The development of the cryptocurrency market has led to multiple applications of distributed ledger technology, opening up incredible trading and business opportunities. Among all the emerging trends in the blockchain sector, NFTs – which can be used to digitally proof ownership of any intellectual property object, be it a song, a painting, or a sculpture made of clay – have become particularly popular.
In this article, we will tell you what NFTs are and what makes them unique. In addition, you will learn about what the NFT market looks like today and how it is evolving. At the end, we’ll examine a few of the main factors that affect the value of NFTs.
- NFT is a cryptographic record on a network representing the ownership of a physical or digital object.
- The NFT market is experiencing a correction today after a recent drop as a result of bearish sentiment pressure on the crypto market.
- The value of an NFT is determined by the sum of such variables as its usefulness (practical application), rarity, and materiality.
What Are NFTs and What Is Their Specialty?
A Non-Fungible Token (NFT) is a cryptographic token that represents digital proof of ownership of a tangible physical or digital object or property and is stored on the blockchain network.
Such a token contains information about the owner, description, transactions between users, and a URL link to a file. The record of each token appears in the blockchain network, ensuring the recorded information’s reliability. Because of the complexity of the blockchain system, to spoof a token, hackers would have to take over much of the network, which is virtually impossible.
Any NFT has a complex structure and can act as:
A digital copy (digital twin, digital shadow) of another object.
In particular, a non-fungible token can serve as a representation of:
- an object in the real world (e.g., a painting, a document on paper, a building);
- another intangible object (a musical work with or without text, an audiovisual work, a literary work, etc.).
NFT can be used for utilitarian purposes: to certify the authenticity of the “original item” (for example, a diploma, a certificate, a collection item, etc.), to mediate the exercise of rights (the transfer of a token may certify the transfer of ownership of the main object), to confirm the fulfillment of any obligations (including to pay taxes or fees).
An independent intangible object
Such NFTs do not duplicate another intangible object but contain it within itself (most often, it is a work of fine art). Thus, the main object is already inside the token, and they represent a single whole.
NFT can be used to tokenize almost anything, as it is only a record in a distributed registry. At the same time, it has recently become generally accepted to mean, by NFT, primarily a digital copy of works of digital art and other intellectual property objects. NFT can solve many problems related to the enforcement of copyright in the digital environment. Still, on the other hand, it can lead to violating such rights because, most typically, the creation of NFT does not perform a copyright check, and the basis of a non-fungible token can be someone else’s work of art.
The Current State of the NFT Market and Its Performance
The first references to non-fungible tokens appeared in 2014, and in a short period of time this technology has gained popularity in the creative sector, as it has become a convenient monetization tool for creators of various copyright objects. However, the universal nature of NFT technology opens up prospects for its application in various industries. NFT technology has quickly gained popularity, and it is hard to imagine the crypto world without it.
The NFT phenomenon and widespread public interest were mainly the results of an information campaign in the media. The popularity of the NFT industry came only in the spring of 2021 – when the artist Beeple sold at Christie’s auction a JPG file with his 5,000 paintings stitched together into one image for the record price of $69 million. The collage titled Everyday: The First 5000 Days included paintings by the artist, which he created daily for 13 years.
In 2021, the world’s stars also looked at NFTs, including the most famous musicians who released their songs as NFTs, movie studios, which sold tokens tied to their pictures, and even billionaires. For example, Elon Musk, the head of the American electric car company Tesla, produced a track about NFT, tied it to a token, and sold it.
The popularity of the NFT market is still high today, with trading volumes numbering in the hundreds of millions of dollars as recently as June 2022, with transactions reaching $1 billion. After that, there was a natural decline that lasted until January 2023. The decline in interest for NFTs was caused by the decrease in cryptocurrencies and the ongoing market correction. But all this time, the industry of non-fungible tokens continued to develop. And at the beginning of this year, digital assets began to rise in price again because, at the same time, the primary cryptocurrency Bitcoin showed stable growth in the market; its quotations again exceeded $30,000.
The market for NFT also returned to the upward trend – prices for tokens and the total volume of sold NFT units on specialized marketplaces increased again. The number of transactions in January compared to December 2022 increased by 38% and reached 9.2 million (trading volume exceeded $946 million). And these are only “clean” deals that are not suspected of inflating NFT prices or artificially creating hype surrounding particular digital collectibles. In January, the ability to issue non-fungible tokens also appeared on the Bitcoin network, using the Ordinals protocol. The number of such NFTs has already exceeded 1 million.
Today, the NFT space attracts the attention of many large corporations. However, the industry doesn’t just live off the release of collectible tokens. NFTs are already finding authentic applications. For example, Sony is working on the use of NFTs in games. Within the social network Twitter, users can install tokens as avatars. Reddit launched its own NFT marketplace last summer, and by February of this year, its sales volume exceeded $12 million, and Amazon presented a platform for trading non-fungible tokens in April 2023, which is currently only available for users from the U.S.
NFT Market Development Trends
The development of NFT technology today gives a different perspective on the digital art world, which is undergoing major changes and gives creative individuals the opportunity to enjoy all the benefits of a distributed registry. Changing the state of many things, including in the crypto market, the NFT sphere has many development trends in the coming years, among which the most sensational ones are the following.
NFTs and Metaverse Projects Integration
In the metaverse, an NFT serves as a digital certificate of ownership, which proves that the NFT holder owns a specific digital asset: an avatar, virtual land, game items, and more. In addition, NFTs can also prove ownership of physical assets if such mechanics are built into the metaverse and there are appropriate integrations.
The popularity of implementing NFT technology in metaverses is growing as it represents the primary means by which people can acquire various objects in the universe through their avatars.
More and more metaverse projects are integrating NFT into their ecosystem, giving users the ability to interact with virtual goods and assets, as well as create their own NFTs. It is expected that this trend will only intensify in the coming years, attracting more and more developers and users.
The NFT industry continues to diversify its offerings, with brands and individuals trying to keep digital assets relevant as the fashion for NFT fades away. By creating different applications and ways to use NFT, brands seek to provide value to the average consumer with digital assets. Brands in the NFT space are creating NFT rentals or platforms to rent them. These services allow consumers to rent or lease their digital assets – usually avatars for games – and then return them to the owner.
The ability to rent NFT tokens promises to become generally available when the new Ethereum standard, ERC-4907, comes to market. It clearly states that the token owner lends its asset to the borrower for a certain period of time (the duration of the lease is also specified), without the right to resell or do anything else (such as using it as collateral). The NFT token is returned to the owner at the end of the specified period.
NFT and Artificial Intelligence Symbiosis
One of the most promising areas of development in the NFT industry is the introduction of the use of artificial intelligence technology to enable the creation of new tokens using neural networks. This idea opens a whole direction in the field of digital visual art, allowing us to apply all the power of software computing mathematical algorithms to create works of art in the form of objects of any complexity, shape, and theme.
The process of creating a picture consists of several stages: first, the user enters words and phrases that determine the direction of the work, on the basis of which the plot of the picture is formed. Once the work is finished, the neural network determines whether it corresponds with the original meaning – if it does not, the algorithm redoes the painting. The final step is to determine the title of the work.
More and more companies are building their digital territories, meaning metaverses will get a new round of development in the coming years. Along with their flourishing, the popularity of NFT will increase because these technologies mutually benefit each other. In some cases, it is an exhibition of paintings in a digital space; in others, the NFT picture can be an artifact used in various games.
But NFT also has a future beyond the individual market. The development of the Internet and technology led to the creation of the metaverse. These can include game worlds, streaming services, and even social networks. NFT is already firmly established in the metaverse world, and the influence of this technology will only grow.
Major Factors Determining the Value of NFTs
The unique, non-exchangeable NFT tokens are a product of the interaction between the cryptocurrency industry and the art world. NFTs have been able to combine the value of digital assets as well as the uniqueness of creative works of artists. One of the most challenging issues in this area is determining the value of NFT. Below are three components that determine the value of any NFT project.
The usefulness of an NFT depends on the real-world application scenarios of the token in the physical and/or digital worlds. For example, it can be used in games to gain additional abilities and use spells. A token can be used as a closet item for your character or as a resource for construction.
Another factor to consider is the real-world usefulness of NFTs. Some NFTs can be exchanged for real prizes, while other tokens give you access to events. People also use NFT as collateral for a loan. In this case, the NFTs are only available once the borrower repays the debt and accrued interest. After the debt is repaid, the NFT is returned to the borrower.
Rarity or uniqueness is the main property of NFTs. Some NFTs are created by famous artists. Other NFTs are tokenized assets from the real world. All NFTs are unique; anyone can verify the ownership and authenticity of a token. NFTs cannot be changed, but the right of a token can be changed if an NFT is bought, sold, gifted, or exchanged. Generally, the value of high-demand NFTs is greater.
Materiality is expressed by tying NFTs to some physical object of the material world. If tokens are tied to rare paintings or other works of art, their value will be much higher than that of objects of no value. The more valuable an object from real life, the higher the value of the token that is attached to it. This rule works mainly with art, music, collectibles, etc.
The NFT market today is a place where various innovative solutions and technologies will merge to reshape the economic system, and in particular the field of art, music, and gaming. The current NFT market is just the beginning of a new opportunity for digital asset ownership.