Non-fungible tokens (NFTs)

More than million-dollar ape pictures

Nov 06, 2022
Crypto tends to come in cycles, both regarding price and new adoption. The new hype cycle where web3 properties gets leveraged into ways to interact with blockchains is hard to predict. In 2021, it was without a doubt NFTs. But what exactly are NFTs and how can you invest in them?

Digital collectibles

A non-fungible token (NFT) is a crypto-asset that lives on a blockchain and is indivisible and completely unique. Compare this in contrast with Bitcoin or smart-contract tokens that are exchangeable between one another. Ie., one bitcoin has the same value and properties and the next bitcoin. NFT contracts however, contain specific information that makes each NFT different from the next. In this way, one NFT cannot be interchanged with another NFT, and the whole cannot be broken down into smaller units and used. The uniqueness of a token living on a shared immutable ledger can be used for many different use cases.
The most popular use case is to create digital collectibles. These are often created in the form of collections where numerous similar but different digital collectibles get created. As often happens in crypto, the marketing got ahead of itself and NFTs soon revolved around paying outrageous prices for pictures of digital apes of which even celebrities started to play around with, piercing it into the mainstream. Nowadays, many different collections are traded on platforms like Open Sea, Rarible, and Reddit, to bring NFTs to an ever-growing consumer base.

More than digital peacocking

NFTs are much more than digital peacocking though. Next to creating digital crypto-collectibles many other use cases are actively explored right now or are being considered for the future. If you want successful investments in crypto, it is important to understand all market dynamics, including new building blocks like NFTs and how they can be leveraged. Unique digital goods can be used for several other use cases such as:
  • Managing ownership of digital items in blockchain based games
  • Proving authenticity of (digital) goods
  • Store other types of unique information such as wills, identities, other type of certificates
  • Bring real-world assets on-chain such as real-estate
  • Bring transparent provenance to (digital) assets
  • Automatic build-in royalties
  • Transparant ticketing systems
  • Be used to manage certain tasks in DeFi protocols
  • Decentralized Domain Services such as ENS and Unstoppable Domains
  • Dynamic NFTs
Essentially, anywhere where unique digital immutable censorship-resistance is useful, NFTs can be used.

Investing in NFTs

Fourstack is not an active investor in separate digital collectibles as it is incredibly fickle to predict such markets based on subjectivity, hype, online chatter and what not. Moreover, since the hype started in 2021, the amount of different collections to choose from is incredibly overwhelming.
You also need to understand that the non-fungible part makes your crypto-asset very illiquid. If you want to change up your fungible crypto-assets such as BTC, ETH or your favourite token, swapping them for something else of value is easy. With NFTs not so much. A buyer needs to show up to exactly want your NFT, not a different one, but exactly the one you are selling. If you happen to pick an out of favour digital collection, its even possible you are unable to sell it at all.
A more prudent approach is to track projects that use NFTs, either in combination with real-life events or other parts of the crypto sphere, to create new use cases that serve the blockchain well. In that regard, it's possible to estimate and speculate on different areas of adoptions without needing to choose if ‘’CryptoPunks’’ or ‘’BoredApes’’ will stay popular or fade away.