Non-fungible Tokens
Around 5 years after the introduction of Bitcoin, the first Non-fungible token (NFT) was created. Quantum, a pixelated image of an octagon filled with concentric circles, was minted on the Namecoin blockchain in 2014 by Kevin McCoy, and sold at Sothebys for just shy of $1.5m. But in 2017, the way people viewed NFTs was changed with the introduction of Cryptokitties, a simple NFT based game that used NFTs as in game characters. The idea behind Cryptokitties tokens was that the value wasn’t determined by a single set of attributes, like price or size, but rather by their uniqueness.
Since then, the use cases for NFTs have expanded more and more, being used for a variety of purposes, from art to real estate. The main usage currently, aside from blockchain games, is PFPs or Profile pictures (also known as picture for proof) with projects like BAYC (Bored Ape Yacht Club) listed on Opensea.io with a floor price of 67.68 Ether (just shy of £100,000 at time of writing). It’s worth noting though, owning one of the 10,000 unique BAYC NFTs gives you more than just bragging rights, with owners becoming exclusive members of the ‘yacht club’ which entitles them to exclusive member-only benefits.
With Non-fungible Tokens making headlines with high profile NFT artwork such as Beeples ‘Everydays:The first 5000 days’, the market for NFTs is still evolving quickly and it is expected to grow in the future as more people begin to recognize the potential and different use cases.
Fractionalized NFTs
One major evolution is the introduction of fractional NFTs, which allow people to own less than 1 token of an item. This is different from traditional collectibles which cannot be traded in fractions and have to be bought in their whole form, and as a result of this NFTs have become a much cheaper alternative to traditional collectibles. Fractional ownership is what makes NFTs so attractive to investors who want to get into the art world but don’t have enough money to buy an original piece of artwork.
For example, to own an original “Sunflowers” painting by Vincent Van Gough would set you back a cool $28.5m if purchased when it was last sold in 1987. To most people, owning an original piece of artwork like this is out of reach. However, if ownership was fractionalized and split into 10,000 unique ownership certificates (imagine you own 1/10,000th of the picture) each representing fractional shares of the artwork. So, for the more reasonable sum of just under $3,000 you could now claim to be an owner of the original Van Gough painting (or a share of it, anyway!)
This is just one example of how the NFT market is changing and new use cases are emerging and the idea could also be applied to areas such as rental property ownership, with sites like lofty.ai enabling shared ownership and income from rental properties which might otherwise be out of reach to investors. This is currently being reviewed by the Securities and Exchanges commission (SEC) in the US as it does fall into the definition of a security.
Whilst fractionalized NFTs sounds like a great idea initially (and they are), the NFT market isn’t currently regulated in any way, meaning there is higher potential for scams, plagiarism and other criminal activity, but we’ll look at all of this in a future blog!