What's the hype around NFTs?

Inspired by the Matrix Resurrections movie release, I was excitedly catching up on all things Matrix, when I found an intriguing search result - NFTs.  

This was largely owing to the new feature introduced in The Matrix Awakens game on Xbox and Playstation, released just prior to the movie. The game offers the player access to unique game avatars in the form of NFTs. Rather than being restricted to a few avatar options, and the player looking like every other player out there, players can now buy an exclusive avatar and keep it forever. Nifty’s and Warner Bros created 100 000 of these unique playable avatars, and then sold them for $50 per item in a matter of hours. 

Take the red pill and let's explore just how far the NFT rabbit hole goes…

What is an NFT?

NFT is an acronym for “Non-Fungible Token”. Still not clear? Since fungible is not a word we use every day, let's break it down a little more. “Fungible” is an investment term used to describe goods or assets that can be traded for something of a similar type. Bitcoin is fungible.  Trading one bitcoin for another bitcoin would get you exactly the same thing. A Van Gogh painting, on the other hand, is non-fungible. When you buy a Van Gogh, you would be buying a one-of-a-kind painting. When you purchase an NFT, you are purchasing a digital, non-fungible, one-of-a-kind product.

It’s an oversimplification, but NFTs are part of the Ethereum blockchain. Ethereum is a cryptocurrency whose blockchain supports the additional information needed to make NFTs work, albeit in a unique way. Blockchain technology is an encrypted, digital ledger, storing transactions duplicated across an entire network of computers, making it impossible to hack or change. 

You might be thinking, “If NFTs are digital images or videos, and I’m browsing the web, can’t I just right click, select “Save as”… and download it?” Absolutely, but that doesn’t mean you ‘own’ it. Even though you can copy an image of a Van Gogh or any other artwork, and print it on canvas, you do not and cannot own the original.

Is there a market for NFTs?

Yes, indeed! If you go along to the NFT ‘supermarket’ you will mostly find digital art in the form of graphics, drawings, videos and music. However, keep in mind that it’s a non-fungible marketplace. The NFT platform offers digital artists the opportunity to sell artwork to you much like a painter would sell his oil paintings. The intent is to sell collectors’ items, as an investment for the buyer. Are there any buyers willing to invest? You may be surprised!

Michael Joseph Winkelmann, known professionally as Beeple, is an American digital artist, graphic designer, and animator. Up until October 2020, the most he had sold a print for was $100 but this all changed. In March 2021, an NFT of his work sold on auction at Christie’s for $69 million. That’s $15 million more than the Monet painting Nympheas sold for in 2014, making Beeple one of the top three most valuable living artists in the world.

Jack Dorsey, the billionaire co-founder and CEO of Twitter sold his first tweet dating back to March 21, 2006 for $2.9 million on Valuables. It reads “just setting up my twttr”. One might reason that since this tweet has been available online for everyone to see for 15 years, how could it be so valuable? What are you paying for? You’re buying a digital certificate signed and verified by its creator. You’re buying an autographed item. While purchasing the aforementioned NFTs may make some sense to you, there are some weirder options out there. You can buy a pet rock, which is nothing more than a PNG image of a rock. Granted, it's a rare design and only a few are available. The one below was sold for $46 300.

Source: Trendsmap

The devil is in the details

What do you need to consider when buying an NFT? Say, for instance, you were one of the 100 000 who purchased a Matrix avatar. What happens when you play in-game with the avatar? Usually your account and avatar are linked with in-game progress. In the Matrix Awakens choosing a blue or red pill unlocks certain aspects of the avatar. A red pill unlocks your Matrix-style avatar, while the blue retains your day-to-day type of avatar. Can you re-sell that NFT, once you have made that decision? Will the buyer retain your unlocked progress, or can they start over? What happens if you get killed in the Matrix? Is that NFT no longer useful? What happens when they retire support for the game and decommission its servers? How valuable is the NFT then, when the game is old and forgotten? Just considering some of the complications NFT platforms present is enough to make my brain start overheating!

Speaking of heating up, there is also the fact that an NFT needs to be verified. Because it’s part of the Ethereum blockchain, it needs to be verified through the same platform. Ethereum uses 48.14 kilowatt-hours of energy per transaction. That's more power than most homes use in a day!

Would I buy an NFT? I’m undecided. I would consider buying a video or digital artwork mostly for the investment potential. Within the gaming context, I might consider buying an NFT of an in-game vending machine or shop for example, where whenever other players purchase items I get rewards I can redeem in the real world. Another perspective on the value of NFTs is in the Twitter and Facebook contexts, where a company’s logo or other images could be verified through the NFT platform. This could be advantageous given how many fake accounts there are.

I would not buy a pet rock! And I don’t think I will be buying a game avatar anytime soon, both for the reasons I mentioned above and because I like to change my character skins often. Also, the avatars are not handcrafted artwork but were mass produced using Epic Games' MetaHuman Creator. Keep the expression “It only has value because someone says it does” close in mind. Think carefully about the potential investment value of the NFT you intend to buy, and whether there is a ‘second hand’ market for it. Don’t be swayed by the trends.