Non-Fungible Tokens, or NFTs, are distinct digital assets. They’re etched onto a blockchain, serving as proof of ownership and authenticity for a particular item. Unlike currencies such as Bitcoin or Ethereum, where each coin is identical and interchangeable, an NFT is singular. Each NFT is distinct and indivisible, its unique identifier and metadata make it impossible to replicate or swap on a 1:1 basis. It’s a digital proof of ownership, a cryptographic certificate for a particular item. This could be digital art, a collectible, music, virtual real estate, something you find in a game, or even something tangible.
NFTs have their origins in the early days of blockchain technology. The first true NFT, was called Quantum, and was minted in 2014. It was a short video clip by Kevin MacCoy that was minted on the namecoin blockchain and sold for barely $4. However, the technology truly found its footing on Ethereum. In 2017, projects like CryptoPunks and CryptoKitties, a game where players breed, buy, and sell unique digital cats, drove the craze. They introduced the idea of digital collectibles and profile picture (PFP) culture.
What is the life cycle of an NFT? It starts when an artist mints a file, this turns a digital item into a token on the blockchain. A smart contract is then created that defines the token’s identity and royalty rules. Post this the item will be listed on a marketplace. Once it’s bought, the ownership record is updated on the public ledger. Now the new owner can resell their NFTs. An interesting feature here is that all royalties are automated, where the original creator can receive a percentage of every future sale. And finally, its utility, now-a-days, NFTs often provide access to private Discord servers, physical merchandise, or playable characters in “Play-to-Earn” games.
NFTs remained niche until the 2020–2021 explosion. The big craze ignited in March 2021 when digital artist Beeple (Mike Winkelmann) sold Everydays: The First 5000 Days at Christie’s for $69.3 million. During the covid lockdown, collections like Bored Ape Yacht Club (BAYC) and CryptoPunks became status symbols. Celebrities like Justin Bieber bought a BAYC for ~$1.3 million in early 2022. Between 2020 and 2021, trading volume increased from about $82 million to over $17 billion.
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But the excitement was fleeting, and the bubble burst in 2022 along with the wider crypto winter. By mid-2022, active wallets fell by 88%, volumes fell by 92%, and many projects lost more than 90% of their value. According to recent studies, 79% of NFT collections were unsold, and 95% of them were now worthless. Since then, the market has solidified, and studies indicate that functional integration is replacing the “speculative” stage of NFTs. The underlying technology of verifiable digital ownership is here to stay, even though the hype has faded.