What are NFTs and why do people pay huge sums for them?

A cat GIF for $600,000, please!

There are three capital letters – NFT – that you can read about everywhere right now. Fynn Kliemann is selling jingles, FC Bayern München licensed NFT player cards, the band Kings of Leon is releasing their album as an NFT, Christie’s, the world’s most famous art auction house, sold a digital painting for $70 million some time ago and even the current Spotify review talks about NFT. But what exactly does NFT mean? We looked at this hype and explain what lies behind the three letters.

What are NFTs?

NFTs are digital stuff. That’s a flippant way of putting it. With an NFT, the creators transform virtual goods into unique and forgery-proof collector’s items via the Ethereum blockchain – a digital certificate of authenticity, so to speak. This gives the works a value that arbitrarily duplicated content cannot have. NFT stands for Non-Fungible Tokens. Another word for token – in this context – is asset or property. Non-Fungible can be translated as “unique”. It is the opposite of a Bitcoin, which is a fungible token.

More vividly, if you exchange a Bitcoin for another Bitcoin, you still have a Bitcoin. No more and no less. The value has not changed. But there are only a few of a player’s card, perhaps still with the player’s signature. Sometimes it is even unique. If you exchange this card for another, you have something else, especially no longer the same value.

How do NFTs work?

Besides Bitcoin, there are other cryptocurrencies. Ethereum and the largest NFTs are part of the Ethereum blockchain. In plain language, this means that payment is not made in dollars or euros, but in ether, the currency of Ethereum. What is a blockchain again? Put simply, it is a chain of digital data blocks that combines transactions (transfers, orders, or account balances, for example), a kind of accounting system for the cryptocurrency. This blockchain makes it possible to see who has the rights to a work. It protects the information, which can no longer be falsified.

What does an NFT look like?

You can’t touch NFTs, because pretty much anything digital can be an NFT – a painting, music, videos or even a cat GIF. A few days ago, the auction house Christie’s sold the work Everydays: The First 5000 Days by Mike Winkelmann aka Beeple for almost 70 million dollars. For 5000 days, he posted a picture every day – now he has combined them all into one digital work. The buyer now receives the image file and an associated non-fungible token. The proceeds catapult Winkelmann into the top 3 of the best-paid living artists. And that’s with a digital work of art that can never hang on a wall. The band Kings of Leon is releasing their new album When You See Yourself as an NFT. Six of the NFTs will include a Golden Ticket that will get you front row seats at the concerts for the rest of your life. Art activists bought an image by Banksy, digitized it and then burned it. This image is now only available in digital form as NFT; it is auctioned on the site OpenSea.

OpenSea is the Ebay of NFTs and very successful at that. In February, the platform generated $86.3 million in sales, up from $8 million in January. Other sites offering auctions include Rarible and Nifty Gateway. Anyone interested in the Kings of Leon album mentioned above or one of the Golden Tickets will have to dig deep into their digital pockets. At the time of writing, the price of a ticket is 420 Ether, which corresponds to 747,264.00 dollars. Fynn Kliemann is also experimenting with NFTs. Last week, he auctioned 100 jingles for 250,000 euros.

Once again, people and organizations who can afford such experiments are ahead of the game. Investor Mark Cuban is one such person. Also, the NBA basketball league or FC Bayern Munich. The fantasy football platform Sorare can be described as a digital Panini album. The cards of the individual footballers are extremely limited. Value increases enormous. The most expensive trading card to date was that of the Paris Saint-Germain player Mbappé. It changed hands for 57,000 dollars. Because the card is registered via the blockchain, it cannot be forged.

After cryptocurrency comes crypto art

Crypto art is the new buzzword sweeping the media landscape. There is a lot of this “art” on OpenSea. This digital art can still be duplicated, copied, and distributed, including NFTs. You don’t have the image rights. NFTs only have something you can’t copy ownership of the work. Artists still retain all rights to the work. Just like with a real painting. Just like with art, anyone can buy a Banksy poster – but you can only own the original once.

Will crypto art become the art of the future? The new art owners hope so. Why else would they pay almost 70 million dollars?

What is the purpose of NFTs?

For artists, it’s a way to finally see money for their work. Likes on Instagram are all well and good, but you don’t earn anything with them. If the NFT is resold, the artist can receive a percentage. Fynn Kliemann’s jingles always earn him ten percent every time they are resold. As a buyer, you probably see it more as a way of appreciating digital art, like how a museum appreciates physical art. In any case, it’s an investment that should pay off at some point.

There is also criticism of the hype

NFTs are climate killers. To explain this, a short technical digression is necessary. The Ethereum blockchain, on which NFTs are based, uses a mechanism called Proof of Work. In the process, the computer solves complex puzzles during so-called mining to be allowed to add new blocks to the blockchain. The difficulty of these tasks is artificially increased to prevent too much ‘money’ from being generated too quickly. This leads to an arms race. Faster computers solve the puzzles in less time, new puzzles slow down the computers, so more computing power is needed, which in turn is slowed down with more difficult tasks. It should be clear that this principle will hardly win a sustainability prize.

Are NFTs still worthwhile now?

If you have the necessary cryptocurrency: of course. It is a business in which supply, and demand determine. The crypto objects can be bought and potentially resold for a profit just like classic art. Or not. Every art market fluctuates, and the crypto art market is no different. No one can say when the hype will end. But it seems that the art market has found a digital counterpart that will not disappear so quickly.

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