In mid-March 2021, the art and finance worlds were stunned when a digital piece of artwork from the artist Beeple sold for $69 million at auction. The digital image was a non-fungible token (NFT), a relatively new type of asset that shares some similarities with cryptocurrencies like Bitcoin and Ether.
While NFTs have attracted recent attention in the media and were even featured in a viral song explainer on Saturday Night Live, it can still take a little time to understand how NFTs work, how to make them, and why they are selling for so much money. Businesses, in particular, should better understand NFTs if they want to participate in the frenzy in some way.
Here’s what businesses need to know about NFTs today.
The basics of non-fungible tokens
Before explaining non-fungible tokens, it’s best to start with the basics of fungible tokens. Fungible tokens such as Bitcoin and Ether are digital assets secured by blockchain technology that are interchangeable and have similar properties to currency. For example, if a friend lets you borrow 1 Ether, you could send back that same amount, but it would not need to be an identical token to what you sent back to your friend.
On the flip side, non-fungible tokens are unique pieces of code that can’t be replicated and don’t have a traditional value associated with them. NFTs are also secured by blockchain technology like Bitcoin and Ether, but each NFT asset is singular. Just like an original painting from Vincent Van Gogh is a one-of-a-kind and can be worth millions of dollars at auction, NFTs are somewhat a digital equivalent that shows ownership. They are worth whatever someone believes their value is, and they can vary widely in what is offered.
To date, companies and creators have developed a wide variety of NFTs, including:
- Digital artwork: Like the Beeple example above, many visual artists have put up their art for sale in NFT form.
- Digital music: Rock band Kings of Leon, for example, released a new album as an NFT and earned more than $2 million from the sales.
- Video clips: The NBA Top Shot marketplace features highlight clips of notable players, such as slam dunks by LeBron James and Steph Curry, that can be purchased as NFTs.
- Virtual real estate: Pieces of land in virtual worlds such as Decentraland are NFTs that can be purchased.
- Digital pets: One of the very first NFT offerings was CryptoKitties, a game that lets you collect and breed one-of-a-kind digital cats.
You can list your asset for whatever price you think someone will buy it for, and ideally, make a profit. Additionally, you can code an NFT, so the original artist gets a royalty when it is resold.
Why NFTs have popped in price
NFT asset values have skyrocketed in the past year for two reasons. First, many NFT purchases are speculative, and some people are buying NFTs to resell them quickly at a higher price. For example, clips on NBA Top Shot have started at prices such as $4,000 and then resold later at prices above $200,000.
The other reason is some people want to participate and own a piece of history, such as Vignesh Sundaresan, who bought the aforementioned Beeple art for $69 million.
“This NFT is a significant piece of art history,” Sundaresan told CNBC. “Sometimes these things take some time for everyone to recognize and realize. I’m OK with that. I had the opportunity to be part of this very important shift in how art has been perceived for centuries.”
How businesses can create and sell NFTs
Given that NFTs have become more mainstream in 2021, there are many upsides for any company or creator that makes digital art or products to test the waters with NFTs. Not every company needs to create NFTs, but if you are a visual artist, musician, or game designer, it’s worth thinking about developing and selling NFTs.
If your business decides to produce NFTs, they first need to be “minted.” Let’s say you want to sell an NFT version of a photograph you own. All you need to do is use a do-it-yourself service such as OpenSea, Rarible or Mintbase to turn the image into an NFT. Some members-only platforms such as SuperRare also can help creators mint NFTs. To perform the minting, you have to pay a fee (typically in Ether) that can cost more than $1,000.
Once a business has minted an NFT, then comes selling. Many of the services that allow you to mint an NFT also act as marketplaces where NFTs are bought and sold, including OpenSea and SuperRare. You can list your asset for whatever price you think someone will buy it for, and ideally, make a profit. Additionally, you can code an NFT, so the original artist gets a royalty when it is resold.
The potential downsides of NFTs
One final thing businesses should know about NFTs are the potential downsides. First and foremost, NFTs are speculative assets that rise and fall in price just like any piece of artwork might. As such, an NFT created for sale may not sell for much, or an NFT you purchase may simply lose value over time.
Secondarily, some reporting has revealed back-end technological problems, such as occurrences of NFT assets disappearing. Because the NFT you own is effectively just a piece of code, viewing and controlling the asset also relies on third parties in order to work. For example, if you buy a digital art NFT, it still has to be hosted online somewhere to view it. But if the hosting service takes it down, it can no longer be accessed.
The bottom line on NFTs
Business owners that create works of art or digital products would be wise to consider minting NFTs to capitalize on the craze and potentially connect with new audiences. However, they also should be aware of the risks of such new technology and make sure they are well-educated on the technology before incurring costs to mint or purchase NFTs.
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