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What are NFTs and are they really just a passing fad?

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On March 16, 2021, billionaire techno king Elon Musk appeared to be selling a recent tweet of his as an NFT.

"I'm selling this song about NFTs as an NFT," Musk, CEO of Tesla, tweeted. He later took back his tweet, after passing on an offer of over a million dollars.

And Musk isn't alone in this recent craze.

what is an nft non fungible token

Jack Dorsey, CEO of Twitter and Square, recently listed his first tweet as an NFT through "Valuables".

In London, prestigious auction house Christie's sold a digital collage NFT made by a South Carolina artist known as Beeple for $69.3 million.

So what actually is an NFT? And why are they currently taking over the internet?

A deep dive into NFTs

Better known as a non-fungible token, an NFT is a type of digital cryptoasset. NFTs are digital certificates that authenticate a claim of ownership to an asset, and allow it to be transferred or sold. The certificates are secured with blockchain technology, similar to what underpins bitcoin and other similar cryptoassets.

The main difference between NFTs and cryptoassets as we currently know them is that the latter allow fungible trading, which means for example that bitcoin can be exchanged for other bitcoin, as they are mutually interchangeable and have the same properties. In contrast, NFTs are by definition non-fungible and are deployed as individual chains of ownership to track specific assets.

However, often NFTs are used to claim "ownership" of a digital asset that is otherwise completely copyable, pastable and shareable - such as movies, JPEGs and other digital files.

While NFTs seem like they've arrived out of thin air, they do trace back a few short years.

In 2012, Colored Coins hit the scene and many still argue that they are the very first NFTs to exist. They are made of small denominations of a bitcoin, and can be as small as a single satoshi, the smallest unit of a bitcoin.

Colored Coins can be used to represent a multitude of assets and have multiple use cases including property, coupons, the ability to issue your own crypto, issue shares of a company, subscriptions, access tokens and digital collectables.

Colored Coins demonstrated a significant leap in Bitcoin's capabilities and opened the door to further experimentation in applying blockchain technology for other purposes, laying much of the initial groundwork for NFTs.

Closely after, a string of other similar projects followed including the peer-to-peer financial platform Courterparty, Cryptopunks, Dapper Lab's CryptoKitties, and Ethereum-based VR platform, Decentraland which let players buy up empty parcels of 3D virtual space. Decentraland's ICO raked in $26 million in just half a minute.

Once limited to the cypherpunks of the crypto world, NFTs have gone mainstream.

Why are NFTs booming in 2021?

Why is 2021 suddenly the year for NFTs? Are they a strong contender to steal the spotlight in the 2021 crypto world?

The $1 billion market for NFTs has seemingly come out of nowhere to capture the imagination of artists and blockchain fanatics all over the world.

A recent report revealed that NFT transactions tripled in 2020, reaching more than $250 million in total.

The NFT Report 2020, stated that the non-fungible token market could be considered the core class for the virtual economy, especially with support from global brands' interests in NFTs. Fashion and luxury brands such as Nike and Louis Vuitton, as well as sports brands like the NBA, NFL, UFC and Formula 1 are all putting their hats in the NFT-ring, creating NFT-based consumer goods and services.

One of the creators of the NFT Report 2020, L'Atelier BNP Paribas' COO and foresight lead Nadya Ivanova says: "The boundaries between virtual and physical worlds have become even more blurred, we are seeing the rapid growth of virtual economies online, each offering a diversity of employment, investment and commercial opportunities."

She adds: "For all the hype around cryptocurrencies, it is non-fungible tokens that are driving and enabling much of the economic activity and use cases within virtual platforms, and they are likely to become both an important asset class and a foundation for the virtual economy in the next decade. Investors and brands that want to capitalise on the shift to virtual activity should start by paying close attention to the NFT market as it continues to mature and grow."

Are NFTs just a passing fad?

While some speculate that the NFT craze is just a bubble stemming from increased online activity following the pandemic, others believe it's here to stay.

Right now, most NFTs are used to predominantly sell digital art and collectibles, but in the future it's expected that they could be used to tokenise any real-world asset, making ownership of assets transparent and scrupulous.

Will the future be filled with cat GIFs being sold off as NFTs for millions of dollars? It's hard to say, but the growing trend is proof of the accelerated interest in the crypto and blockchain realm and its longevity in the years to come.

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Simon Peters is a cryptoasset analyst at eToro, with a detailed knowledge of crypto markets and the crypto industry. He has a degree from Brunel University London in Mechanical Engineering, and has a CFA UK Level 4 Certificate in Investment Management.
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