What exactly are NFTs and what makes them so valuable?

What are NFTs? (Image source: Pixabay/Riki32)

So-called NFTs have been making headlines for quite some time now. Again and again fabulous sums of money are reported in this context. Just a few days ago, for example, news broke that a seller had sold an NFT for well under one cent instead of more than one million euros due to a stupid mistake. But what are these mysterious NFTs anyway? What gives them value?

What are NFTs?

NFT stands for Non-Fungible Tokens, which in German means something like: Non-exchangeable token. This means above all, but not only, digital objects. In principle, an NFT can also be assigned to physical objects. For example, Nike sold the Cryptokicks shoe collection as NFTs. Most of the time, however, it is virtual images, texts and sounds, such as those that are brought into the limelight, not least by the above message ether stone.

Normally, digital objects have no intrinsic value, or at least not much, since they can basically be reproduced as often as desired.

Blockchain does that

Using blockchain technology, an NFT is assigned to objects such as the aforementioned Etherrocks or works of art, tickets and other digital objects. They are thus clearly recognizable.

Specifically, a certificate is issued for e.g. a virtual rock. Even though there are billions of identical versions of this one stone, the NFT still points to a single, specific stone. Additional NFTs can be imprinted on other stones, even those that look similar. This is how collections often work. The items in a collection are also often slightly modified, as is the case with Etherrocks, for example. Each ether skirt differs minimally from the others in terms of color. And each stone is associated with its own NFT.

This is ensured by the blockchain technology, known primarily from cryptocurrencies such as Bitcoin and Ethereum, where most NFTs are based on the Ethereum blockchain. Blockchain is basically nothing more than a series of records that are cryptographically linked to each other. Specifically, each new data record contains, i.e. each new block, the hash value (spread value) of the previous block, including various transaction data and a time stamp.

Most importantly, however, is the reference it contains to a corresponding clearly identifiable image, sound or text file, which is usually located on a third-party server. The digital objects are not stored in the NFT itself. Theoretically, it would work, but NFTs or blockchain aren’t actually designed for that.

One problem with NFTs is that they can be on multiple blockchains. This means that there can theoretically be two or more NFTs for an object, whether digital or physical. Since there is no higher authority, both are in principle valid. In practice, however, NFTs almost exclusively use the Ethereum blockchain, so there are hardly any problems here – at least not yet.

Can someone create an NFT?

In principle, anyone can create an NFT or have it created. Artists often use it to monetize their work. A digital wallet, a so-called wallet and a suitable trading platform are sufficient. The latter takes over the creation of NFT, which in most cases is initially free. Fees are only charged when the item is sold.

First publisher introduces controversial NFTs into game


Ubisoft quartz

First publisher introduces controversial NFTs into game

Why are NFTs so expensive?

Now we have clarified how NFTs potentially come in value. But why are some of them so expensive? How can they be worth hundreds of thousands to even millions of euros?

To answer that, let’s take another look at said ether stone: In December 2017, exactly 100 of these were produced and attached to the Ethereum blockchain. Only 30 of these were sold in the first three years. Then, when famous entrepreneur and influencer Gary Vaynerchuk tweeted about etherrock in August 2021, the rest were sold and prices rose to six figures.

Etherrocks is therefore a good example of the hype that has arisen around NFTs. The so-called CryptoKitties and CryptoPunks are an equally interesting case. The virtual cats and punks are also based on the Ethereum blockchain. One of the best-selling NFTs is from the CryptoPunk series and changed hands on December 9, 2021 for 2,500 Ether. Per March 21, 2022, it is slightly more than 6.6 million euros.

The most expensive NFT to date is the artwork Every day – The first 5000 days by artist Mike Winkelmann aka Beeple. The collagen was sold on 11 March 2021 for 42,392 ether – equivalent to over 112 million euros today.

How are NFTs traded?

NFTs are traded by dedicated platforms. These assign the respective object to the NFT. Buyers and sellers are in turn represented by their crypto wallets. If a purchase is made, the trading platform processes it and adds the transaction data to the blockchain in the form of a block via a smart contract. The most widely used payment method is the cryptocurrency Ether, which also fuels NFTs as speculative objects.

Are NFTs Redundant?

Although it may seem so in terms of virtual stones, NFTs are not redundant. On the contrary: there are digital objects that should be identifiable as individual objects. A good example of this is works of art. Even if they are in the form of a JPEG file, someone has to create them. Basically, this is no different than in the physical world. Paintings can be copied and even faked, but only one can be the original.

However, NFTs are also subject to criticism. On the one hand, they have long since become objects of speculation, which those who already have a lot of money primarily benefit from. On the other hand, creating an NFT and running the blockchain requires a lot of electricity, raising questions about its utility, especially in times of climate change and rising energy costs.

What can happen to NFTs?

If EA has its way, NFTs will play an important role in the future. The publisher cites Ultimate Team as an example. Especially when it comes to collecting and reselling in-game items, NFTs are obviously a good choice. For the so-called Metaverse, where we have to work, play and live, at least when it comes to large tech companies like Meta (formerly Facebook), such technology is probably also essential. Hear more about Metaverse in the GameStar Podcast:

Link to podcast content

In one form or another, NFTs are likely to stay with us no matter how we think about it. However, it is also important to prevent excesses such as the pyramid scheme repeatedly mentioned in this context. Ultimately, governments and businesses are encouraged to act here.

What do you think about NFTs? Or to be more precise: What do you think of the hype surrounding NFTs? Write it to us in the comments!

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