Over the past few years, non-fungible tokens have increased their popularity thanks to million-dollar transitions. But what are NFTs and how are they changing businesses?
What are NFTs?
First things first. NFT stands for “non-fungible token” and represents ownership of unique digital items (such as Gifs, video games, songs, digital art, etc). Unlike fungible tokens that can be exchanged for the same amount and have a fixed rate (a euro can be exchanged for another euro), NFTs are unique and their value is grounded on their properties.
Based on blockchain technology, this means that when someone exchanges an NFT, a file inside the blockchain will be created. As a result, it won’t be possible to copy, delete or manipulate it anymore.
For those wondering how it can be acquired, there are several marketplaces like OpenSea.io, Rarible or Nifty Gateway. In the process, they use cryptocurrencies such as Ethereum. So far, the most expensive NFT called “The Merge” was sold on the 2nd of December 2021 for $91.8 million.
What are NFTs being used for?
Thanks to their uniqueness and the ability to clearly state who their creator or their owner is, non-fungible tokens are becoming popular among artists, collectors and content creators.
When creating an NFT, one can decide how many will exist and what kind of information will be public. In addition, it is also possible to program a royalty to be paid every time the NFT is transferred from one person to another. Since the process doesn’t imply the participation of third parties, business is done faster and transparently.
But what makes people buy NFTs? If we consider buyers’ perspectives, it is easy to see. NFTs of clothes, for example, eliminate the limitations of physical items and space. Furthermore, the items won’t degrade and can be used numerous times. As people spend more time online, the need for virtual objects is increasing. There are social networks and videogames already partnering with brands to create new realities and expand the realm of NFTs.
NFTs and their impact on fashion and other industries
The possibility of virtually creating what it is not possible to have in real life has always amazed many people. With NFTs, this feature is taken to another level. During the lockdown, the first digital home called “Mars House” was created and sold as an NFT, reinforcing the change to a new set of digital interactions.
Social media is also entering this innovative world. Recently, YouTube made it possible for content creators to sell their videos as NFTs with the view to boost engagement with fans. On the other hand, Twitter also allowed users to have non-fungible tokens as profile pictures.
Likewise, the gaming industry is truly impacted by these. Many developers have exploited the possibility of adding and buying NFTs in the form of clothes or cosmetic items to the game. This might involve the use of cryptocurrencies in the future, which is making gamers very sceptical.
Alongside comes the fashion industry. Going back to 2019, Nike patented their first NFTs shoes, calling them “CyptoKicks”. In addition to them, Gucci created clothes for avatars and games, together with sneakers that were available for purchase virtually. Fashion platforms are emerging in this new reality. “Neuno”, for instance, is a startup platform that works directly with brands and will allow users to buy and trade fashion non-fungible tokens with credit cards. “Clothia”, another online seller, has dedicated a percentage of its business to them. “RTFK” became famous for their exclusive sneakers sold as NFTs and worn by using an AR filter.
Last but not least, there are sports and music. The NBA has its famous platform known as NBA Top Shot, where fans can gather parts of the games digitally. Equally, music artists like Deadmau5 and 3LAU traded music as NFTs.
NFTs: The not so green side
Non-fungible tokens are under fire due to the environmental impact they have. Since they use blockchain technology to operate, an enormous amount of energy is spent on the process of adding new information to the main block.
Ethereum, used in most transactions, is based on a system called “proof of work”. As mentioned by The Verge, “to keep financial records secure, the system forces people to solve complex puzzles using energy-guzzling machines”. However, NFTs are just a small part of the operations made via Ethereum. Thus, they cannot be blamed fully for all non-eco-friendly behaviours.
Changing to a “proof of stake” system is claimed to be a good alternative. With this option, cryptocurrency tokens are locked up in the network. For that reason, they act as proof of the intention to keep the record accurate. In case there are malicious actions, the tokens involved will be taken away from the owner.
Another option for reducing energy consumption is the development of a more decentralized proof-of-work network. With it, people would be trading NFTs outside the main blockchain, until the business was done. As soon as they finished, the transactions could be added to the main blockchain. This final stage would be verified through the proof-of-work process.
Renewable energies could also play an important role in making NTFs greener. Ethereum is already working on upgrades to massively reduce its carbon footprint. However, the supply of these energies is less constant. Its power also depends on external factors that cannot be controlled, such as weather conditions. Electronic waste is another downside of NFTs which is difficult to handle.
The Crypto Climate Accord came to light in April 2021. Its main commitment was the increase in the use of renewable energy to 100% by 2025 in all blockchains. Although this might seem too optimistic, it laid the grounds for a new approach far from fossil fuels.
Long live NFTs!
As the world digs deeper into virtual reality and the decentralized web, new business opportunities are emerging. Non-fungible tokens are recent but are very promising. The first NFT vending machine accepting payment with debit or credit cards (instead of asking for cryptocurrencies) is the most recent feature. Therefore, proving that there is a real potential for NFTs to grow their popularity and value, despite the less positive impact they have on the environment.
Whether they are here to stay or not, only the future will tell.