Non-Fungible Tokens (NFT) - Valkyrie

Non-Fungible Tokens (NFT)

Key Takeaways

  • While crypto assets, such as bitcoin or ether, are interchangeable, non-fungible tokens (NFTs) have features that are unique to each user or each token.
  • NFTs can store user-specific information, such as tracking health and academic records or ownership of real-world assets.
  • Most economic interest in NFTs today are in tokens related to art and video games, where trading volume in 2021 exceeded $12 billion. 

Cryptos like bitcoin and ether and fiat currencies like dollars and euros are fungible.  Each coin or bill is like the other and it doesn’t matter which specific coin or bill you receive or spend.  Commodities of a specific grade are also fungible, such as light sweet crude oil or 24-karat gold.  Oil from different suppliers can all be commingled together in a single pipeline, and gold from different mines can be processed in the same smelter.  We also know that fungible currencies and commodities are divisible, you can buy a gallon or a barrel of gasoline or spend just part of a dollar or a bitcoin. 

When something is non-fungible, it has unique characteristics where the item can be differentiated from others.  Fungible items are typically not divisible, but must be sold in their entirety.  While much of the focus on blockchain technology focuses on storing and transferring value, such as bitcoin or ether, it is important to remember that blockchain technology can also be profitably used to store information.  Non-fungible tokens are being used to store information such as individual health or academic records, ownership and location of shipping containers, or titles to real-world property such as real estate.  Notice the unique characteristics of each of these, where the information refers to a specific individual, a single shipping container, or property located at a specific address. 

When most people think of non-fungible tokens, however, they are referring to the purchase and sale of art and items used in video games.  In 2021, users spent over $12 billion on the purchase of non-fungible tokens.  The leading platform for trading art-based NFTs, such as Bored Apes and CryptoPunks is Open Sea, which has over $10 billion in trading revenue since inception.  There are 10,000 NFTs in each of these series, each of which has unique visual features, a serial number and an ownership record.  Video highlights of NBA players are sold in the NBA Top Shot series, which is hosted on the Flow blockchain. 

The ownership record and description of each NFT is recorded on a blockchain, such as Ethereum, Solana, or Wax.  Once an NFT is purchased, the owner’s address is written to an immutable blockchain as well as information on the serial number and location of the specific NFT.  While the ownership information is written to a blockchain, in many cases the image is stored off-chain on the Internet, with the URL location of the NFT recorded on the blockchain. 

The most popular video game based NFTs are from Axie Infinity, which has sold over $3 billion in in-game items since inception.  In order to start playing this game, users must purchase three Axies, small creatures that can battle and breed.  The value of each Axie varies by visual features as well as over time. 

Leading metaverse properties are Decentraland and The Sandbox.  In these virtual worlds, participants can build and outfit avatars as well as own digital land.  Substantial corporate sponsorship is evident in these platforms, as brands are looking to diversify their advertising footprint across television, radio, print, Internet, and now the metaverse.