People Are Spending Thousands of Dollars on NFTs. Are They Fools?

What are NFTs and will this digital bubble burst?

It’s been almost a year since Beeple sold his NFT for a whopping 69 million dollars! This sale took the world by storm and opened everyone’s eyes to the million possibilities of the digital ecosystem. There was no going back from that point. We started seeing multiple marketplaces popping up which offered different collections from what seemed like an infinite number of digital artists.

2021 was a really great year for NFTs. OpenSea, one of the largest NFT marketplaces, had a transaction volume of $14 billion in 2021, which is 646x of that of the previous year. Around 29 million wallets traded NFTs in 2021.

Despite all of these numbers, most people still have no clue what an NFT is. The most common question asked is — if the picture is online and I can just take a screenshot, why does it matter who owns it? Another one is — Why would I spend so much money on a picture of a monkey with a costume?

Yeah, the world of NFTs is a little bizarre and quite often lacks any sense. Let us try to understand the basics and see if the hype is warranted.

What Is an NFT

Let’s say you make an ebook using a template. You plan to have a giveaway and award one of your subscribers this ebook. Since there is only one ebook, it has a perceived higher value, and the lucky subscriber will feel very special. You might even make three different ebooks on different topics for three lucky subscribers. (this is how ERC-721 works) On the other hand, you can use this template to make a mass circulated ebook. Since there are multiple copies of the same ebook, the perceived value will be lesser than that of the first example. The template and ebook(in both cases) are analogous to smart contracts and NFTs respectively.

Now let’s get a bit technical.

Let us first look at smart contracts. A smart contract is just code stored on the blockchain. It contains logic and data(state). To access the smart contract, you use the smart contract's address. The smart contract logic can manipulate the state, view it, etc. So you can have a variable and have a function called addOne which increases the variable by one. We can see the updated state using the getValue function. You call the function with the help of the contract address and the function name.

A great thing about smart contracts is that you can inherit another smart contract, essentially using it as a template.

To make an NFT, you have to inherit a smart contract called ERC-721 (you can also use other smart contracts like ERC-1155). You can use this link to get started.

The above code is an NFT contract inherited from ERC-721. Let’s dissect the above code line by line.

We create a contract called MyPokemon that inherits ERC-721 and the ownable contract. We will see what ownable is used for in the later lines.

The next thing we do is create _tokenIdCounter using the Counters contract. This is essentially our first example. It is initialized as 0, and on calling increment, it increases by 1, just like our addOne function above.

Next, we have our ERC-721 constructor, which defines the collection as MyPokemon and the symbol as Pok. We now come to our first function. The function _baseURI() sets the base URI for all of our NFT data. We will talk more about this later.

After this, we have our safeMint function used to create our NFT and send it to a particular address. It accepts an input “to” which is of type address which is the address of the person we want to send the NFT to. You might have noticed the onlyOwner in the function line. This is a modifier derived from our Ownable contract, ensuring that only the contract owner can call the function safeMint.

In the function body, we do the following - increase the _tokenIdCounter by 1 - assign the current value of _tokenIdCounter to tokenId - create an NFT with tokenId and send it to the address “to”

After all of this, you might be wondering where the picture and details of the NFT are stored.

NFT Metadata

So, where do we store the NFT data? Remember I told you that I would talk about the _baseURI() function later as it has some significance. Using this URI, we store the NFT data. Every token has a unique URI. Token 1 will have the URI of mybaseuri/1, which will store a JSON file. For storing this JSON data, we can use a central server or a decentralized one like IPFS. The benefit of IPFS is that no one can change the data. The JSON data is like the following.

{
  "name": "Pikachu",
  "description": "The OG pokemon",
  "image": "https://ipfs.io/ipfs/Qm231qweda.png"
}

We also provide a link for the NFT image. Platforms like openSea use this data to display your NFT to the general public.

Now you might be wondering why we can’t just store this data on the blockchain with the help of states. Well, we can but it is not feasible. As doing anything on the blockchain requires gas fees. Storing so much data on the blockchain would thus require a tremendous amount of gas. That’s why we store this data off-chain.

Is This Just a Bubble?

While there is a lot of potential with NFTs, they are not providing any value as of right now. People are buying NFTs, hoping that the next person will pay more than what they paid. Nobody really cares about the art. The art is already available to everyone.

Only as more and more crypto game creators start implementing NFTs and other use cases implemented will NFTs provide actual value. Till then, it is just a pyramid scheme where the people at the top continue to mint money. I believe that this digital bubble will burst, and only after that will we get to see worthy implementations of the NFT.

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