WTF are NFTs? Find out in our essential guide

Unless you hap­pen to be well versed in all things cryp­tocur­ren­cy and blockchain tech­nol­o­gy, non-fun­gi­ble tokens, or NFTs as they are more com­mon­ly known, are like­ly to have entered your realm of con­scious­ness only very recent­ly. Or maybe you are learn­ing about them for the first time. 

Either way, in the space of a few short months, NFTs have gone from being niche dig­i­tal assets, rel­e­gat­ed to con­ver­sa­tions between cryp­to natives, to head­line-grab­bing instru­ments used by high-pro­file cre­atives to earn eye-water­ing sums for their dig­i­tal work.

But what exact­ly are they? What are the ben­e­fits and risks of invest­ing? And should we all be buy­ing them?

Non-fungible what?

First, you might be won­der­ing what on earth “non-fun­gi­ble” means. In lay­man’s terms, some­thing that is fun­gi­ble can be eas­i­ly replaced with some­thing else of the same type and equal val­ue. If you con­sid­er a £1 coin, no mat­ter which £1 coin you have of the mil­lions of iden­ti­cal ones mint­ed each year, it holds the same val­ue as any oth­er. Oth­er exam­ples of fun­gi­ble assets include oil, gold, bit­coins and even a box of corn­flakes: they are items whose val­ue doesn’t depend on their unique­ness. 

“If some­one owes you £50, you’ll take any £50 note, you don’t care which; that’s because it’s fun­gi­ble,” explains Antoni Trenchev, man­ag­ing part­ner of Nexo, the lead­ing reg­u­lat­ed finan­cial insti­tu­tion for dig­i­tal assets and a mem­ber of Bulgaria’s par­lia­ment.

When some­thing is non-fun­gi­ble, it can­not be replaced with anoth­er sim­i­lar item because only one of it exists in the world. Con­sid­er the Mona Lisa, arguably Leonar­do da Vinci’s most famous work. Anoth­er painter could repli­cate the piece, and could do so quite accu­rate­ly, but there would still always be minor dif­fer­ences; maybe the brush strokes or the tonal­i­ty would dif­fer slight­ly. A copy could nev­er hold the same val­ue as the orig­i­nal of which there is only one.

In sim­plis­tic terms, an NFT is a unique rep­re­sen­ta­tion of val­ue that pro­vides cre­atives with the oppor­tu­ni­ty to pro­duce one-off pieces of art in the dig­i­tal world, where a nor­mal­i­sa­tion of mass repro­duc­tion, stream­ing, down­load­ing and upload­ing has dri­ven down the val­ue of their work. 

An NFT also enables artists to sell direct­ly to con­sumers, there­by increas­ing prof­its, and have a built-in func­tion to pay cre­ators when their work is sold on. They are like vir­tu­al col­lectibles that can be bought, sold or trad­ed for mon­ey, either as spec­u­la­tive assets or as a way for brands, as Nike has recent­ly announced, to ver­i­fy the authen­tic­i­ty of a prod­uct. 

For Lior Mes­si­ka, founder of Eden Block, a ven­ture cap­i­tal firm spe­cial­is­ing in blockchain and cryp­to, the poten­tial for NFTs is “colos­sal” in terms of their abil­i­ty to “dis­rupt the entire con­cept of dig­i­tal own­er­ship”. 

“More than any­thing, NFTs rep­re­sent a shift in cur­rent busi­ness mod­els,” he says. “If blockchain as an oper­at­ing sys­tem is help­ing us to do things dif­fer­ent­ly, NFTs are just anoth­er way of dis­trib­ut­ing val­ue in a way that is fric­tion­less.” 

This, he believes, will ben­e­fit both cre­ators and con­sumers. “Blockchain tech­nolo­gies are extreme­ly effec­tive at fix­ing the prob­lems we cre­at­ed by mov­ing too fast with the inter­net,” says Mes­si­ka. “Con­tent cre­ators will become so much rich­er in the next few years or decades thanks to this kind of inno­va­tion, which will even­tu­al­ly feed through to con­sumers.”

It began with a tweet

If it seems like every­body is sud­den­ly talk­ing about NFTs, it’s because they are. Trenchev says: “Despite the fact they’ve been around for a few years, we’re hear­ing a lot more about NFTs recent­ly because there have been some crazy auc­tions, with art sell­ing in dou­ble-dig­it mil­lions.” 

He attrib­ut­es at least some of this to glob­al lock­downs, which have hit the finances of major record­ing artists who would ordi­nar­i­ly make a big part of their income from tour­ing. It’s a trend that has seen Kings of Leon become the first band to release an album as an NFT and singer Grimes sell $6 mil­lion-worth of dig­i­tal art in tokens. Twitter’s founder Jack Dorsey made head­lines in March by auc­tion­ing off his first-ever tweet as an NFT for almost $3 mil­lion and Kevin Roose, a jour­nal­ist at The New York Times, made $560,000 for char­i­ty by sell­ing an NFT of one of his columns.

Trenchev also believes that sky­rock­et­ing prices for bit­coin and oth­er cryp­tocur­ren­cies in 2020, which brought mas­sive finan­cial gains to investors, are behind an increased inter­est in NFTs. “There are mil­len­ni­als and Gen Zed­ders, who sud­den­ly find them­selves sit­ting on an enor­mous amount of wealth cre­at­ed seem­ing­ly out of thin air, and they’re look­ing for ways to spend it,” he says. 

He adds that while “pre­vi­ous gen­er­a­tions view hard assets to be real estate, cash and bonds”, this doesn’t mean the next gen­er­a­tion is going to dance to the same tune. Such invest­ments might not seem so strange to gen­er­a­tions who have grown up online.

Where can I sign up?

Expert opin­ion dif­fers on whether NFTs are a wor­thy invest­ment. “It’s still too ear­ly to say if this is a good invest­ment,” says Trenchev. “But I’d def­i­nite­ly say it’s an over­heat­ed and over­priced mar­ket.” 

Mes­si­ka is more upbeat. “It’s the same as every oth­er asset class and basi­cal­ly depends on whether or not the NFT is good or not,” he explains. “Being an NFT doesn’t make it more or less valu­able, but I own a few and I feel con­fi­dent they’ll hold val­ue. Over­all I think the mar­ket will grow.”

Out­side invest­ment, though, are they a worth­while expen­di­ture for the aver­age con­sumer? Gem Stoned, a con­tent cre­ator, thinks so. “I’ve bought two, sold two and mint­ed sev­er­al,” she says. “I real­ly love art and cryp­to, and I love that NFTs give you the abil­i­ty to sup­port the artist direct­ly while own­ing the piece as an asset that can hope­ful­ly go up or hope­ful­ly not go down in val­ue.” 

If you decide to give it a go, it’s worth bear­ing in mind that mak­ing dig­i­tal art­works uses a large amount of com­put­ing pow­er, so NFTs are not par­tic­u­lar­ly envi­ron­men­tal­ly friend­ly. Beyond that, Trenchev and Mes­si­ka agree you should start small. “My advice is always the same,” says Trenchev, “nev­er put any mon­ey into a finan­cial asset that you can­not afford to lose.”