What do you get when digital artists and blockchain developers unite? Non-fungible tokens, or NFTs for short. This unique method of establishing ownership over digital collectibles has allowed a new type of asset to enter the market. In the first six months of 2021, NFTs raked in $2.5 billion in sales. That number is up exponentially from last year’s $13.7 million. Some famous NFTs that have sold include “EVERYDAYS: The First 5000 Days,” which was the first purely digital work of art ever offered by a major auction house. It sold for $69 million. Another notable NFT may not be considered art at all; Twitter founder Jack Dorsey’s first tweet sold as an NFT for $3 million. Investors speculate that NFTs are here to stay.
So how do NFTs work? What does it mean to be the owner of a digital collectible anyone can copy? Similar to cryptocurrency, NFTs rely on blockchain to assign ownership of digital assets. The public key serves as the ownership agreement while the private key functions as a password capable of authorizing changes in ownership. Within the blockchain itself exists a ledger of transactions with which no one may tamper. While digital collectibles can indeed be copied, ownership cannot. As the dollar values attached to the transactions listed above prove, ownership means quite a bit to the market at large.
The advent of NFTs allows digital artists to close the gap which places them at a disadvantage next to physical artists. Prior to their integration with blockchain, digital artists struggled to prove they were the original creator of a work, monetize artworks that are easily copied, or prevent unauthorized use of their work. Now when an artist turns their work into an NFT, they gain abilities once unavailable to them. They can enable features that give them a cut of any future sales. They can sell art that would otherwise lack an interested market. Most importantly, they can prove their creatorship in a way not possible before.
Since digital artists paved the way, other creatives are finding ways to turn their digital files into NFTS. Game developers can incorporate NFT elements, sports companies can sell licensed video “moments,” and musicians can sell tickets, albums, or previously unreleased songs as NFTs. The limit on which digital files can be sold as NFTs is dependent only on what the market will allow.
Despite the security elements inherent in blockchain, NFTs are not impervious to risk. They have many of the same dangers as cryptocurrency. One such danger is the chance an owner will forget their private key. Chainalysis estimates that 20% of all Bitcoin supply is locked by people who have forgotten their private key. That’s $140 billion worth of cryptocurrency that cannot trade due to lost passwords. Another danger is hacking; hackers stole $600 million in cryptocurrency in 2021. Private keys can be stolen if they’re used or stored on networked devices. NFTs are legitimate investment opportunities, but buyers still need to be vigilant.
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