What Are NFTs and How Do They Work?

Digital avatars listed on the non-fungible token platform CryptoPunks.

CryptoKitties, one of the original NFTs, generated $433,454 in sales in the past week, according to NonFungible. The digital cats, which were developed by a start-up called Dapper Labs, were once so popular they clogged up the network of digital currency ether.

NBA Top Shot, a platform created by Dapper Labs in partnership with the basketball league, attracted $147.8 million in sales in the last seven days, according to NFT data tracker CryptoSlam. The service lets users buy and sell short clips showing match highlights from top basketball players.

Even Mark Cuban and other celebrities are cashing in on the NFT craze. The billionaire Dallas Mavericks owner has auctioned digital goods online and owns some himself.

The increased momentum for these tokens comes as bitcoin and other cryptocurrencies have rallied significantly in recent months, and at a time when people are spending more of their time indoors due to coronavirus restrictions.

What are NFTs?

NFTs are non-fungible tokens — meaning you couldn’t exchange one NFT for another — that run on a blockchain network, a digital ledger that records all transactions of cryptocurrencies like bitcoin.

The difference with bitcoin and other tokens, though, is that each NFT is unique and can’t be replicated. Each one accrues value independently. Crypto investors say NFTs derive their value from how scarce they are. They’re stored in digital wallets as collectors’ items. Beyond art and sports, people have also found uses for NFTs in virtual real estate and gaming.

Nadya Ivanova, chief operating officer of BNP Paribas-affiliated research firm L’Atelier, says collectible digital assets can be thought of as a better version of an MP3 file. Musicians have struggled to profit from their work in the digital age, and Ivanova says some are turning to NFTs to prove ownership of their work and find an additional source of revenue.

“It’s allowing content creators to actually own the property rights for what they create, which allows them to profit from it in different ways which they can’t do with physical art,” she told CNBC, adding that crypto art is the strongest growing subsection of the digital collectibles market.

The total value of NFT transactions quadrupled to $250 million last year, according to a study from NonFungible and L’Atelier. The number of digital wallets trading them almost doubled to over 222,179, while some traders were able to make profits of over $100,000.

“We’re seeing a new generation of traders within the NFT market; people who are digitally native looking for digital native asset classes outside of established asset markets,” Ivanova said. “These are people who have amassed reputation and wealth and want to invest it in purely virtual assets like NFTs.”


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