If Bitcoin was hailed as the digital answer to currency, NFTs are now the poster child for revolutionizing digital collectables. While there is much chatter about it, there are still many people scratching their heads to understand how images that all of us used to download from Google are now being sold at such brobdingnagian prices.  So, here is the first edition of  "The Rabbit Hole", where we simplify and explain the coolest kid of the metaverse: ‘NFTs.’

At the TokenDispatch we are big-time stans of the classic ‘The Starry Night’ by Vincent Van Gogh. It’s a mesmerizing piece of art. Interestingly, it’s all over the internet - you can spot it as cover images on Twitter, Facebook, album art, and many uncountable people use it as their wallpaper. Van Gogh died in penury, never seeing his art garner mainstream success. It only makes one wonder how much money Vincent Van Gogh would have made if his work had hit the mainstream? And what would it have taken to hit the mainstream?

Centuries later, perhaps we have an answer in Non-Fungible Tokens, a.k.a NFTs. “Non-Fungible” in layman terms means something unique and can’t be replaced with something else. So, while you can exchange a Bitcoin for another, and you’ll have the same thing, the same isn’t applicable for non-fungible tokens. It’s like exchanging limited edition pokemon cards, but virtually.

So, isn’t this like paying to download a jpeg image? Yes and no. For example, millions of people have seen Jack Dorseys’ first-ever tweet selling for $2.9mn. The image of the tweet has been copied and shared countless times. In this case, the artist (here, Jack) might retain the copyright ownership of their work, so they can continue to produce and sell copies, but the buyer of the NFT owns a "token" that proves they own the "original" work.

While NFTs are often associated with pictorial art, they aren’t limited to it. They represent a larger idea of exclusivity and proof of ownership and can support many use cases. So, you might need a concert ticket issued in the form of an NFT to attend the show in the metaverse or a Web3 company where you interned issued the certificate as an NFT and similar cases. The interesting part is how people are onboarded on this ship heading towards the metaverse.

Artists over the years have not always been able to monetize their art and talent to the extent of their potential. This is mostly because of redundant distribution methods that don’t allow for community formation and also limits access to a few influential people who’ve been long in the game.

With Web 3.0, fans, enthusiasts and even people looking to make strategic bets are getting access. It’s more like a coming of age story for the passion and creator economy where one’s conviction that an artist will make it big one day will not just provide inner satisfaction but also a chance to rake in millions if the artist in question makes it big then unlike conventional art there's a secondary market which is accessible with less gatekeeping and includes both art aficionados and people who’re just venturing out in Web3. NFTs have several use cases that can help us dive deeper into the metaverse.

NFTs are not just challenging traditional intellectual property-based business models but enabling new bottom-up business models for long-tail digital assets.

Rightful Ownership: In the digital world, where everything can be copied, the success of NFTs lies in authenticity and blockchain technology which preserves that. A single piece of artwork, when converted into an NFT, is unique and can’t be copied. The smart contracts governing the data of the NFTs make it impossible to destroy, modify or copy them. An NFT representing the original digital version of the artwork can be displayed as easily as any digital file. However, there is still only one true original, just like Van Gogh’s masterpiece, hanging in the Museum of Modern Art in New York.

Storage: Special storage is needed to properly preserve valuable artwork, keeping in mind special lightning, humidity, and temperature. As fine art is an investment, proper storage is mandatory but, at times, a challenging task. This is seen most prominently in museums preserving pieces of fine art.

Monetization: Smart contracts can enhance the economic power of artists in a more lasting and systemic way. For the first time, smart contracts will allow them to receive royalties in a secondary market. They could also provide a transparent and fool-proof mechanism for profit-sharing and collective decision-making, eventually addressing art patronage's inequity and economic precarity, shifting the power dynamic within the industry's culture-defining.

Community: Building liquidity for NFTs and digital content is critically about matching buyers and sellers. This involves a lot of network science, but more importantly, community building. A marketplace with a defined community and clear guidelines and culture helps lower these search costs even more. That is good for the community and helps attract like-minded users to their platform, creating an informal social layer that facilitates buying and selling. One other important thing to note about communities is that they are borderless. In the Metaverse, “content is the platform”, and there is more value if there is free circulation of goods and people across virtual worlds.

Access: The art world earlier was dominated by a select few individuals with heavy pockets. At least for now, NFTs are much more democratic, with a greater focus on the artist rather than the buyer,

Secondary market: Despite the hype, we’re still very early and even though there seems to be a lot of chatter - only a handful of people own NFTs. This will certainly change as more people understand the mechanics behind them. Like all art markets, we will likely see early adopters at some point deciding to sell their possessions. This sets up the premise for a thriving secondary market where NFTs can be readily bought and sold without much dispute, given that authenticity can be easily verified and a steady flowing demand where the border is no bar.

Technicals for the geeks

NFTs primarily work on the Ethereum Blockchain. As the name suggests, this is a special type of contract on the blockchain, namely ‘ERC 721’. The ERC-721 introduces a standard for NFTs. In other words, this type of Token is unique and can have a different value than another Token from the same Smart Contract, which may be due to its age, rarity, or visual. Wait, visual?

Yes! All NFTs have a uint256 variable called tokenId. So for any ERC-721 Contract, the pair contract address, uint256 tokenId, must be globally unique. That said, a dApp can have a "converter" that uses the tokenId as input and outputs an image of something cool, like zombies, weapons, skills or amazing kitties!

With the emergence of blockchain-based games where in-game items are being minted as NFTs, there has been an emergence of the new token - ERC 1155. While there is some debate on what the ideal contract for minting NFTs is, @beaniemaxi tweet explains this best:

How to Buy NFTs

  • Purchase Ethereum: Since most NFTs are Ethereum-based tokens, most marketplaces for these collectables accept only ETH tokens as payment. If you already have an account with a cryptocurrency exchange, you can purchase Ethereum on it and send your crypto to your web3 cryptocurrency wallet, such as MetaMask.
  • Connect your MetaMask to OpenSea or another NFT Marketplace: Many marketplaces buy and sell NFTs. Depending on which marketplace you choose, you’ll be able to purchase different types of art or collectables. Many of these websites have secondary marketplaces with various NFTs, but each platform operates slightly differently.

    OpenSea is a marketplace for NFTs that operates on Ethereum. Users can interact with the network to exchange non-fungible tokens for cryptocurrency. It hosts a variety of digital collectables, from video game items to digital artwork. To use the platform, you need a web3 cryptocurrency wallet such as MetaMask. Your Ethereum wallet address acts as a username and password and lets you interact with certain platforms like OpenSea. Once you’ve connected your wallet, you’re ready to start browsing the market and placing bids!

    SuperRare is a social network for NFTs. Each piece on the platform is unique, and users can buy and sell these original pieces on its website. The platform operates with Ethereum’s network, so you’ll need to fund your account with Eth tokens to make your purchase.

Nifty Gateway is an NFT marketplace owned by the popular cryptocurrency exchange Gemini. The platform works with popular artists such as Steve Aoki, Grimes, 3LAU and many others to release artwork on the marketplace. The company also has a secondary marketplace that allows collectors to resell artwork. You can fund your Nifty account with Ethereum, or you can connect a credit card directly on its website.

WarizX NFT Marketplace is India’s first NFT- non-fungible tokens marketplace launched on May 31, amid the crypto boom. They run on the Binance Smart Chain, one of the largest crypto exchanges in the world. Binance acquired WazirX in 2019. The marketplace welcomes those interested in buying or selling NFT and has no listing price. The platform will charge a ‘minimal gas fee’ of $1 per transaction.

  • Buy Your NFT: It’s an easy process to buy an NFT once you’ve funded your account. Most marketplaces are in an auction format, so you’ll need to submit a bid for the NFT you want to purchase. Some marketplaces operate more like exchanges, using the highest bid and lowest ask for NFTs with several prints.

A benefit of purchasing an NFT from the primary marketplace is the potential resale value directly after the product goes on sale. Some NFTs in high demand will sell 5 to 10 times or even as high as 50x their initial price right after the release.

The downside to buying NFTs on the primary marketplace is it’s hard to estimate the demand for the art. While this has been the case for evaluating anything art/abstract since its very commercialization.

As a general rule of thumb, you should look at the historical trend of the NFT project and, most importantly, previous works of the artist to get some sense of their trajectory. Also, most NFT projects these days have an active Discord server where they keep communicating with the patrons and fans. This is a great indicator. Also, finally, it comes down to your conviction and idea of art, i.e., the value you’re ready to shell.

Safeguarding your NFTs

Tokens are stored in crypto-wallets that let you connect with different Dapps built on various blockchains but with a layer of security. One such open-source and free-to-use wallet is Metamask. A community of developers runs it across the world.

Firstly, you need to create a Metamask account and, once done, connect it with the marketplace you’re planning to buy the NFT from. Also, don’t forget to fill your wallet with ETH since you’ll need that to buy these pieces (yes, they can’t be bought using dollars but instead cryptocurrencies). That’s all.

If you’re more sceptical and want to safeguard your possessions even further, then there are physical wallets available as well. They’re a bit expensive but worth the additional investment.

And if you’re still sceptical, then why not put it in a trunk and dig that down your backyard? JFYI, historically such heists haven’t gone well.

Other things you should know

Economics: Paintings are not valued based on the price of the paints used on the canvas, and Jeff Koons’s Rabbit sculpture didn’t sell for $91 million at Christie’s because of the number of nails used or even the price of them. Art prices might rise and fall, but not because of fundamentals; instead, consensus (NFT buyers) and willingness to pay to confer value.

When an artist mints an NFT, their superfans get another way to express their affinity towards the artist. It’s the new age artefact, primarily digital in nature but bound by community and scarcity in essence.

Fees: While it has become effortless to buy NFTs, given the traction they have been getting, some additional fees might come as a surprise to you when you decide to buy an NFT and hit the button. One of them is the Gas Fee.

Gas in crypto refers to the computational effort required to execute operations. Users have to pay for the computing energy required to process and validate transactions on the blockchain. Thus, “gas fees” are the transaction fees that users pay to miners on a blockchain protocol to have their transactions included in the block.

Gas fees are denoted in Gwei, which is just .000000001 ETH. You can think of them as cents, like 1  Cent is $0.01.

Simple demand economics are at play. If there is more demand for transactions, miners can choose to include the transactions that pay more, compelling users to pay more to have their transactions processed quickly and efficiently. Users of Ethereum can also choose to pay more for faster transactions. This is also known as the ‘priority fee’.

The above graph depicts historical gas fees over the past few months. It may sometimes happen that the gas fees are higher than the price of the NFT you’re planning to buy.

When gas prices are high, it becomes difficult for artists to create and sell their work. If you try to reduce your prices to accommodate the gas prices, then the perceived value of the artwork is diminished. Since gas prices differ from the actual valuation of the digital assets, costs may be much more than the actual cost of the assets you’re selling.

Yes, just like global oil markets, this is also getting out of proportion, but there’s a logic to it, and people are straining their eyes and breaking dozens of keyboards to roll out better infrastructure with reduced processing fees. Till then, here are a few ways to save on gas fees:

  • Transact either very early in the morning or late at night when there is less demand and lower gas fees. This may or may not work all the time though
  • Blockchains such as WAX(Worldwide Asset Exchange) do not require gas, and transactions are instant.
  • You can set a Gas limit (the amount you’re willing to pay). This will lead to your transaction processing only when it is profitable for a miner to process it. Win-Win. That’s what Web3 is all about.
  • You can keep track of the gas prices to estimate the price when you want to run your transaction. (Note: This is not possible for time-sensitive transactions)

Environmental concerns: While NFTs are a gateway to the Web3 world, they come at a cost. Most urgently, the process of minting an NFT or any token on certain blockchain networks is environmentally degrading to a great extent. Minting requires large computational power, and only large servers can manage this. NFTs run on the Ethereum network, and most of Ethereum is minted using a proof-of-work system, which has a significantly larger carbon footprint than proof-of-stake systems.

Use case: There is not just artistic or snob value to NFTs. In the larger context of the metaverse, NFTs will play an important part where they can serve anything from memorabilia to a lease contract of a building. We’ve tried to enumerate some of the use cases here:

Upcoming trends in NFT

Fractionalised NFTs, or F-NFTs, alter the four fundamental values - utility, ownership history, future value and liquidity premium. Ownership history is now divided among the masses. The resulting utility from the fractionalised tokens varies. Liquidity is now higher — instead of just one asset, there are many little bits and pieces — and the future value will change according to the other three features.

The iconic Doge meme NFT that sold for $4 million in June is now speculated to be worth $220 million after getting split into 17 billion pieces.

For the geeks: In technical terms, the original NFT was minted as an indivisible ERC721 token. However, the fractionalised version is 17 billion ERC 20 tokens, which are fungible — they can be exchanged for one another since they all are a part of the same NFT.

The rationale: The hype for NFTs doesn’t seem likely to pass anytime soon. If this happens, it will result in the prices of NFTs becoming more expensive with each passing day, making them expensive. With fractionalisation, investors with limited funds can own a part of the NFT without emptying their pockets. More importantly, this adds liquidity and accessibility to a larger base of investors.

We’ve told you about NFTs, the rationale, and the technical aspects. Now it's time for you to follow some popular projects. Here are a few:

CryptoKitties  - Launched: 2017

CryptoKitties is an Etherum-based game involving collecting and breeding digital cats. It is represented by virtual cats who are different from each other. The first demo CryptoKittie was revealed in October 2017 and launched with the concept of breeding. Each cat has a different “cattribute” that can be passed down to its offspring.

Users breed digital cats by depositing Ether (ETH) to dapper, the official wallet of CryptoKitties. Users can breed kitties in two ways- either by breeding two of their kitties or breeding with the father (also called public sire).

CryptoKitties had some notable six-figure sales in 2017 and 2018 and was not as dormant as other projects on this list, as there were 3.2 million transactions on the smart contract in October of 2018.

Beeple NFT - Launched: 2021

Beeple NFTs is probably the most popular project of 2021.

Mike Winkelmann, also known as Beeple, is a digital artist whose NFT was bought for $69M worth ETH in a Christie’s sale. Before this, the sale of Beeple’s paintings were not more than $100 per print; however, the recent sale of $69M made Mike one of the most valuable artist globally.

Beeple has gained huge popularity due to his series “Everydays – The First 5000 Days”. Beeple is also known for uploading his artwork every day for 14 years.

CryptoPunks  - Launched: 2017

Launched by Larva Labs, Crypto Punks is a hugely influential project that essentially kicked off the NFT movement and arguably inspired the creation of the ERC-721 token standard on Ethereum.

Each punk was algorithmically generated, and the collectables were limited to 10,000 Punks pixel-art characters inspired by the punk movement and the cyberpunk fiction genre.

Human Punks are the most common, but there are other species of Punks.

There are just 9 Alien Punks, 24 Ape Punks and 88 Zombie Punks. Alien Punks have fetched over $8 million on auction.

Bored Ape Yacht Club - Launched: 2021

BAYC is similar to CryptoPunks in that these NFTs are commonly used as online avatars. The project features cartoon apes with different attributes and rarities, and the cheapest Apes cost about 40 ETH ($120,000).

Just a few months ago, you could get your hands on an Ape for around 1 ETH, making this project 1 of the fastest-appreciating NFT collectables in the industry.

Since its inception, BAYC has airdropped token holders Bored Ape Kennel Club (BAKC) and Mutant Ape Yacht Club (MAYC) NFTs, which have accrued floor prices of 2.85 ETH and 4 ETH, respectively.

Interestingly, brands seem to be riding the bandwagon, and why not? Two of the most popular brands have already seemed to gain some steam.

Nike CryptoKicks

In December 2019, Nike secured a patent for “CryptoKicks,” which denotes the pairing of a non-fungible token with a physical shoe release. Once a purchase is made with a registered seller, the buyer receives a corresponding NFT that uses blockchain technology to verify authenticity and ownership. The digital token follows if the shoes are subsequently sold or traded again.

NBA TopShot - Launched: 2020

NBA Top Shots is one of the top NFT projects owned by the NBA in association with Dapper Labs.

It is built on the Flow blockchain instead of Ethereum. Since its formation in 2021, the clips of iconic moments have been sold for exceptionally higher prices.

On NBA Top Shots, users buy their iconic NBA moments and own these digital collectables forever. NBA shots certify NFTs and grant the buyer the authenticity and ownership rights of that exclusive moment.

In addition to the highlights, Top Shots contain player statistics and information about players’ history.

So, that’s a little about NFTs to get you started. This in no way encompasses all there is to know about NFTs but hope it’ll spark your curiosity and get you started.

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