NFTs Are Fueling a Boom in Digital Art. Here’s How They Work | WSJ

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NFTs Are Fueling a Boom in Digital Art. Here’s How They Work WSJ

NFTs Are Fueling a Boom in Digital Art. Here’s How They Work WSJ

– [Narrator] This is Nyan Cat.He’s part cat, part Pop-Tart.The GIF of a rainbow-casting felinewas a viral meme back in 2011.Fast forward to February 2021,the original GIF wassold at an online auctionfor 300 Ether,the cryptocurrency thatpowers the Etherium network.That was equivalent tonearly $600,000 at the time.You may be asking how someonecan own the original copyof a GIF that was pervasivearound the internet.It’s because it was sold asan NFT or non-fungible token,which acts like a digitalcertificate of authenticity.The market for NFTs ballooned in 2020,climbing to a market capof at least 338 millionfrom about 41 million in 2018.But skeptics are askingwhether these assetsare really worth thevalue assigned to them,especially if all it takes to view themis an internet connection.To understand how NFTs work,first you need to understandwhat fungibility is.Fungibility refers tothe ability of an assetto be exchanged or substitutedwith similar assets of the same value.A simple example of afungible asset is currency.Say you have five one-dollarbills in your wallet.You may not want to carryaround so much changeso you exchange them fora single five-dollar bill.The value of your moneyis still five dollarsregardless of the fact it’snow in a different form.Non-fungible assets are the opposite.Each one is uniqueand can’t be easily substitutedfor something similar.Think of the “Mona Lisa.”It’s an original piece of art.It couldn’t be swapped out for, say,a “Mona Lisa” posterfrom the Louvre gift shopbecause the poster doesn’thold the same value.- The idea behind NFTs is thatyou have this digital signaturein the way that a great work of artmight bear the signature ofthe person who created itso you can always go andlook at the original and say,”Yes, this is the realone. This is authentic.”A NFT winds up having thatthrough the blockchainwhere the information is recorded.- [Narrator] NFTs are cryptocurrenciesbut unlike fungiblecryptocurrencies like bitcoin,they are completely unique.They exist as a stringof numbers and lettersstored on a blockchain ledger.This information can containwho owns the digital asset,who sold it, and when it was sold.This information is also encrypted,ensuring the NFT’sauthenticity and scarcity.In doing so, they fix a difficult problemfor digital creators on the internet:how to make your creation scarceand therefore more valuable.- So, with NFTs, you windup having the scarcitybecause they are non-fungibleand because of that,there’s only one of thesetokens that can exist.It can’t be traded for anything similarbecause there is nothingsimilar that exists.And so, you wind up gettingthat scarcity and that limitationwhich helps drive up some of the prices.- [Narrator] One of the early applicationsof creating this scarcitywas the digital collectiblegame Cryptokitties,which emerged in 2017.Users were able to buy, trade, and breeddigital cat collectibles.Each new cat was an NFTwhich certified itsoriginality and ownership.Since then, NFTs have been appliedto video games, digitalart, and sports memorabilia.One example is NBA Top Shot,which allows users to procure a collectionof digital basketball highlights,like a video clip of a posterizing dunk.All highlights are NFTs andhave become big business.By mid-March, NBA Top Shot had clocked inover $338 million in salessince it went live in October 2020.Non-fungible tokens are making their wayinto the mainstream art world as well.Auction house Christie’s opened biddingfor its first purely digital art NFT.Bids rocketed into themillions of dollars.- People are really excited about NFTsbecause, unlike with theblockchain underlying bitcoin,you can do a lot morecomplex things with it.You can wind up setting terms within itsuch as, you know, the original creatorupon each resale of thisasset will get x-amount.Or you can take it and you can have an NFTthat itself mints other NFTs.And it winds up having all of thesereally untested applications.The surface has only been scratchedin terms of its potential.- [Narrator] Along withall the hype around NFTs,experts have raised some concerns.One issue is that not all NFTs verifythe person selling a digital art pieceis actually the original creator.This is difficult particularlyin online marketplaces.- One of the concerns isthat anyone can essentiallygo on a lot of these marketplaces and say,”I am the person who created this token,”and it can be really hard to verify that,especially if you don’tknow who they actually areor they’re sayingsomeone that they’re not.- [Narrator] And some are skepticalthat ownership alone makesdigital assets valuable.When it comes to digital art,a buyer owns the original digital paintingbut the person can’t keepothers from copying the imageand sharing or changing it online.- You have had a lot of scamsin cryptocurrencies just historicallyand so the concern is that, you know,people are hyping these up.They’re saying, like, “Gobuy these NFTs. It’s great.”But in reality, you know,there’s always gotta be abuyer for there to be a sellerand people might decideall of a sudden, you know,”Let me cash in my profits,”and someone’s going tobe stuck holding the bag.- [Narrator] Proponents are bullishon the potential for NFTsbut critics are wary that it may bea digital bubble in the making.(suspenseful music)

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