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To most of you, the below GIF is nothing more than an animated pair of sneakers. But for a select few, this is a valuable digital asset (NFT) worth tens of thousands of dollars.
Last month, one person spent 22 Ethereum ($13,331 at the time of sale and $20,702 at the time of writing) at auction for the X Evolution NFT edition, a pair of AI-designed sneakers brought to life by the team at RTFKT Studios.
“The X auction opened on Nov. 19 and lasted for 10 days on a new platform that RTFKT built. However, the shoe that bidders saw on the 19th was just a plain white high-top. As bids topped a certain amount of ETH, the design would change – a splash of paint at a time.
No one knew what the shoe would look like at its 10th and final “evolution,” and that remains a mystery: The winning 22 ETH was only good enough for the sixth evolution. The final evolution was set at a threshold of 58 ETH.” – CoinDesk
The purchase also included a 1/1 custom pair of physical sneakers, an unlockable Snapchat lens, and an avatar skin to wear in the The Sandbox metaverse.
If you feel lost, don’t worry. Let’s backtrack.
What is an NFT?
NFT stands for a non-fungible token. In order to fully understand how NFTs work, you’ll need to have a basic understanding of blockchain technology.
Blockchains are distributed databases used to securely store data and information in a publicly accessible way. Since these databases are distributed across multiple sites in a computer network, there is no need for a middleman. The most well-known use of blockchain technology is Bitcoin, a decentralized digital currency used to make safe, anonymous, and verifiable payments.
Bitcoin is considered a fungible currency because, like the USD, it can be exchanged for another token (or dollar) of the same value. This means that the one-dollar bill in your wallet is worth the same as the one-dollar bill in mine. Fungible currencies are also easily convertible. One dollar can quickly be converted to four quarters.
It’s very important to note that NFTs are not a form of currency, but rather a digital token of information stored as a database entry in the blockchain. These tokens are unique, noninterchangeable, and can be used as a reliable and verifiable proof of ownership vehicle.
Where can NFTs be used?
Art & Collectibles – An NFT can be used as a certificate of authenticity for frequently counterfeited original paintings, sculptures, sneakers, and more. After being verified by an independent authenticator, a token can be created for a specific piece of art and transferred with ownership once the item is sold.
This also works with digital art:
“Because of the legitimate scarcity made possible by blockchains, buyers can rest assured that the art they purchase is, in fact, rare. This gives digital art real value that we’ve never seen before.” – Decentraland.org
Like physical art, the value is in the eye of the beholder. Wealthy folks could soon be swapping out the Picasso originals in their living rooms for digital screens bearing AI-designed abstracts. As demand for these collectibles grows, digital art curators and galleries will continue to emerge, giving birth to an entirely new industry and alternative asset class.
Gaming – Much of Fortnite’s $2.4 billion in 2020 revenue came from in-game cosmetic purchases of skins, dances, and emotes. NFTs can be used to resemble these in-game items and move them from one game to another. They can also be used to build singular, unified virtual identities and share public player records.
Ticketing – NFTs can be used to store a variety of ticket information like time, place, and seat location, while also assuring that you’re in possession of a real ticket. I’m very bullish on this use case as the virtual event industry continues to grow.
Identification – Passports, birth certificates, and driver’s licenses are all forms of identification that can be digitized through non-tradable NFTs. While this is still a ways away for the US, China is already taking steps toward digital identification as part of the plans for its blockchain-powered smart cities.
Bottom Line: NFTs have the potential to disrupt multiple industries through their ability to digitize the provenance process and serve as an alternative investment asset. The technology is still early, but the upside is there. Pay attention to these over the next five years.