What Are NFTs? Why People Collect ?
What are NFTs and how do they work?
Even before you think about non-fungible tokens (NFTs), which in their most basic form are unique digital collectibles secured by the blockchain, you must understand how collectibles work. Perhaps the following eclectic Beanie Babies parable will clarify the erratic and eccentric psychology behind why we collect.
Why People Collect NFTs?
Before NFTs, there were Beanie Babies . . .
From stamps to Civil War weapons to sneakers, people col lect many different objects in various formats. So, it should come as no surprise that there is a market for collectibles in a digi tal form. Conceptually, it’s confusing. But on the sheer basis of wanting to own a unique item that others do not have, digital col lectibles vary little from their physical counterparts. Therefore, to understand why people collect NFTs, we’ll draw a compari son to a physical collectible that took the world by storm in the 1990s: Beanie Babies.
From its inception in 1993, Ty Warner, the founder of Beanie Babies, built scarcity into his product. The plush toys were distributed in small quantities to small retailers, avoiding chain retailers and large orders altogether. Ty didn’t want people to be able to find or buy every Beanie Baby they wanted.
The company kept the number of Beanie Babies in circula tion secret. It “retired” the production of certain Beanie Babies to create more exclusivity. It intentionally let misprints and faulty Beanie Babies through the cracks, which would become extra rare editions of the toys.
Around the same time as the Beanie Babies’ rise in the public consciousness, eBay emerged and positioned itself as the online marketplace for buying and selling collectibles worldwide. It was a synergistic relationship that ballooned the resale value of Beanie Babies and validated eBay as a valuable tool for speculators in all collectibles markets.
Those lucky enough to get their hands on one of the retired $5 plushies could, at minimum, see a two- or three-fold return by listing it on eBay. Some rarer misprints, such as the “Pinch ers the Lobster” misprint as “Punchers the Lobster,” yielded one collector more than $10,000.
The Beanie Babies craze was in full swing toward the end of the 1990s. Robberies and even murders ensued over the pursuit of the plush toys. For example, at a Hallmark store in West Vir ginia in 1999, a security guard was shot and killed when tensions were high due to a late shipment of Beanie Babies.
Sane adults searched far and wide for the chance to get a single life-changing Beanie Baby. One set of divorcees battled over who got the Beanie Babies collection, believing it was the most valuable asset that the two had to divvy up.
Then in 1997, McDonald’s got in on the craze with Ty Inc. Together they launched the Teenie Beanies product line in McDonald’s Happy Meals and proceeded to sell 100 million of the mini plush toys in just 10 days.
Magazines, such as Mary Beth’s Beanie World, which sold 650,000 copies a month at its height, published entire spreads on Beanie Babies, discussing their value as a speculative investment, which, with the right strategy, could yield more than enough to send a kid to college.
Just when Beanie Babies seemed to be a collectible that would carry on for decades, it all came crashing down. Talk of their overvaluation sparked an avalanche of Beanie Babies hoard ers to list their toys on eBay, causing a significant oversupply. In turn, the price of Beanie Babies plummeted.
Seemingly overnight, people’s collections of presumed valu able Beanie Babies became nearly worthless. The story of Chris Robinson Sr.—the man who spent more than $100,000 on Beanie Babies for the speculative investment—became the symbol for the crushing defeat that this collectible market experienced.
The Financial Times aptly called Beanie Babies “the dot-com stock of the soccer mom world in the second half of the 1990s.” We don’t draw this comparison to say that NFTs are doomed to the same fate as Beanie Babies, that is, a collectible bubble bound to burst. Instead, Beanie Babies provide an excellent look into the dynamics of why people collect.
The same basic principle that drove people to collect Beanie Babies drives people to collect NFTs: scarcity. Although other fac tors drive collectors to collect, such as investment, speculation, emotional connection, the fear of missing out (FOMO), and “the thrill of the hunt,” at the core of collecting is scarcity. No matter what we collect, we do so because there are a limited number of those things. Could the NFT market crash? Anything is possible. But unlike Beanie Babies, NFTs provide real-world solutions to problems plaguing the art and collectibles markets, as we discuss in Chapter 3, “Why NFTs Have Value.”
Now that we’ve addressed why people collect, whether it’s physical or digital collectibles, let’s dive into the topic at hand: NFTs.
What Exactly Are NFTs?
NFTs are generally known as a particular type of digital col lectible, such as digital art from Beeple, a digital trading card from Rob Gronkowski, a short video from Saturday Night Live, a picture of fortune-telling Curly of The Three Stooges with an unlockable Curly-esque fortune, or one of the CryptoKitties. But what exactly are NFTs?
NFTs are unique items verified and secured by a blockchain, the same technology used for cryptocurrencies. An NFT pro vides authenticity of origin, ownership, uniqueness (scarcity), and permanence for any particular item. Let’s break the term non-fungible token down a piece at a time.
Tokens
Let’s start with the word token. According to Dictionary.com, one of the definitions of token is “a memento; souvenir; keep sake.” Since NFTs are commonly known as digital collectibles, one might think the token in NFT is derived from this definition. Although it may apply (somewhat), the token in NFT is derived from something entirely different: the blockchain.
Some of you may be fretting, “Oh no, here comes the tech nical part. I just want to know what an NFT is.” To understand completely what an NFT is, you need to learn a little about blockchain. We promise not to make it too complicated.
You’ve probably heard of Bitcoin and perhaps some other cryptocurrencies. According to Investopedia, a cryptocurrency is “a digital or virtual currency that is secured by cryptography.” Just know that cryptocurrencies are digital currencies that exist on the Internet. You can buy and sell them for investment purposes, buy things with them, or even stake them (essentially lending them to earn interest).
Whenever someone transacts with a cryptocurrency, whether buying, selling, transferring, staking, or purchasing something with cryptocurrency, that transaction must be verified. The verification process determines whether the sender has the amount of cryptocurrency being sent. This is what keeps a cryptocurrency secure and reliable.
When cryptocurrency transactions are verified, for example, with Bitcoin, the verification is conducted on a group of trans actions, not a single transaction. This batch of cryptocurrency transactions is known as a block. Each block has a certain storage capacity. After the block is filled and the transactions have been confirmed, the block of transactions is then appended to the pre viously verified block, creating an ever-growing chain of blocks: a blockchain. The process repeats, and the blockchain grows longer and longer (see Figure 2.1).
So, the blockchain of a cryptocurrency is a list of all transac tions (every single one) of that currency, going all the way back to the beginning of that cryptocurrency.
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| NFTs, explained: what they are and why People Collect |
Every time someone buys or sells Bitcoin, buys something with Bitcoin, exchanges Bitcoin, or transfers Bitcoin, that trans action is listed on the Bitcoin blockchain. The number of daily Bitcoin transactions reached around 400,000 in January 2021, and Ethereum (the second largest cryptocurrency) was processed more than 1.1 million times per day (Statista.com). Think of a blockchain as an extremely long accounting ledger.
Coin vs. Token.
When speaking about certain cryptocurrencies, people often use the terms coin and token interchangeably. But that would be wrong because there is an important distinction.
Cryptocurrencies that are coins, such as Bitcoin, Litecoin, Dogecoin, and Ethereum, have their own respective blockchains. In contrast, tokens are cryptocurrencies that don’t have their own blockchains. Instead, tokens utilize another coin’s blockchain. For example, GameCredits (GAME) and SushiToken (SUSHI), among thousands of others, are tokens that use the Ethereum blockchain. Cryptocurrency tokens that exist on the Ethereum blockchain are also known as ERC20 tokens. ERC20 is the Ethereum standard for creating cryptocurrency tokens.
GameCredits is an interesting case because it was initially a coin with its own blockchain. But to take advantage of the greater functionality that the Ethereum network offers, it switched to become an ERC20 token. So, now all GameCredits transactions (and all other ERC20 token transactions) are recorded on the Ethereum blockchain. This is the reason why Ethereum pro cesses so many transactions a day
So, the token in NFT is a cryptocurrency token. An NFT exists on a blockchain. Currently, most NFTs are created on and live on the Ethereum blockchain. Some NFTs are created on and exist on WAX, the Binance Smart Chain, and some other blockchains.
Non-fungible
So, we’ve got the token part down. Now let’s turn to non-fungible. What does fungible mean? According to Dictionary.com, fungi ble is an adjective that means “(especially of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.” Let’s start with some examples.
Dollars are fungible. If we give you a five-dollar bill and you give us back five one-dollar bills, the exchange value is equal. It doesn’t matter which dollar bills you gave us. Say that you had a stack of one-dollar bills. You could give us any five of them, and it wouldn’t matter. You could even Venmo us $5. The fact is that dollars are entirely interchangeable.
Similarly, cryptocurrencies are fungible. If you send us a Bit coin, we don’t care what wallet it came from; a Bitcoin is a Bitcoin, just like a dollar is a dollar.
Even some goods or commodities (as the previous defini tion points out), such as barrels of oil, are considered fungible. It doesn’t matter which barrels you send me. Any barrel of oil of the same grade would do.
Using the previous definition, it seems evident that non fungible items can’t be freely exchanged or replaced by similar items. For example, diamonds are non-fungible. Each diamond is unique in size, color, clarity, and cut. If you bought a particu lar diamond, it would not be easily interchangeable with another diamond.
Likewise, NFTs are non-fungible. Each NFT is unique. You cannot freely exchange or replace one NFT for another.
But what makes each NFT unique? After all, isn’t it easy to download, copy, and share images from the Internet? Yes, but you can take a photo (or preferably create an image) and mint that image into a token that exists on a blockchain. We use the term mint like minting a physical coin.
When cryptocurrency coins and tokens are created, they are minted. Usually, millions or even billions of coins or tokens are mined or minted for a particular cryptocurrency. Generally, a cryptocurrency has a circulating supply, the number of coins or tokens already minted, and a max (maximum) supply, the total number of coins that can be minted. The max supply amount is baked into the original code that created the cryptocurrency and cannot be altered.
Contrast this with a fiat currency, such as the U.S. dollar, the supply of which can be continually inflated by printing more dol lars. As more dollars are printed, the value of each dollar decreas es, assuming that the demand for dollars remains the same. Thus, there is no max supply of dollars or other fiat currencies.
Bitcoin has a max supply of 21,000,000 coins, whereas Uniswap (UNI), an ERC20 token, for example, has a max supply of 1,000,000,000 tokens. Each NFT functions like a crypto currency, but NFTs have a max supply of 1. That’s what makes NFTs unique and non-fungible; they cannot be freely exchanged with something of like kind because there is nothing of like kind. Think of an NFT like an original painting: there’s only one. There can be copies of a painting or prints made, but there’s only one original.
Baca juga: Introduction to NFTs (Non Fungible Tokens)
Even though we just said that an NFT has a max supply of 1, it is possible to mint an NFT with a supply greater than 1. For example, you could mint 100 “copies” of the same NFT. Tech nically, it’s 1 NFT of 100 tokens. Each of the tokens could be exchangeable with the other tokens of the same NFT because they would be the same in every respect. Although these multi token NFTs are considered NFTs, we would not technically refer to them as NFTs because they are fungible, albeit with a limited supply, but they are still fungible.
We need to distinguish between a multitoken NFT and a limited edition or series of NFTs of a particular design. For example, Rob Gronkowski issued four series of NFTs, the design of each series representing one of his football championships. Each series has 87 (being the number of his jersey) editions, and each NFT is individually marked 1/87, all the way up to 87/87. Similarly, The Three Stooges NFT series “All Stooge Team” is an edition of 30 individually marked NFTs. Figure 2.2 shows #19 in that series.
Albeit part of a series of 30, the NFT pictured in Figure 2.2 is a unique token with a supply of 1, which indeed makes it an NFT. Similarly, each of Gronk’s NFTs are also unique NFTs.
One can make an analogy of such limited edition, individ ually marked NFTs to a series of prints of a painting that are also individually, sequentially marked. Whereas an analogy to the multitoken NFT could be a statue that is cast from a mold a lim ited number of times, and then the mold is broken. Each statue is an original, but also identical to the other statues from the mold. If each statue is sequentially marked, making each one unique, then this analogy would not be applicable in this case.
Edition numbers can have different valuations. With phys ical art prints, we generally assign the greatest value to the first edition of the print series, that is, edition 1 of 500. However, with NFTs, the driver of edition valuations can vary. For example, with the NBA Top Shots NFTs, it’s common for the edition number that matches the player’s jersey number in that specific NFT to be the most valuable edition. For LeBron James, edition #23 is often the most valuable, as is edition #77 with Luka Doncic or edition #11 with Kyrie Irving. Absent such an alternate value driver, edition 1 would likely achieve the highest value, like an art print.
Also, note that in the Rob Gronkowski and The Three Stooges NFT editions, each individually numbered NFT had to be minted separately. In the case of a multitoken NFT, all of the tokens of that NFT are created in one minting.
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