The meteoric rise of NFTs in 2021 has fueled a heated debate about the future of non-fungible tokens. But while experts bicker over the long-term viability of NFTs, digital collectibles retain their stronghold in the market. According to Chainanalysis (blog), NFT collectors have sent over $37 billion to NFT markets as of May 1, 2022. This number exceeds the total of $40 billion sent in 2021.
However, the current cryptocurrency and blockchain market is on shaky ground with the fall of bitcoin and rampant inflation.
So, will we ever witness the imminent demise of NFTs? And what determines their value? Let’s find out.
What are NFTs, anyway?
Let’s say you’re an artist looking to sell your masterpiece. You painted it and you have full ownership of your painting. But instead of paying the agent to sell your painting, you can sell it directly to collectors through a digital auction. To do this, you need to turn your physical item into a digital collectible. And that’s where NFTs come in.
Simply put, NFTs are blockchain tokens that represent a unique digital item. Non-fungible tokens allow users to buy and sell ownership of unique digital items without intermediaries.
NFTs are typically bought and sold on specialized marketplaces, and they give the holder ownership of the data, media, or item to which the token is linked.
What does non-fungible mean?
To define the true meaning of “non-fungible”, let’s examine what fungible means. The blockchain includes many of the same tokens, which can replace each other. In this way, the system can continue to operate without interruption even after replacing the blockchain components.
For example, bitcoin and other cryptocurrencies are fungible. If you send someone bitcoin or part of it, you can get one back. Also, it doesn’t have to be the same bitcoin or the same amount you sent. Physical currency is also fungible – you can make a change or convert it to any other fiat.
NFTs, however, cannot be replaced or split into standalone tokens. Each NFT is unique and exists in a single copy, thus prohibiting sharing. All information about its author, buyer and transactions is securely stored in a blockchain. In other words, an NFT is a digital certificate attached to a single object.
In this sense, NFT is similar to real art. You can’t replace Monet’s paintings with Mona Lisa – they just can’t be compared.
What makes NFTs valuable?
Generally speaking, non-fungible tokens have no physical value behind them. However, they still increase in value because of the community. And there is a logic behind this upward momentum.
Due to the nature of the blockchain, non-fungible tokens are minted once and for all. No living person can go back in time and manipulate the origin of NFTs. Take the Bored Ape Yacht Club collection. The project launched in 2021 with just 10,000 unique, algorithmically generated cartoon monkeys. This rarity spawned the value of this collection which now translates to $400,000. Therefore, rarity and exclusivity are among the cornerstones of the NFT ecosystem.
Moreover, owning an NFT is now like owning a piece of art history. Valuable or not, non-fungible tokens have already gone down in history as an era of digital art.
Thanks to the blockchain (again), the ownership history of NFT remains visible and transparent. At the same time, authenticity and source are documented on the platform, eliminating art forgery and theft.
On the contrary, to prove the authenticity of the Mona Lisa, a collector needs:
- A certificate of authenticity signed by a reputable authority.
- A signed statement from the artist (which is definitely not possible in this case).
Non-fungible tokens have all of this information conveniently stored on the blockchain which remains immutable until the blockchain exists.
The third and final component behind the value of NFT is its increasing value. Once purchased, a digital collectible may increase in value depending on the overall demand or shortage of tokens. This means that buyers can sell their NFTs for a higher price than what they paid for them. In this sense, non-fungible tokens act as a long-term investment that can provide a return in some cases.
Will the NFT industry soon collapse?
There is a lot of speculation in the industry as to whether the NFT industry is sustainable or not. Although there are some concerns, it is important to remember that the industry is still in its infancy. It is difficult to predict the future of an industry that is still so new.
That being said, there are some factors that could contribute to the collapse of the NFT industry. For example, if the prices of Ethereum and other blockchain-based assets continue to rise, it could become too expensive for people to participate.
Another factor refers to an oversaturated market. We might see more NFTs being created than there are people interested in buying them. This could lead to lower demand and lower prices, which could lead to investor disinterest.
The current NFT craze is often compared to the Dutch tulip mania when tulip bulbs were the subject of speculation. When the exuberance wore off, the tulip bubble collapsed.
Many experts believe that non-fungible tokens will follow in the footsteps of Dutch tulips. Limited supply, blockchain vulnerabilities, power-intensive mining, and the ability to copy-paste your unique collectible could undermine the bright prospects of NFTs.
What future for NFTs?
Non-fungible tokens and the blockchain terrain in general present untapped opportunities for both wealthy collectors and enthusiasts. Yet the NFT boom feels like a searing frenzy doomed to oblivion.
Nevertheless, non-fungible tokens combine the excitements of art ownership and modern technologies, making for an attractive investment. Today, the growing popularity of NFTs is reflected in its numbers – the number of wallets trading NFTs has jumped from around 545,000 in 2020 to over 28 million in 2021.
For now, non-fungible tokens should ride the wave thanks to their adoption in games and their unlimited potential for asset ownership.