Barely known towards the end of 2020, non-fungible tokens exploded in popularity in early 2021, fueled initially by NBA Top Shot, and later by CryptoPunks, the Bored Ape Yacht Club, Deadfellaz, CryptoKitties, and more.
For perspective, the market capitalization of NFTs in 2020 was around $330 million, while in 2021, they have exceeded $41 billion.
However, and it’s sad but true, despite all the interest in NFTs, it is likely that many buyers have not made the effort to really understand the technology behind them and what it is what they are really buying.
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Well, what goes inside an NFT?
In essence, NFTs are smart contracts filled with data and stored on the supply chain. blocks (formerly Ethereum, now also Solana or others). The data in this contract can consist of various things, such as art files, signatures, and much more.
When someone buys an NFT, they are buying a smart contract and the underlying data on the blockchain, to summarize.
A relevant fact of this technology and that many buyers overlook, is not only the cost involved in making the transaction, but also the expense involved in maintaining that NFT, storing that data within the blockchain.
Users may be surprised to learn that, on Ethereum, storing data worth 1 GB can cost $240 million per year. The Solana blockchain, which has become a popular alternative, is cheaper (nearly $1 million a year).
So you can get an idea and you can compare. Take for reference the quintessential NFT work, Everydays: The First 5,000 Days, by artist Beeple, which sold for $69 million.
Well, this NFT was stored on the Ethereum blockchain. It has a weight of 0.3 GB, so it would cost more than 72 million dollars to maintain it annually.
We are talking about more money than the sale itself.
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So, this fame that has arisen from the purchase of NFTs, how is it assumed by its buyers, in the long term? Well, the answer is simple, there is a way to avoid this cost.
The actual file of the NFT is not stored in the corresponding blockchain. It is stored outside. On the contrary, the smart contract, which is in Ethereum, for example, contains a link that takes us to the original file.
With this arrangement, the participants in the NFT avoid the cost of storing the actual files on the chain, and yet still enjoy all the benefits of buying, selling, and transacting with the product.
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However, this exposes the buyer, being outside the blockchain, to risks related to centralization, such as file location fees (Google or AWS server, for example) or that some of these companies no longer want to support a blockchain.
It is essential to know all the risks that you will face if you decide and have the money to buy an NFT. However, despite their current shortcomings, they have real potential to change the world we live in.