On December 2, 2021, news broke out that the NFT The Merge was sold for $91.8 million. This may seem extremely strange to the uninitiated after looking at some of the most expensive NFTs ever sold. Case in point, the CryptoPunk below is worth $23.7 million:
Image Source: Larva Labs
So, why all the fuss? What are NFTs used for?
Why Do People Buy NFTs?
If you look closely at the CryptoPunk above, you will find out that initially, it was released for free. As long as you have an Ethereum wallet, you can get it. But now, it is being sold for $32.75 million. Just like stock or cryptocurrency investments, this may be the precise reason people buy them.
But despite this, there is still no guarantee that when you buy an NFT, it will increase in value. Which makes us even wonder more, why are people buying them? The most straightforward answer to this question is blockchain technology.
You can find JPEGs everywhere you look, but what makes NFTs different? They are practically the same thing except for the price tag. Blockchain is what makes NFTs unique and valuable. It allows creators to authenticate an NFT publicly, which serves as its digital signature. This is what verifies originality and proof of ownership.
In essence, you can replicate a JPEG image thousands, even millions of times, but you can’t with an NFT. Here is a list of a few concrete reasons why people want an NFT of their own:
1. As Digital Collectibles
An NFT can represent artwork, videos, music, and in-game items. They can also serve as digital souvenirs, such as Jack Dorsey’s first-ever tweet. Since NFTs are authenticated, buyers get the chance to own a digital collectible that no one else has.
2. As a Profitable Endeavor
NFTs have unique characteristics that make them valuable, thus a good investment for some. As opposed to cryptocurrencies that can be divided, with an NFT, you can’t. This means every NFT is worth more than the currency you bought it with. This is a profitable endeavor since an NFT’s value is based on demand and how much a buyer is willing to pay.
3. To Store Value
NFTs have the capability to preserve value as they are not subject to inflation. As with traditional currencies that are at the mercy of inflation, an NFT is not. Therefore, it can be considered a stable and safe investment. Each NFT is monitored and verified on a decentralized blockchain, making forgery or theft impossible.
What are the Uses of NFTs?
We’ve seen why people buy NFTs, which may be enough to answer this question. However, NFTs provide more uses, such as the following:
We all know that art is subjective. It relies on viewer experiences, thoughts, emotions, and opinions while looking at it. While some NFT art does not seem to be worth millions, there are those who still find them appealing.
Image Source: Trevor Jones Instagram
For artists, this is a huge thing. They are given a chance to earn through their art while building a loyal fanbase. A digital painting gains functionality and not just aesthetics when a smart contract is attached to it. This allows artists to earn from sales and royalties following future sales.
2. Digital Identities
Another everyday use for NFTs is Decentralized Identifiers or DIDs. W3.org defines these as a new way for identifiers to verify and decentralize digital identities. These DIDs include any person, organization, thing, or abstract identity. Once they gain solid identities, they can avoid fraud in their Web 3 dealings by using NFTs.
3. Tokenization of Real-World Goods and Services
NFTs can be used to tokenize physical items such as real estate, music albums, and wine bottles, among many others. Being in the blockchain allows for creating registries that can validate the authenticity of goods and services. Plus, shipping and commerce will benefit from NFTs when companies issue smart contracts for cargo and other delivery services.
Play-to-earn games such as Axie Infinity may be the most practical use for NFTs. The digital identification model lets players use NFTs to verify and secure their earnings in video games. Before this, there were already in-game items, currencies, and collectibles, but NFTs took it to a higher level. They can trade, buy, or sell items that allow them to earn money while doing so.
Image Source: Axie Infinity Website
5. Authentication of Documents
Governments, businesses, and individuals can use NFTs to provide document authentication. An excellent example of this is when the principality of San Marino in Italy used NFT-based Covid-19 passports. Verification of a person’s medical history was made quick, easy, and paperless.
Why are NFTs Valuable?
The key word that defines why an NFT is valuable is authenticity. NFTs allow anyone to verify an object’s authenticity, art, video, music, and others. It is the heart of an NFT, otherwise known as a non-fungible token. It is something unique, irreplaceable, and can never be replicated.
Think of an NFT art the way you look at a Van Gogh painting. You can have any brilliant artist duplicate it and make hundreds of copies. But since a Van Gogh painting is non-fungible, there can only be one original. This is what makes it valuable.
Just like the painting, an NFT gets its value from multiple factors. These are utility, rarity, ownership history, future value, and liquidity premium. Below are some factors that determine the value of an NFT:
- Its underlying value – the value of the creator
- The potential value – the NFT’s value in the future
- The buyer’s perception – how valuable the buyer thinks of the NFT
- Similar market value – the worth of the creator’s other pieces
The NFT market is exploding in growth as we hear more and more news of NFTs being sold for millions. The primary reason for this may be its profitability, especially for artists. If you want to start trading NFTs, you can get the help of Penji to create art for you.
Our graphic designers and illustrators can come up with art that you can convert (called minting in the NFT sphere) into NFTs. Watch our demo video here to learn about what we do. Or you can start your NFT journey by signing up using this link. Our designers will be ready to create for you.