What is an NFT? Why is there so much hype right now? These are just jpegs that people pay money for, although I can download them for free any time?
OK, we need to step back a little to fully understand what NFTs are.
We go back to 2008 when the “blockchain” was invented (thoughts in this direction were already there in the 80ies).
Satoshi Nakamoto (nobody knows who is behind this synonym — a single person or a group) wrote a white paper in 2008 that was the foundation for a digital currency. We all know this currency today: “Bitcoin.”
The idea of the white paper was to describe a way how to send payments from one party to another without relying on a trusted third party:
“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.”
Financial institutions are your bank or payment provider like Paypal. Every transaction is handled by these third parties. For example, if you pay someone on the internet, your money is sent via the financial institution to the seller.
The white paper describes a way to send money without the need for trust “in the middle.” Usually, a buyer does not trust the seller — and vice versa. But trust is elementary for financial transactions. This is basically why you need a third party who serves as an intermediary and guarantee the “trust.”
But how can transactions be sent between two parties without the need for trust?
This is where the blockchain comes into play. Technically it is pretty hard to explain how a blockchain works — if you want, you can read the full white paper. But we don’t need to understand all technical details to understand the general way it works (or do you know how “the internet” works?).
“Ownership records” are stored decentralized — on a lot of different computers. So if data is stored on one computer, it is relatively easy to manipulate it. But suppose the information is stored on thousands of computers. In that case, it is impossible to hack all computers to manipulate the records on all computers.
If you send “digital money” (e.g., Bitcoin) to someone, the network of computers confirms the transactions and places the record into the blockchain (Person A sent Bitcoin to Person B). This makes person B the new owner of the Bitcoin that was sent. Person A can’t reverse this transaction. The blockchain is built so that it can’t be manipulated (until today, all attempts to manipulate it failed).
As there is no trusted third party in the middle, you are responsible for the keys to the blockchain, basically to your wallet. If you lose these keys, there is no one to call, unlike your credit card, where you just call your bank, and they issue you a new one.
What does that have to do with NFT? The basis for NFT is that there is no middle man who serves as a trusted third party. This is the basis that people can do any kind of business, so-called “peer to peer.”
Now, let’s explain what “fungible” and “non-fungible tokens” are.
Bitcoin is a “fungible token,” “which means one Bitcoin is equal to one Bitcoin, and it’s equal to all other Bitcoins. Such tokens are assumed to be interchangeable and divisible too”.
“Non-fungible tokens are special tokens that represent unique, collectible items. They are unique in the sense that they cannot be split or exactly changed for other non-fungible tokens of the same type.”
The technology that bitcoin is based on does not allow to build “non-fungible tokens” on it.
That’s where “Ethereum,” the second-largest cryptocurrency, comes into play.
Vitalik Buterin presented the Ethereum Whitepaper at the end of 2013. However, it took until July 2015 until the Ethereum Network was launched. Ethereum is not only a digital currency. It is a platform to build smart contracts on. This is the basis for a lot of different “dApps” — decentralized apps. dApps can be something like identity management, e-voting, virtual organizations — or NFT.
The standard for NFT that the Ethereum community agreed on is the “ERC-721” standard.
“Minting” is the process where a digital asset is let out into the blockchain. It contains any important information, like metadata, price, properties, royalties, etc. Once it is is in the blockchain, it can be traded.
The first NFT dropped before Ethereum was invented.
2012 “Colored Coins.”
The first “NFT project” was “Colored Coins,” — but it was not a visual project. “Colored Coins” “describes a class of methods for representing and managing real-world assets on top of the Bitcoin Blockchain.”
Still not an actual NFT project, as we know it today, was “Counterparty.” “Counterparty” was developed on top of the Bitcoin Blockchain to allow asset creation, and it had its own exchange. Counterparty has its own ticker symbol and is still tradeable today.
Based on Counterparty, there were several projects in the following years:
Spells of Genesis was the first game on the blockchain.
Rare Pepe is a meme featuring a frog — there are a lot of these memes out there.
In 2015 the first NFT on the Ethereum Blockchain was released: Etheria. They were launched and demonstrated live at “DEVCON 1”, the first Ethereum Developer Conference in London. They are basically “land tiles” that nobody bought back then — just in 2021, when interest in NFT gained, they were finally sold — for a total of $1.4 million.
World-famous today, for free in 2017. Not a lot of people were interested in the Crytpopunks back then. The idea came from Matt Hall and John Watkinson. They made Crypounks out of their company “LarvaLabs.”
“There’s like a weird intersection here between these virtual, digital things and an artificial rarity, but a rarity that is real and valuable in some sense.” *
The rest is history. Today, Cryptopunks are sold for millions of dollars. Celebrities hold them. They are more a status symbol than any Lamborghini can ever be.
Another project that launched in 2017 was Crytpokitties — by Dapper Labs. It is a game that allows players to purchase, collect, breed, and sell virtual cats. Cryptokitties are still very popular today. However, while hundreds of thousands of breeds of Cryptokitties are out there today, there will always be only 50.000 “Gen 0” Cryptokitties.
Decantraland is a 3D virtual reality world, which went into beta in 2017 and was released to the public in February 2020. In Decentraland, you can buy virtual land and all other kinds of digital assets. On their marketplace, users can buy and sell land, estates, avatars, and wearables.
2020 “NBA TopShot.”
DapperLabs released a beta of “NBA TopShot” in early 2020. It is a project to sell tokenized collectibles of NBA highlights. It runs based on a blockchain that DapperLabs developed, called “Flow.” Market Cap of “NBA TopShot” today is around 700 Mio. USD.
2021 The year NFT took off.
This year is probably the year where interest in NFT increased to a much higher level. Of course, we are still far from mainstream adoption, but there are more projects than ever, and prices for certain assets went through the roof.
Beeple topped it all, selling his artwork “Everyday: The first 5000 days,” which was sold for an incredible $69.3 million in an auction at Christie’s, March 11th.
Cryptopunks went through the roof (Punk 7523 being the most expensive one, sold for $11.7 million), Bored Ape Yacht Club became famous. So many other projects and artists developed their own NFT — and so many exciting projects on their way.
2022 The future
No one knows what the future holds for NFT. But It is an exciting time, and everyone tapping into NFT today is still early — the NFT space will look different from today in 2022.
How it will look like? No one really knows. Will we see avatar projects reaching the top? Will we see projects that we can’t imagine today? Is it just a giant bubble, and prices will implode? Or will adoption grow?
Once you understand why NFT are not just stupid jpegs with no value, you will be fascinated by this world. No matter where it heads towards.
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PS: Do you want to buy your first NFT? I wrote a little guide on how to do it