Are NFT is the next multi-billion dollar industry or is this just another fad in the crypto space? I’m going to be writing about what NFTs are. The different types of NFTs, the future of NFTs, and more. I used to play a lot of Counter-Strike Global Offensive (CO-GS) back in the day and one of the main reasons why Counter-Strike Global Offensive became one of the most popular Esport games and the number one game on Steam for years is because of its great skins. Players could buy and trade skins and an entire economy was created around these digital assets. There were dozens of online marketplaces which you could trade skins and there were even trading servers where players could flip skins with each other.
These skins became a full-fledged commodity because they had intrinsic value and could be traded between players. On top of that some of these individual skins usually knives or gloves would trade for thousands of dollars or even tens of thousands of dollars. Again this dollar isn’t like CO-GS dollars, this is real-life USD that we use. Controversial gambling websites started popping up which accepted these skins as currency and allowed players to bet on various games to try and win more money.
One player by the name of Mick skillet which was a very famous gaming YouTuber had invested thousands of dollars in skins and had an inventory valued over two hundred thousand dollars he also owned a gambling site called CO-GS Magic. Though the creator of Counter-Strike Global Offensive and the creator of steam had decided after many years of controversy that they would put an end to this gambling scheme that was happening. So they decided to ban all bots that were used on gambling websites and also they banned any account that was affiliated with gambling websites and one of these accounts was MCskillet’s own account. When an account gets banned the user can no longer trade his skins making them completely valueless. Mick skillet had lost a $200,000 inventory and then shortly after committed suicide.
I am not defending an underage gambling industry. However, this story is the perfect example as to why centralization & NFTs are so revolutionary these CO-GS skins were centralized and were held in player’s own servers and databases and they had complete control over every single skin. This is the exact issue that cryptocurrency was designed to solve, centralization, and of course, this doesn’t just apply to money but this is an example where it actually applies to in-game items. I mean think about it digital assets already exist in almost every video game whether that be Fortnite, Call of duty, Counter-Strike, PUBG, Minecraft and the demographic for gamers is basically the exact same demographic for crypto. So I think that the gaming industry will fully embrace NFTs and blockchain.
What are NFTs (Non-Fungible Token)?
Now let’s answer the question what are NFTs? Well firstly NFT stands for Non-Fungible Tokens and they represent a digitally scarce item. Whether that be in-game items, art, a domain, name real estate trading cards, insurance, etc. Fungibility or fungible means that each individual unit is identical. So a good example of this is fiat currency, if you have a five-dollar bill you would expect that that five-dollar bill has the exact same value and intrinsic properties as any other five-dollar bill. You would expect that you could trade that five-dollar bill with any other five-dollar bill without any issues.
The same thing applies to bitcoin, one bitcoin is not more superior or more valuable than any other bitcoin. However, non-fungible means that each item is unique for instance, a piece of art is non-fungible because even if you made a copy of a famous painting the copy would have basically no value or very little value whereas the original that was created by the artist would still have a lot of value. Even if you made almost an identical copy the original is unique and will never be duplicated or have a replica that could have the exact same value.
NFTs are unique and have a very limited supply or even just a single one in existence. On top of that NFTs can be verified on the blockchain so you can guarantee that you have the real deal and you don’t have some counterfeit of that item. You can also verify the number of that item on the blockchain in a transparent way and can guarantee the quantity of that item in existence. Additionally, NFTs can be sent around and traded just like any other cryptocurrency on the Ethereum network.
As of now the vast majority of NFTs exist on the Ethereum network and can be stored in an Ethereum wallet you may have heard of ERC20 tokens which is an Ethereum standard used to create fungible cryptocurrencies like most ALTcoins. However, NFTs use ERC721 or ERC1155 which is an Ethereum standard designed for creating unique scarce assets.
Types of NFTs (Non-Fungible Token)
The most popular types of NFTs right now are domain names, trading cards, digital art, and my favorite in-game items. However, literally, anything can be created as an NFT. So these definitely don’t account for all the types of NFTs and all the possibilities of NFTs that can be created. However as of now, these are the main types of NFTs, you can buy .eth or .crypto domain names from unstoppable domains. These domain names aren’t normal because firstly ownership of the domains is tracked on the blockchain and not with a centralized domain registry and secondly because you can actually link these domains to a crypto address and then you can send crypto to the domain. So for instance, if you have a .eth domain you could tell someone to send ethereum or any ERC20 token to your domain name.eth.
The second type of NFT is digital art. These NFTs can be purchased from a website called OpenSea or Wearable. Honestly, it’s really difficult to tell which art pieces will appreciate in value and which won’t. There is a lot of money to be made investing in digital art. I do also have to warn you that these types of NFTs aren’t very liquid so if you do buy one it could take you a while to sell it because you’re gonna have to wait for a buyer that’s willing to pay the asking price that you’re listing it for. As of now, the best way to trade them is peer-to-peer and so you have to wait for a buyer that’s willing to purchase the NFT from you.
The third type of NFT is trading cards which you can also buy from OpenSea or Wearable and I have no doubt that NFT trading cards will be very big in the future. Finally, the last type of NFT are in-game items and as of now, there are only a handful of video games that actually support NFTs on the blockchain. These video games right now include Decentraland, Gods unchained, and the infamous Crypto Kitties which has a history of absolutely destroying the ethereum network when the game got too popular and ethereum couldn’t really handle it. You can also buy in-game items that exist alone and don’t really have a video game as of now so these in-game items exist outside of any particular video game. Another really awesome part about in-game items as NFTs is that they don’t have to exist for a single game. So for instance you could take your ar skin from Fortnite and then use it as a different gun skin in Valorant or any other game. Again this is in theory as of now and it’s kind of speculation of how the gaming industry could look in the future and we are kind of seeing a trend in that direction but as of now that isn’t really adopted and most in-game items are centralized and locked within the game and the company itself.
Accounting for NFTs (Non-Fungible Token)
NFTs should be classified as intangible assets. So every time you buy NFTs you should record them at purchase price. As of now, the NFT market might be going up but in near future, it may fall. If you will hold NFTs at that point you need to record impairment cost to balance the current market price to the beginning purchase price.
As the NFT market is comparably new so you can calculate impairment based on the average trading price of a set of similar assets, which may give a more accurate picture. Another problem with NFTs is about Amortization. We shouldn’t amortize NFTs as they are proven to have a longer lifespan like trademarks.