What are NFTs? How did they grow so much in popularity?

Angela Ye

Introduction

In recent years, there has been a lot of excitement surrounding NFTs, especially in the digital art world. NFTs are unique digital assets that allow the transfer and ownership of digital assets. Examples range widely, from digital art to memes of frogs to photos of tweets from celebrities. In this article, we will break down what NFTs are, how they work, and why they became so popular. This article will be useful to you because having an understanding of NFTs is a fundamental piece of modern FinTech knowledge.

Chain 1: What are non-fungible tokens?

Although NFTs may seem complex, they are unique digital assets that represent ownership of a specific item or piece of content. Essentially, they are like physical collections of valuable items – only digital. Like a certificate of ownership, NFTs provide buyers with digital files that represent exclusive ownership rights. [Blockchain technology](https://aws.amazon.com/what-is/blockchain/#:~:text=Blockchain technology is an advanced,linked together in a chain.) also makes it easy to verify ownership and transfer tokens between owners.

A key characteristic of NFTs is that they are "non-fungible", meaning they cannot be interchanged or replaced with something else. On the other hand, physical money and cryptocurrencies are "fungible" since they are interchangeable with something of the same type and value – one dollar is always worth another dollar, and one Bitcoin is always equal to another Bitcoin.

Another critical feature of NFTs is that they are built on a decentralized network, meaning that ownership is recorded on the blockchain and is not controlled by a central authority, making them resistant to tampering, destruction, or replication. Since no one can modify or replicate the ownership records, they are often considered a more secure and transparent means of storing and transacting digital assets.

Chain 2: How do NFTs work?

NFTs are created through a process called [minting](https://blog.chain.link/how-to-mint-an-nft/#:~:text=Minting an NFT means creating,stored during the minting process.), which records their information on a blockchain. Most NFTs are stored on the Ethereum blockchain. As tokens are minted, smart contracts are created, which means that NFTs are assigned a unique identifier directly linked to a blockchain address. Therefore, even if multiple NFTs of the same exact item are minted, each token has a unique identifier and can be distinguished from the others. Smart contracts also allow NFTs to store valuable information, including ownership history, item authenticity, and other critical details. This makes it easy to verify and validate ownership and the transfer of tokens between owners.

NFTs can be bought, sold, and traded automatically without intermediaries. Their value is determined by the market – i.e., supply and demand – and they can be bought and sold in the same way as physical assets. NFTs are digital representations of assets, including real-world items such as artwork and real estate. Some users believe that tokenizing real-world tangible assets in this way can make buying, selling, and trading more efficient and reduce the likelihood of fraud.

Chain 3: The Rise of NFTs

NFTs originated with "Colored Coins," which allowed individuals to market assets based on small denominations of Bitcoin in 2012. Though not quite an NFT yet, the "coloured coin" served as a precursor. The first real NFT, Quantum, was created in 2014. While Bitcoin was never intended to act as a database for these alternative tokens, several NFTs were launched on pre-Ethereum blockchains in subsequent years. Spells of Genesis, launched in 2015, and Rare Pepes, launched in 2016, were among them. However, these projects failed to achieve widespread popularity and remained mostly unknown to all but those knowledgeable in blockchain technologies.

NFTs only gained mainstream momentum in 2017. Around this time, the first NFT collections were launched on the Ethereum blockchain. Previous blockchains made trading and transferring ownership difficult. However, the Ethereum network's smart contract functionality enabled token creation, programming, storage, and trading directly on the blockchain. These new features eased the onboarding process and increased access. A notable turning point in the NFT market was the launch of CryptoKitties, one of the first blockchain games built on Ethereum. It was the first project to receive widespread media attention and was the inspiration for [ERC-721](https://docs.openzeppelin.com/contracts/3.x/erc721#:~:text=ERC721 is a standard for,across a number of contracts.), an open standard that allowed compatible blockchains to be built on the Ethereum blockchain, thus enabling wider usage.

As the popularity of NFTs has grown, so has the interest from companies and brands looking to capitalize on market growth. Many well-known brands, such as Coca-Cola, Taco Bell, Hot Wheels, Adidas, and Gucci, have started creating NFTs related to their products. In some brands, certain NFT collections have sold at prices higher than the cost of the company's main products.

Chain 4: Why did NFTs become so popular?

The popularity of NFTs had grown rapidly in recent years, starting in 2017 when CryptoKitties launched. Since then, NFTs' popularity has steadily increased until the market exploded in 2021.

Source

According to Statista, there was a drastic increase in NFTs sales in 2021 and 2022, with the highest number of sales peaking in August 2021 with a daily average of 183,755 NFT sales. But what was the reason for this explosion in popularity? There are several important reasons:

  • The COVID-19 pandemic: National lockdowns across the globe in 2021 due to the COVID-19 pandemic played a key role in the explosive rise of NFTs, especially in 2021-2022. When physical gatherings were limited due to COVID-19, many digital services, including NFTs, experienced an unprecedented increase in demand. In fact, the number of wallets trading in NFTs expanded considerably from roughly 545,000 in 2020 to around 28.6 million in 2021.

  • Creative freedom: NFTs have opened a new revenue stream for artists, musicians, and other creators. Especially in the time of the pandemic, when art and performing spaces were closed, the only way for artists to earn money was to sell their works digitally. Furthermore, NFTs allowed them to directly profit without cuts from intermediaries such as distributors or publishers, giving them more control over their work and the ability to set their prices.

  • Exclusivity: Owning digital assets has become akin to owning a rare piece of art, making NFTs highly desirable for collectors and investors. The ownership of NFTs is impossible to falsify, and anyone can see it on the blockchain. NFTs have become more than a means of investment but also a status symbol, like a luxury car or a designer handbag. People buy them to display their wealth and status.

  • Investment Potential: NFTs are also becoming popular because they offer investment potential. Since NFTs are unique, they can often increase in value over time. When CryptoKitties was sold for an extremely high price, people flocked to invest money in NFTs. While many investors may not understand cryptocurrency, they were attracted by the scarcity of NFTs and their rising value. This valuation reached a peak in March 2021, when "Every day: The First 5000 Days" by Digital artist Beeple, the largest NFT sales to date, was sold for $69 million.

Conclusion

Although NFTs became wildly popular after 2017, the hype died down somewhat after the peak of NFTs in 2021-2022. Therefore, many are concerned about whether NFTs are a temporary hype that will eventually die down. With increasing regulation and government scrutiny, NFTs would no longer be as speculative as it once was. However, it still has the potential to revolutionize how we monetize and interact with digital content.

Sources

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