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NFTs Are Fueling a Boom in Digital Art. Here鈥檚 How They Work | WSJ - YouTube
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- [Narrator] This is Nyan Cat.
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He's part cat, part Pop-Tart.
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The GIF of a rainbow-casting feline
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was a viral meme back in 2011.
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Fast forward to February 2021,
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the original GIF was
sold at an online auction
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for 300 Ether,
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the cryptocurrency that
powers the Etherium network.
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That was equivalent to
nearly $600,000 at the time.
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You may be asking how someone
can own the original copy
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of a GIF that was pervasive
around the internet.
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It's because it was sold as
an NFT or non-fungible token,
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which acts like a digital
certificate of authenticity.
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The market for NFTs ballooned in 2020,
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climbing to a market cap
of at least 338 million
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from about 41 million in 2018.
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But skeptics are asking
whether these assets
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are really worth the
value assigned to them,
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especially if all it takes to view them
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is an internet connection.
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To understand how NFTs work,
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first you need to understand
what fungibility is.
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Fungibility refers to
the ability of an asset
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to be exchanged or substituted
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with similar assets of the same value.
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A simple example of a
fungible asset is currency.
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Say you have five one-dollar
bills in your wallet.
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You may not want to carry
around so much change
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so you exchange them for
a single five-dollar bill.
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The value of your money
is still five dollars
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regardless of the fact it's
now in a different form.
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Non-fungible assets are the opposite.
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Each one is unique
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and can't be easily substituted
for something similar.
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Think of the "Mona Lisa."
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It's an original piece of art.
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It couldn't be swapped out for, say,
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a "Mona Lisa" poster
from the Louvre gift shop
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because the poster doesn't
hold the same value.
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- The idea behind NFTs is that
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you have this digital signature
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in the way that a great work of art
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might bear the signature of
the person who created it
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so you can always go and
look at the original and say,
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"Yes, this is the real
one. This is authentic."
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A NFT winds up having that
through the blockchain
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where the information is recorded.
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- [Narrator] NFTs are cryptocurrencies
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but unlike fungible
cryptocurrencies like bitcoin,
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they are completely unique.
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They exist as a string
of numbers and letters
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stored on a blockchain ledger.
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This information can contain
who owns the digital asset,
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who sold it, and when it was sold.
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This information is also encrypted,
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ensuring the NFT's
authenticity and scarcity.
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In doing so, they fix a difficult problem
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for digital creators on the internet:
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how to make your creation scarce
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and therefore more valuable.
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- So, with NFTs, you wind
up having the scarcity
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because they are non-fungible
and because of that,
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there's only one of these
tokens that can exist.
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It can't be traded for anything similar
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because there is nothing
similar that exists.
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And so, you wind up getting
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that scarcity and that limitation
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which helps drive up some of the prices.
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- [Narrator] One of the early applications
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of creating this scarcity
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was the digital collectible
game Cryptokitties,
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which emerged in 2017.
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Users were able to buy, trade, and breed
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digital cat collectibles.
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Each new cat was an NFT
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which certified its
originality and ownership.
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Since then, NFTs have been applied
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to video games, digital
art, and sports memorabilia.
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One example is NBA Top Shot,
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which allows users to procure a collection
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of digital basketball highlights,
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like a video clip of a posterizing dunk.
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All highlights are NFTs and
have become big business.
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By mid-March, NBA Top Shot had clocked in
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over $338 million in sales
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since it went live in October 2020.
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Non-fungible tokens are making their way
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into the mainstream art world as well.
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Auction house Christie's opened bidding
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for its first purely digital art NFT.
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Bids rocketed into the
millions of dollars.
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- People are really excited about NFTs
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because, unlike with the
blockchain underlying bitcoin,
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you can do a lot more
complex things with it.
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You can wind up setting terms within it
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such as, you know, the original creator
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upon each resale of this
asset will get x-amount.
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Or you can take it and you can have an NFT
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that itself mints other NFTs.
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And it winds up having all of these
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really untested applications.
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The surface has only been scratched
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in terms of its potential.
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- [Narrator] Along with
all the hype around NFTs,
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experts have raised some concerns.
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One issue is that not all NFTs verify
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the person selling a digital art piece
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is actually the original creator.
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This is difficult particularly
in online marketplaces.
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- One of the concerns is
that anyone can essentially
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go on a lot of these marketplaces and say,
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"I am the person who created this token,"
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and it can be really hard to verify that,
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especially if you don't
know who they actually are
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or they're saying
someone that they're not.
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- [Narrator] And some are skeptical
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that ownership alone makes
digital assets valuable.
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When it comes to digital art,
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a buyer owns the original digital painting
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but the person can't keep
others from copying the image
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and sharing or changing it online.
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- You have had a lot of scams
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in cryptocurrencies just historically
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and so the concern is that, you know,
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people are hyping these up.
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They're saying, like, "Go
buy these NFTs. It's great."
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But in reality, you know,
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there's always gotta be a
buyer for there to be a seller
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and people might decide
all of a sudden, you know,
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"Let me cash in my profits,"
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and someone's going to
be stuck holding the bag.
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- [Narrator] Proponents are bullish
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on the potential for NFTs
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but critics are wary that it may be
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a digital bubble in the making.
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(suspenseful music)
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