What is an NFT, and why are VCs investing in them?

The futuristic technology everyone’s talking about lately is the NFT, a red-hot digital asset whose acronym stands for nonfungible token. NFTs are a data unit on a digital ledger or a blockchain in which every NFT symbolizes a one-of-a-kind, collectible virtual good and is therefore not interchangeable. NFTs are the latest class of cryptocurrency that have gone mainstream online and have seemingly touched all walks of life.
By design, NFTs are useless as currency but are useful for other things, particularly digital art. NFTs offer their owners the convenience and security of blockchain technology. However, every NFT is a specific asset with a specific value.

How NFTs work

In the simplest terms, NFTs convert digital artwork and other collectibles into verifiable and unique assets that are easy to trade on the blockchain. Though NFTs may be a bit esoteric, their payoff has been enormous for many musicians, artists and influencers, with investors paying high amounts of capital to own NFT versions of their digital images.
Typically, NFTs are used to purchase and sell digital works of art. They can take the form of tweets, GIFs, virtual trading cards, video game skins, images of physical objects and virtual real estate, among other elements.

How is an NFT made?

Anybody can make an NFT. To create one, you need a small purchase of the digital currency Ethereum, a digital wallet and a connection to an NFT marketplace. This is where you will be able to upload and turn the content into crypto art or an NFT.

How can you buy and sell NFTs?

Any digital image can be bought as an NFT. However, there are some things to consider when purchasing one, particularly if you are new to this segment. You need to decide which marketplace to purchase from, what type of digital wallet is needed to store it, and what kind of cryptocurrency you need to complete the sale.
The most common NFT markets are Mintable, Nifty Gateway, OpenSea, and Rarible, but be wary of the fees. Some marketplaces charge what is referred to as the gas fee, which is the internal price to complete the transaction on Ethereum. Other fees may include a charge for converting dollars into Ethereum and closing costs.
The process of selling NFTs varies from platform to platform but also depends upon their content. Upload your content on a marketplace, then follow the directions to convert it into an NFT and include details such as a description of the work and its price. The majority of NFTs are bought with Ethereum, but NFTs can also be purchased with other types of blockchain such as Flow and WAX.

NFTs are raking in money from investors

NFT marketplaces began witnessing explosive growth in February this year as artists, celebrities and musicians began releasing exclusive digital goods as NFTs. For example, Twitter CEO Jack Dorsey sold his first-ever tweet as an NFT for $2.9 million, and artist Mike Winkelmann, better known as Beeple, sold an NFT at a Christie’s auction for over $69 million last month.

Meanwhile, venture capitalists, hedge funds and private investors have been pouring millions into the blockchain-secured works. NFT companies received almost $90 million from investors in the first quarter of 2021, according to Pitchbook. One of the largest deals was for blockchain-based football game Sorare, which fetched around $50 million from VC firms Accel and Benchmark. NFT marketplace OpenSea raised $23 million in a round led by Andreessen Horowitz in March, and Mark Cuban recently invested in NFT Data Aggregator CryptoSlam. In mid-April, NFT startup Dapper Labs was reportedly raising a new funding round at a $2.6 billion valuation with participation from prominent tech hedge fund Coatue Management.

Will NFTs go mainstream?

The supporting infrastructure for NFTs has rapidly expanded to allow protocols, applications and creators to scale up quickly to match demand. The sector also has full-stack NFT services from the market, trading venues and minting platforms. Improved user interface accessibility and user experience are expected to be the gears that catalyze the next wave of growth, although NFTs are yet to see mainstream adoption or much awareness from casual investors.

Some observers predict NFTs will continue their growth trajectory, as evidenced by their tremendous expansion within the last few years. The next big wave could be global brands creating their own NFTs for issuing into the market. Others say their value proposition of uniqueness and originality doesn’t inherently render them valuable and that the hype will fade. At present, there are over 3 million NFTs for sale, and sales volume on the top sources has grown over 400 times year over year to over $100 million per week, according to an estimate from Andreessen Horowitz. But only time will tell whether NFTs represent a totally new economy based on digital ownership.