NFT is one of those trends of recent years that constantly sets new price records: just in 2021, according to DappRadar, the volume of turnover of non-fungible tokens exceeded 23 billion dollars. Against the backdrop of this incredible growth, many are voicing their concerns about the safety of investments in the industry. Uncertainty is also heightened by a plethora of tokens of dubious value being sold for six and seven figure sums. In this article, we will try to figure out what NFTs are: an echo of the digital future or a global scam?
What is NFT
NFT is an abbreviation for "non-fungible token". To better understand the meaning of the term, let's turn to the theory of blockchain technology on which the entire crypto industry is built.
Originally, the word "token" did not refer to cryptocurrencies, but to records in the blockchain confirming the transfer of coins between users. Each token was not unique, just as one coin is not different from another.
NFT developers introduced an algorithm that made it possible to create non-fungible (i.e. unique) tokens. This made it possible to register any digital object in the blockchain. It can be created and resold, but all information about it is stored in an open source. An NFT can be made out of anything that can be digitized: images, video and audio files, etc.
NFTs are often compared to event tickets. An ordinary, fungible token will be just a pass, and a non-fungible token will be a ticket to a specific seat in a specific row.
How is the value of NFTs determined? That depends entirely on the interest of the public. Creators and collectors are attracted by the main advantage of non-fungible tokens, which is their ability to establish ownership and quickly offer a digital product for global auctions. But other market participants have their own interests as well: NFTs as an investment are an asset with a good return in the future.
Even for users who are not deeply interested in the topic, it is easy to create or buy a non-fungible token: this is possible today on most NFT marketplaces. Creating NFTs usually involves paying a gas fee (for creating a transaction on the Ethereum network) and a system commission. A non-fungible token can be created for free with "lazy minting" when an NFT is registered but not entered into the blockchain registry until the first purchase. Such a feature is offered by Rarible, OpenSea and GoFungible platforms.
We have prepared a guide to lazy NFT minting for you: you can list your piece of art as a non-fungible token for sale today!
Types of NFT tokens
It is generally accepted that the first NFT was created by Kevin McCoy. He originally developed a project for creative people to make it easier to promote their works of art. Today, the NFT industry has permeated every area of life. Artists, musicians and other creatives exhibit their works in the form of non-fungible tokens, sports fans are sharing unique footage of matches; NFTs are now used in the gaming field: popular online games are actively introducing non-fungible tokens such as characters, objects and territories, and they can also be bought and sold.
The very first NFT object created by Kevin McCoy.
Today, NFT tokens can be divided into several main categories: art objects, collectible artifacts, game non-fungible tokens, and NFT passes. Let's take a closer look at each of these categories.
🖼️ NFT in art
Burned in 2021, a Banksy painting became the first piece of art in the digital environment that does not have a physical original. There are now an increasing number of online auctions for the sale of artworks in the form of NFTs from world-class cultural artifacts to street art and canvases by emerging artists.
Compared to conventional auctions, non-fungible tokens can act as proof of ownership. Previously, transferring ownership of a famous painting required showing it, verifying its authenticity, receiving money, and transferring it to a new owner. In case of NFTs, everything is much simpler: when a transaction takes place, an note is made in the blockchain confirming the transfer of rights to the new owner, and in this case there can be no fakes, because all records are stored on many devices around the world.
Real fights begin when the rarest copies of the best collections surface at online auctions. One of the top collections of NFT art is Botto paintings. They are created by artificial intelligence that generates images according to specified algorithms. Already in 2021, the neural network started generating an income of about $1.3 million.
Images are generated almost instantaneously, but they go through a rigorous selection process. First, artificial intelligence creates a random line of text. The VQGAN (Vector Quantized Generative Adversarial Network) neural network based on this protocol begins to "draw" images. The algorithm called CLIP (Contrastive Language-Image Pre-training) checks and eliminates each image until it reaches a score, and then assigns two-word names to the approved versions. The final step is selection of the images by the owners of the Botto cryptocurrency. A weekly vote determines which of the 350 submitted images will be sent to the SuperRare auction.
Botto's algorithms are capable of quickly analyzing and cataloging vast amounts of data from the art world, and NFT technology has made it possible to present these works to the international market. This is the world's first case of artificial intelligence creating entire collections of paintings and earning its developers millions of dollars.
👾 NFT collectibles
This item combines a lot of different cultural phenomena. One of the most famous collectible artifacts Nyan Cat, the flying cookie cat meme by Christopher Torres, was sold for $580,000. Jack Dorsey's first tweet, scenes from the movie "Pulp Fiction", and the source code of the Internet – all this has also become an NFT and is a collector's item.
Another notable example is the MetaFUCKs. There are 12 images in the collection, each drawn by a professional artist. These pictures can be used in the metaverse as art objects.
The creators of metafucks have divided their objects into rarities (they call them "utilities"), which give the owners certain bonuses. There are only six tools: there can be common, uncommon, rare, epic, legendary and mythical metafucks. Each offers a number of features: 3D models of images, access to pre-sales of new collections, merch, access to educational materials, access to participating in investment pools and much more.
Collectible NFTs are becoming a phenomenon of their own in the crypto industry. If the NFT has an original in the real world, then the original can be attached to and transferred with the token, but often the object exists only in digital form. The NFT is a certificate of ownership, and thus it is important that the buyer knows that they are participating in a transaction with the actual creator.
🤖 Game NFTs
Previously, artifacts from games were sold for conventional units of currency. Now they are valuable in and out of themselves, they become the subject of investment and are traded on NFT marketplaces. NFT tokens mainly are implemented in online games, and one of the most famous are Cryptobots and Crypto Kitties.
This summer, we published a detailed review of the Cryptobots game with an analysis of the gameplay, mechanics and in-game economy of the project. If you want to try an exciting and profitable NFT game, we advise you to start with this one! And follow our socials: we have already organized contests twice with Cryptobots with very valuable prizes.
The emergence of NFT tokens designed for games is linked to the proliferation of P2E (play-to-earn, play to earn) and F2P (free-to-play, play without investment) games. In P2E, you often have to buy NFTs in the form of characters or equipment to participate in the game. In the F2P model, you can start playing immediately without investing. With projects like that you can also earn money, but you'll have to put more effort into them.
The sale of NFTs from the new Otherdeed for Otherside collection in early May 2022 by Yuga Labs was a landmark event for the gaming NFT sphere. It was not without breaking records: in less than a day, the creators earned more than 561 million dollars.
Each Otherdeed token, according to the developers, is “the key to acquiring a piece of land in Otherside,” the company’s new game. Yuga Labs introduced 55,000 tokens, each valued at 305 ApeCoin (ARE). At the first stage of sales, the company earned almost $319 million, and secondary auctions surpassed the threshold of $242 million.
🎟️ NFT-tickets and passes for private events
The first such NFTs were "digital monkeys" from the Bored Ape Yacht Club collection. Ownership of tokens allowed access to private virtual VIP clubs. Today, NFTs are also being used as tickets to in-person forums and events. This is expected to simplify the ticket issuance process, protect users against fraud and give artists new ways to connect with fans.
Another striking example is Moonbirds, which emerged in April 2022. Moonbirds comprise 10,000 pictures that depict owls on different backgrounds, in different clothes and in different moods.
The developers are Proof Collective, the creators of the famous Proof podcast media. The collection was designed to be not only beautiful, but also useful: each picture is a kind of key to exclusive events, meetings and future projects. NFT owners have certain Proof membership rights, including the right to participate in exclusive discussions on Discord and be the first to rate new projects.
NFT: another Ponzi scheme?
Reading the previous sections, you probably were thinking: how can pictures on the Internet allow someone to earn millions of dollars? You are not alone in this: the NFT industry, from its very inception, has been feared by both representatives of the governments of individual countries and independent investors. Uncertainty is reinforced primarily by the rapid development of this market. The dynamics are really impressive - in 2020, the total amount of investments in NFT came to $33 million, in 2021 - $13 billion. Many consider NFTs a pyramid scheme that can disappear at any moment. Let's try to dispel these doubts.
A financial pyramid is a fraudulent scheme, the basis of which is earning by attracting new participants. For example, the creator takes $100 from the first investor, promising him a 10% profit in the future. This 10% is paid by attracting a second investor, who also gives $100 with the promise of a return with a profit of 10%. Such a scheme often features rewards for informing and recruiting people.
The first pyramid scheme was called the "Ponzi scheme" after its founder, an American Charles Ponzi. It was implemented in 1919 in Boston as a "Securities Exchange Company". Now the phrase "Ponzi scheme" or "Ponzi pyramid" is used as a synonym for "financial pyramid".
Here are the main features of a Ponzi scheme:
🔻 The project does not have a real product or service that can generate profit;
🔻The project is closely related to the investment area and promises a profit as a percentage of the initial contribution in the near future;
🔻 The founder has access to the bulk of the investments made by the members;
🔻 The project needs a regular inflow of new funds necessary to settle with previously attracted investors.
The NFT industry is fundamentally different from the above because is has the following features:
🔸 Digital objects in NFT form represent the product that investors are willing to pay for. Most often they have a collection value, but they can also be of practical use. Now NFTs are being actively explored as a technology that will automate and simplify the process of registering patents, diplomas of education and other documents.
🔸 You can invest in NFTs, but there are no individuals in the industry who would directly guarantee or even promise a profit. Participants in the market of non-fungible tokens act independently and are aware of the risks of investments.
🔸 The advantage of blockchain technology is the absence of a central regulatory body. Unlike bank transfers, transactions are carried out directly from the buyer to the seller without intermediaries. Each NFT holder knows how much is invested in the token and can return their money at any time by reselling it.
🔸 The NFT industry, unlike the pyramid scheme, is not as sensitive to the influx of new funds. As in the case of Bitcoin, the rapid growth or fall of the market depends only on the interests and activity of the participants.
We emphasize once again that the main feature of the NFT industry and the crypto industry as a whole is decentralization. A main regulatory body on the market is nowhere to be found, although strong players may try to influence the cost of tokens and create artificial hype.
Causes of concern about the NFT industry
NFTs are often compared to the ICO boom of 2016-2017 and the dot-com bubble that led to an oversupply of internet companies in 1995-2000. Given the complete self-sufficiency of the NFT market, why is there still doub? In addition to the rapid rise in token costs, a number of other factors contribute.
🔧 Easy NFT generation. On most dedicated platforms, anyone can create an NFT in less than 15 minutes. Using the "lazy minting" method, you can even do it completely free of charge. Various NFT generators, such as Genfty or NightCafe, allow you to create collections of thousands of tokens with just a few mouse clicks. Many digital objects are created on the market that do not represent any significant value.
💸 Making money on speculation. A large portion of participants in online auctions buy tokens in the hope of their value increasing . In some cases, such calculations are justified, and resale is profitable, but more often the projects turn out to be a scam. Then the creators stop supporting the collection, and users are left with a set of pixel images that have no value.
💥 Artificial hype. Hype is one of the main problems of the NFT industry. In the pre-sale (closed sales) or airdrop (free distribution of collectible tokens) phase, project initiators often develop a large-scale marketing strategy that draws attention to the project, sets up websites on social networks, and enables active interaction with the audience. The excitement in this case may turn out to be both genuine interest in the collection and a sign of a scam - in this case, people are used only to attract investments.
📈 Volatility of the cryptocurrency market. Volatility is a good indicator of the stability of an asset's exchange rate in the market. The attitude towards NFTs is influenced by price fluctuations of individual tokens and the instability of the cryptocurrency market as a whole. Changes in the bitcoin price fuel the fears of NFT investors: at the beginning of the year, the price reached $60,000 per coin, and by the end of 2022, it fell to $15,000. Not only the NFT sphere, but the entire cryptocurrency industry will be worried until the market stabilizes.
Why the NFT industry became popular
Thus, NFTs have quickly adopted the key features of smart contracts, thanks to which they once gained incredible popularity (smart contract technology allows transactions to be completed quickly, without paperwork and without third-party involvement). These features are transparency and accessibility (anyone can create, buy and sell NFTs), as well as decentralization, which has led to the absence of market leaders. With the exception of NFT marketplaces, there are no intermediaries that carry assets on their balance sheet and relieve parties of taxes and commissions. This role is being taken over by automated blockchain technology.
Many believe that NFTs are the first wave of the concept of Web 3.0, a third-generation Internet form based on blockchain technology. In the Internet of the future, automated software algorithms will be responsible for all operations, and this is precisely the characteristic of non-fungible token technology.
In addition to openness and lack of central control, there are several other reasons for the popularity of non-fungible tokens:
😎 Well-known NFT objects, like art objects in real life, can emphasize the high status of the owner;
🎟️ NFTs gives you the opportunity to become part of a large project, the creators of which will invite all investors to exclusive events or offer entry to a closed fan club;
🖼️ Technology allows you to easily and quickly put creative objects on the world market with confirmation of your own authorship;
⚽ The NFT industry is not limited to the arts, it is rapidly filling up with an audience from the world of sports, music, and online games.
Will investments in NFT bring profit?
The NFT market offers many options for earning. One of the most popular is investing in NFTs. Often, users purchase tokens in the hope of them rising in value. Long-term investing differs from fast trading by long-term retention of assets, understanding of prospects and cultural significance of the project.
A potentially profitable NFT project will have the following characteristics:
🧑💻 The presence of an active community of developers and a real audience. This is easily tracked by analyzing the project's website and social media accounts. If there are bots in the comments and there is no way to contact the developers, it is most likely a scam.
🛣️ Perspectives of the project. Estimating the significance of the idea will make it possible to determine how relevant the ideas of the creators will be after several years.
👑 Cultural significance. This indicator is based on several parameters: the level of fame of the artist/developers, aesthetics and popularity among a certain audience. The higher the status of the project community, the more authority and recognition it can receive in the future.
🤔 Perception of the collection in the real world, which is not connected with the participants of NFT auctions. Will the tokens gather around themselves a group of like-minded people or will they provide concrete advantages to their owners? Or will possession of these artifacts simply emphasize status?
🗺️ A road map with far-reaching goals. The road map is a document describing the concept of the project and the proposed methods of its development. Ambitious plans often characterize strong projects. Especially if the founders openly demonstrate how exactly they are already moving towards their goals.
These are the main parameters that can help identify the most attractive projects from the point of view of their profitability. In any case, it is worth understanding that the NFT industry still remains a little-studied field where unique opportunities are combined with high risks.
This article is not an investment recommendation. The financial and other transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about conducting any operations with cryptocurrency and / or tokens.