A Non-Fungible Token or NFT, is a unit of data that is stored on a blockchain with a unique identification code and metadata for reference. They can be used to represent items such as photos, videos, audio and other types of digital files. NFTs have gained considerable momentum as an emerging niche. They can be distinguished from more identical fungible tokens, such as bitcoins, which allows them to be used as vehicles for commercial transactions. NFTs are irreplaceable because each asset, or token, is unique. This transparency and scarcity bring a number of opportunities to artists and creators — making NFTs the best way to represent, send and trade unique assets. They serve as a tool to make art and other forms of creativity more discoverable and reward artists and creators for their work.

Although everyone is talking about NFTs now, they are not new. The first NFT project, CryptoPunks, was launched in 2017. 10,000-pixel art characters — CryptoPunks — were created and anyone with an Ethereum wallet could claim one for themselves for free. The first NFT project that gained wider recognition was CryptoKitties, which allowed users to collect digital pets. CryptoPunks and CryptoKitties were only enjoyed by a limited group of Ethereum fans for a few years. NFTs were not seen as investments at the time, but as fun collectibles that made use of the latest and exciting blockchain technology. For example, an NFT virtual painting of the Ethereum founder Vitlik Buterin, titled EthBoy, sold for 260 ETH — almost $560,000 in terms of today’s prices. EthBoy is much more than just an image stored on the blockchain — it is a fully interactive work of art that changes its appearance daily based on external data such as the ETH price and Ethereum gas fees.

The situation changed in 2020 when decentralized finance solutions were introduced and grew popular. Decentralized finance allows financial products to be made available on blockchain networks. As such, they are accessible to everyone without the need for intermediaries like banks. NFTs were revamped by decentralized finance developers, who began to find new uses for what was once considered a novelty.

NFTs have an edge over real-world collectibles since users can use the blockchain to verify their authenticity or trace them back to their original creators. The presence of the NFT marketplace allows these assets to be sold in a decentralized manner and without a third party, lowering costs for investors. Since buyers have immutable access to the assets, these tokens enable real ownership. The issuer would also not be able to revoke this ownership in the future for any reason.

However, the decentralized networks on which developers build NFTs are not user-friendly. This is a critical barrier to mass adoption since most of the targeted audience for these products knows little to nothing about blockchain. NFTs, unlike bitcoins and other currencies, are not divisible. Although this trait is desirable to collectors, it does not support inclusion and sometimes inflates assets’ prices. The future of NFT collectibles is dependent on the next generation valuing these products and being willing to pay more for them. Investing in an NFT may be a speculative and risky investment unless the collector has a personal connection to the item.

A groundbreaking moment in the history of NFTs happened when Jack Dorsey, founder of Twitter, sold the NFT of his first tweet for $2.9 million. Seeing that there is money to be made with NFTs, celebrities like Lil Pump, Lindsay Lohan and Paris Hilton started selling their own NFTs. The U.S. American rock band Kings of Leon raised about $2 million by selling their latest album as an NFT. The introduction of NFTs into the mainstream demonstrates the value NFTs can bring to fans, creators and artists alike. Many reputed companies like NBA, Top Shot and Sorare are now launching their own licensed NFT projects to trade virtual baseball and football cards.

NFTs are getting more advanced and complex. Currently, many companies are working on utilizing NFTs to create blockchain-based video games, which could make them even more popular. Unlike the initial coin offering, or ICO, craze of 2018, the NFT phenomenon is built on unique technological fundamentals. Maybe owning an NFT project will become as common as owning a website in the future.

The future of NFTs is bright, promising to create a sustainable sector in the cryptocurrency market just like decentralized finance. With greater accessibility and lower transaction costs, NFTs will eventually reach a better product-market fit. Even if there is a bubble in the NFT art scene, inflated by many celebrities, that may not be inherently bad.

The hype is creating interest in NFTs, which will lead to greater education and knowledge about this aspect of finance. With a greater understanding of what an NFT is and the possibilities they can create, such as royalties for their original creators, there is likely to be greater adoption. This will create more opportunities for value across a range of NFT assets.