The tech industry is an industry awash in trends. A new one pops up seemingly every month, joining the ongoing flood of the metaverse, Web3 and blockchains.
Strongly tied to that last one is a relatively-new trend: NFTs, an acronym for “non-fungible token”. Lately, many businesses and celebrities have hopped into this market, from McDonald’s to Eminem, and there’s a lot of hype swirling around this as the next big step in decentralising the Web.
But with all that hype comes uncertainty about what NFTs are and how they work. The jargon can be dense with terms like “diamond hands”, “hodl”, and “gas wars” being thrown about on top of cryptocurrency’s own sizable glossary. So, to help you understand this new trend, we’re going to try to break it down and analyse whether it’s a worthwhile business opportunity or a trend best left alone.
How We (Sort Of) Got Here
NFTs’ history is inextricably linked to that of cryptocurrency and the blockchain. NFTs utilise blockchain technology, and most NFTs are stored on popular crypto chains like Ethereum. These tokens have been around since 2014 and were created by artist Kevin McCoy and technologist Anil Dash.
However, NFTs hit the cultural mainstream in 2021. Popular internet memes from the 2000s like Disaster Girl and Overly-Attached Girlfriend have been packaged and sold as NFTs, celebrities like Paris Hilton and the aforementioned Eminem have bought in, and major companies like video game publisher Square Enix are entering the space.
This surge in popularity did not come about organically. It occurred in concert with a massive mainstream advertising push by both NFT minters and cryptocurrency companies.
From Yuga Labs putting out ads in New York City’s Times Square for their Bored Ape Yacht Club NFTs to Crypto.com’s ads where Matt Damon compares cryptocurrency to exploring uncharted worlds, the hype and the buzz surrounding these tokens is as manufactured as the latest marketing onslaught of a Hollywood blockbuster. But is the hype backed up by some interesting tech?
How it Works
The first thing that should be noted is that NFTs aren’t actually the pictures often associated with them. A “non-fungible token” is essentially a digital marker on the blockchain that can’t be copied or substituted. As for what one can do with those markers, the answer is, at the moment, not a whole lot.
The most common way to use them is to attach the token to a URL which leads to a website where an image (such as the Bored Ape Yacht Club’s menagerie of monkeys) is uploaded. The token acts as a proof of purchase. It’s unique, and while similar markers for similar images can exist, no two will exactly match. The uniqueness is tracked by the blockchain itself through its digital ledgers. This is why jokes about “right clicking and saving” the images attached to someone’s NFTs, while funny, aren’t totally accurate to how the tokens work. The tokens don’t care about things that aren’t related to their specific blockchain, unless a cross-chain bridge is involved connecting two blockchains.
How Safe Is it?
Safety is a top priority for companies operating in the digital space. From hackers to data leaks to simple phishing scams, the internet is full of potential disasters for any business. With that in mind, how safe are NFTs, or, more accurately, how safe is the blockchain? In its favour, its decentralised setup makes it difficult to find a single entry point, all transactions are traceable by users which makes it difficult for bad actors to hide, and information is largely immutable.
On the flip side, the blockchain is just as susceptible to individual computer hacks and phishing scams as any network. A user’s private key, their personal ID pass for the blockchain, can be stolen and exploited, which is believed to be how Bitfinex lost $72 million (£53 million) in Bitcoin in 2016, and without that key, a user’s options for retrieving their NFTs and cryptocurrency are mostly nonexistent.
Finally, that same immutability can work against a blockchain in the wrong circumstances. In the event of a major crypto theft, the only way to restore the blockchain is to institute a rollback, which would split the chain into two forks, one showing the altered transactions and one showing the unchanged transactions. Rollbacks are historically unpopular in the crypto community with companies like Binance facing criticism for considering them in the wake of major thefts.
How Businesses Can Use NFTs
The primary thing a company should look at when examining a trend is how that trend can help their business. While this consideration will obviously vary from company to company, the general answer is “it won’t”.
At the moment, NFTs function essentially as digital merchandise. Buy your official Mickey Mouse NFT on OpenSea and own a piece of the magic of Disney! Buy your own Bored Ape Yacht Club NFT and get access to a collaborative graffiti board they actually call “The Bathroom”!
It’s branding, and even in cases where your company might have an IP worth marketing in this way, the results are not entirely great for established brands trying to enter the NFT market. Looking at the Mickey Mouse collection, its highest-priced NFT is sitting at .1 ETH (£229) which sounds like a lot for a digital receipt of a Mickey Mouse picture, but compare that to Apes-R-Us, which currently sits at #200 on OpenSea’s NFT rankings for the Ethereum chain as of this writing. Its lowest-priced NFT is currently priced at .05 ETH (£114) with the second-lowest going for .09 ETH (£206) at the time of this writing. Its highest is currently at 808 ETH (£1.8 million).
Looking at numbers like that can be deceiving. While some NFTs can go for such rates, this does not guarantee your company’s NFTs would do the same. It’s a speculative market, and when wading into any speculative market, it’s important to not get distracted by the promise of the ceiling when the floor is so low you might fall. Disney is arguably too rich to care if Mickey doesn’t sell well, but not everyone is Disney.
If your company is built ground-up with the blockchain in mind, you will likely do better in the space, but companies from more traditional parts of the tech world would probably do best to stay away for the time being.