Why are some NFTs valuable and others aren’t?

When something is non-fungible, it cannot be replaced by another identical item.

The tokens are considered non-fungible because they’re indivisible and unique. Let’s take a look under the NFT hood.

How do NFTs work?

An NFT is a unique digital signature that you can attach to an asset.

Whether that’s a song, or an image, or a piece of footage, a unique digital signature is like a fingerprint that contains information like who created the asset, when, and any conditions on its future sale. (Like whether or not the creator gets a percentage of when it’s onsold again.)

These signatures are ascribed to a blockchain. Remember the blockchain? It’s a huge public database that tracks and records the movement of all its assets.

If someone agrees to sell one of those assets, all the participating nodes verify and agree that this asset has been sold and the digital signature now belongs to someone else.

It’s why Bitcoin caused such a splash when it was launched in 2008. This was the first time you couldn’t just copy and paste something on the internet. If you tried to copy or paste a digital asset on the blockchain, there would be two digital signatures. All the computers verifying and confirming the changing database would reject the second one because its provenance can’t be verified.

Confirming and agreeing the historical ownership of a digital asset underpins how blockchains work.

And because the blockchain is public, you can see which wallet previously owned that digital asset. And the owner before that. You can actually trace each digital asset back to who mined it and when.

The US authorities actually used the public blockchain after the Colonial Pipeline was hacked and the criminals demanded $US5 million in Bitcoin as ransom payment.

But because each Bitcoin has its own digital signature, and the blockchain tracks how each signature moves through transactions, the US authorities traced where the Bitcoin ended up and were able to reclaim around $US2.3 million of that money. So that was cool.

But Bitcoin is generally associated with digital money, whereas NFTs are associated with things.

At the moment, these things happen to be artworks, songs, videos, sports trading cards, whatever.

NFTs have been around for quite a few years, we looked at the market for non-fungible rare Pepe memes and crypto kitties here. But they really took off in recent times when the National Basketball Association in the United States released NFT-based trading cards. These were called NBA Top Shots.

The NBA controlled how many were in circulation and fans, wanting to own their favourite player card, traded them on a blockchain-based marketplace.

Things have value when they’re scarce. And because you can’t copy and replicate an NFT, some people see them as valuable.

How do artists use them?

Bianca Beers is a digital artist, who often works with the likes of Nike, Microsoft and Adobe on big branding campaigns. She also runs her own practice out of her studio in Seven Hills in Western Sydney.

She began releasing NFTs this year, finding the process simple and useful because she could connect straight with buyers without having to use a gallery. She could also see who owned her work and every time it gets sold again, she gets a clip of the sale.

“It’s like a royalty,” she says. “Which is the dope thing for creators because you can generate some passive income from something you’ve previously made.”

Digital artists, who have created work in Adobe’s Photoshop or animated it in After Effects, use websites like Foundation, OpenSea and Rarible to mint and sell their work.

How do you make an NFT?

The steps are simple: they open a crypto wallet, deposit Australian dollars and buy some cryptocurrency. Most websites operate in ETH (the currency of Ethereum), but can also accept various tokens.

Once the artist has some currency, they open an account on their NFT platform of choice. The process of ‘minting’ their artwork involves uploading it to the platform, which encodes it to that platform’s blockchain (creating that digital signature!), and then listing it in their public-facing marketplace.

It costs some crypto to upload the work and to list it. In both instances, the artist is paying the Ethereum ‘gas’ fee. These fees change depending on how much activity there is on the blockchain, as all the miners are constantly verifying and checking that all transactions are accounted for.

Beers says she tries to time her minting for when gas fees are low, which could be in the middle of the night or early morning.

Once the work is listed on a marketplace, buyers can bid for and buy the works which are then deposited in their own wallets or storage space.

The blockchains are public, meaning anyone can see who minted the work and how many people have bought and sold it. For this reason, it’s impossible to copy and it’s impossible to download, hence the name ‘non-fungible-token’.

If the buyer wants to on-sell the work, they re-list it on the platform and, depending on which site, the artist gets a clip of every future sale price as the work changes hands.

NFTs are not just money-makers

NFTs are emerging not just as a way for artists to sell their work, but as a marketing tool for brands. Sydney-based artist Campbell Walker, who illustrates under the moniker ‘Struthless’, recently developed an NFT for F.Whitlock & Sons, a New Zealand brand launching in Australia.

The work, which went live via OpenSea, generated around $1800 in sales that will be donated to charity.

“As an artist, the more ways you can make a living from creating the better,” Walker says.

“Technologies like NFTs lower the barrier for artists to participate and mean work can reach as wide an audience as possible. The fact that corporate brands see this happening seems like a good signal for artists wanting to make work, but also wanting to get a slice of other parties making money from them.”

Why are some valuable and others not?

Generally, things are valuable when they are scarce. There is only one Mona Lisa. There are only 59 Le Bron James dunking NBA Top Shots (one of which sold for $US387,000).

But the truth is, people are minting millions and millions of NFTs that are flooding onto marketplaces and sparking speculative buying frenzies. There are forums and chat rooms with thousands of people talking about what they’re going to buy, in order to pump up the price and then sell when they think they’ve made enough of a profit.

These are called pump and dump campaigns, and when we’re talking about stocks, it’s illegal. But crypto markets are not really regulated in Australia and investors, creators, and market places are experiencing heavy volumes of speculative buyers and sellers.

This shows that NFT markets are not mature. They are speculative and driven by momentum and sentiment rather than price discovery.

It’s kind of like a gold rush, where people are paying thousands of dollars for pans and shovels and then millions for every rock that’s unearthed, whether it’s gold or not.

At some point, it’s likely these markets will settle down and, like the primary and secondary art markets now, prices will begin to reflect realistic demand.

That said, it’s worth noting that NFTs are proving the gateway to owning digital assets within digital environments, like the metaverse. Or within video games.

But for now it helps to know that non-fungible-tokens are proving a new way for people to make things on the web that cannot be duplicated.