Blockchain, NFT, WTF?

Non-fungible tokens or NFTs are unique digital assets—the ownership of which is verified by the blockchain technology—and they are selling for millions of dollars right now. An NFT can be anything from a tweet to a domain name, and they differ from cryptocurrencies because they are irreplaceable and non-interchangeable.

In 2020, 74,529 “wallets” bought at least one NFT, while 31,504 wallets sold at least one NFT, according to a report by NonFungible.com and L’Atelier BNP Paribas. A single user may have several wallets, the report said. And, also in the same year, total volume of NFTs traded in the U.S. was $250.85 million, up almost 300% from $62.86 million in 2019.

Camila Russo, founder of The Defiant, a content platform focusing on decentralized finance, said this burst of NFT popularity is a result of “all the time we’re spending online.” 

“If you have a really expensive handbag, or like really expensive shoes or a watch, you don't get to show those off anymore,” she said. “But you do get to show off your million dollar avatar, if you buy that cryptopunk. So, I think maybe that's what kind of fueled it.” Russo spoke on the panel “Blockchain, NFT, WTF?,” at the 2021 Finance Festival. The two-week virtual event, hosted by Ladies Get Paid and Public.com, focuses on empowering women to take control of their wealth and future.

A growing marketplace for NFTs offers opportunities for both creators and those looking to buy, but there are some things both investors and makers of NFTs should consider before diving in head first.

What NFTs Mean for Investors

For investors, NFTs offer ownership of a digital asset. If someone buys an NFT that is a digital picture, the owner can prove that, unlike any other picture on the internet, Russo said.

“This picture is linked to this specific token address,” she said. “And I can prove that it's in my wallet. So, I own it.”

According to Ariana Fowler, associate at the cause-based venture capital firm The Fund, NFTs are an iteration of people’s “desire to get close to creators, to influencers, to the people that they look up to.” It’s also a way for people to contribute small amounts of money, but still buy things they think are cool, from the people they think are cool, she said.

When it comes to investing in cryptocurrencies, women don’t just have the potential to create wealth for themselves, they may also have the ability to have a greater impact. And NFTs may not be too different. For example, American entrepreneur Alexis Ohanian tweeted in March that women that invest in NFTs—especially the NFT trading card boom—could “change the game” and have a “huge” impact on women’s sports.

NFTs Are Unique—But Are They?

NFTs are gaining popularity as collectibles in sports and arts but there is some criticism to that, even by software creators themselves. In a March 2021 tweet, Litecoin founder Charlie Lee explained the concept of NFTs with an analogy involving the “Mona Lisa.” Lee said an NFT is akin to a certificate of ownership of the Leonardo da Vinci masterpiece, signed by the painter himself. One may not be able to duplicate this certificate, but the painting itself can be copied and owned in the form of prints, which makes Lee question the true value of the certificate of ownership 

But Ethereum’s community forum counters that argument by saying that the more a piece of content is screen-grabbed or shared, the more valuable it becomes, and that “owning the verifiably real thing will always have more value than not.”

Impact of Gas Fees

Every transaction on the blockchain is verified by computers solving complicated math problems. In the simplest terms, those involved refer to the energy used for every computation as a “gas fee.” According to Ethereum, gas fees are what help keep the network secure, and by requiring a fee for every equation on the network, the organization remains spam-free. 

Fowler explained that she was hoping to buy her first NFT by purchasing the Kings of Leon album released as an NFT in March 2021. But due to the high gas fee, she decided not to purchase, settling instead for a T-shirt bought with dollars. 

“If you’re looking to buy an NFT, your price may double depending on the gas fee,” Fowler said. “The network has so many different things going on, that it can’t confirm everything at once.” Fowler said that it's not equitable because “if you can pay more money in gas fees, your transaction gets pushed through faster.”

While gas fees are an issue right now, both Russo and Fowler said that there is work being done to eliminate or at least bring down gas fees.

Know What You Own

“What do you actually own is like, the token,” Russo said. “[It’s] a piece of code that's in the Ethereum blockchain, or whatever blockchain these entities are issued. And what it can do is it can be traded back and forth.”

Given that the NFT marketplace is still so new, there are many questions about how licensing and intellectual property laws apply to them. So you bought an NFT, but how are you to know what rights you get along with the digital asset?

NFT ownership does not give the buyer rights to the ownership of the underlying artwork or, by extension, the intellectual property.

What NFTs Mean for Creators

For creators, NFTs offer another avenue to be able to monetize their work.

Russo gave the example of a band that, say 10 years ago, could upload their song or track online. It would then play over and over again without the band necessarily receiving a monetary benefit.

“Now, they can attach their track to an NFT,” Russo said. “People can prove their ownership of that track. And so the artists can sell that token to collectors and fans, and actually, for the first time, profit and connect with their fans directly, thanks to this NFT technology.”

Furthermore, that revenue can be recurring every time the NFT is sold again. The original owners or creators of the EulerBeats Originals, for example, still earn an 8% royalty every time the NFT is sold. This concept is still developing, according to Ethereum, but it’s a key idea to grasp. 

For artists and creators, NFTs also serve as another marketplace for their creations. Given that some NFTs are generating big bucks, it may be tempting for creators to go down the NFT route, but there are several things to be aware of before doing so. 

Not Everyone Hits the Jackpot

Mike Winkelman, a digital artist now famous as Beeple, sold his art as an NFT for $69 million in an auction via Christie’s in March 2021.

But for those looking to make big bucks from the sale of NFTs, Fowler said she doesn’t agree that NFTs are “democratizing the art space.” 

Those “hyper-inflated” NFT sales happen for artists that already have garnered media attention and a following, according to Fowler. Plus, not every artist can go to auction houses, so the pool is even more exclusive.

“I don't want people to think that that that's going to happen, because we're kind of seeing the similar thing that we saw with the ICO craze, which was the initial coin offering craze back in 2017, or all these people were just like, pumping tokens saying buy my token, you'll become a millionaire,” Fowler said.

And its not just the access that determines the money an artist can make off their art. A recent study by European researchers found that art made by women sells for less—a 47.6% gender discount—just because it's made by women. On top of that, NFTs are bought through a bidding process, and studies indicate that between 2000 and 2017, 96% of all art auction sales were by male artists.

Fowler does have a tip to help with the success for artists, irrespective of gender—create a community or a sustained long-term value, rather than just a product to be sold.

Consent and Intellectual Property

Just like buyers should be wary of what their rights are when they’re purchasing an NFT, creators need to be aware of what content can be turned into an NFT without landing them in hot water.

According to a report from design and science fiction site Gizmodo, DC Comics Inc. warned freelancers against the sale of digital assets featuring DC Comics characters. The other side of that story is unauthorized conversion of works into NFTs without the consent of their owners, artists, or museums. 

Dr. Tina Rivers Ryan, the curator of modern and contemporary art at Albright-Knox museum, tweeted about one such incident in March 2021. For individual artists, it could hinder any gains or popularity they could possibly receive from their own works.

The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future performance. Investing involves risk, including the possible loss of principal.