NFTs explained (so anyone can understand)

I recently launched a project called Base Colors — “The NFT collection for every color on the internet.” I started writing this post to explain Base Colors in a way that anyone could understand but I realized that, in order to do that, I needed to first explain NFTs in a way that anyone could understand. So that’s the purpose of this post — to explain NFTs.

You know what collectibles are. Here are 10 familiar examples:

• pokémon cards

• baseball cards

• beanie babies

• vinyl records

• comic books

• watches

• stamps

• coins

• cars

• art

NFTs are a new kind of collectible. More specifically, they are digital collectibles. They may eventually be more than that, but they are at least that, so let’s start there.

(just like physical collectibles, even though you can’t touch them)

The examples listed above are all physical collectibles. Digital collectibles are a bit different. Namely, you can touch physical collectibles, but you can’t touch digital collectibles. This confuses people, but it shouldn’t. Just because you can’t touch something doesn’t mean it can’t have value.

Consider domain names (websites) for example. Domain names are sort of like digital collectibles. Google owns a highly valuable collection of domain names including google.com, gmail.com, youtube.com, and others alike. You can’t touch google.com, but it is obviously valuable. You could offer Google $1 million. Google would never sell it to you.

Today, the most popular term for describing digital collectibles is “NFTs”. One example of an NFT collection is ENS names. ENS names are like domain names, but instead of ending with “.com”, they end with “.eth”, and instead of representing a website, they represent a crypto address. That means you can send digital assets to them. So if Google owned google.eth, you could send cryptocurrency to Google by sending it to google.eth.

ENS names can be valuable, just like domain names. Vitalik Buterin is the creator of Ethereum and one of the most well-known individuals in crypto. Vitalik owns vitalik.eth. You could offer him $1 million for vitalik.eth, and it’s probably not as valuable to him as google.com is to Google, but I don’t think he would sell it to you for $1 million.

Another example of an NFT collection is CryptoPunks. CryptoPunks is a collection of 10,000 NFTs that look like these:

Individual NFTs from the CryptoPunks collection have sold for millions of dollars. That might seem silly, but some people really value certain collectibles. This has been true for centuries in the world of physical collectibles, and so far it has held true in the world of digital collectibles as well.

Here are a few examples of physical collectibles that have sold for a lot of money:

And here are a few examples of NFTs that have sold for a lot of money as well:

I could show you countless other examples of each, but you get the point. It is fair to wonder why these collectibles are so valuable. I don’t really understand multi-million dollar stamps myself. But the thing is, it doesn’t matter if I understand it. It is what it is. People have valued baseball cards and stamps for decades and it seems likely that they will continue to do so for the foreseeable future.

We don’t need to understand why all of these different kinds of collectibles are considered valuable in order to understand that they are considered valuable, but we can try. One simple way to think about collectibles is as status symbols. After all, you can’t really do anything with baseball cards or beanie babies besides buy them, hold them, enjoy them, show them off, and sell them. But watches are a bit different. You can do something with a watch. You can wear it and you can tell the time. Watches serve a function, and a useful one at that, but that is not why they are valuable. Rolex watches routinely sell for tens of thousands of dollars, but they don’t tell the time any better than a $50 Timex. They are status symbols. You don’t buy a Rolex to tell the time. You buy a Rolex to show your status.

CryptoPunks are status symbols, just like Rolex watches. If you wear a Rolex watch, people will assume you are wealthy and successful. Similarly, if you have a CryptoPunk as your profile picture on Twitter, people will assume you are wealthy and that you were early to appreciate digital art, which might even mean you are smart. CryptoPunks are cool, just like Rolex watches, so some people value them both very highly. It might not make sense to you, just like paying millions of dollars for stamps doesn’t make sense to me, but it makes sense to some people. And you don’t need everyone to value CryptoPunks for CryptoPunks to be extremely valuable. You really only need a few people. The internet connects everyone in the world. If you can find one person who is willing to pay $1 million for your CryptoPunk, then that’s how much you can sell it for. And if you sell it for $1 million, then that’s what it’s worth. It doesn’t matter what anyone else thinks.

Now, it is worth considering the value of NFTs (digital collectibles) relative to the value of all collectibles (the vast majority of which are physical collectibles) because it makes it seem obvious that the digital collectibles market is going to grow, potentially a lot. Currently, the global collectibles market is estimated to be worth around half a trillion dollars, or $473.81 billion to be precise. The NFT market, on the other hand, is currently estimated to be worth $4.7 billion. That means digital collectibles currently represent just 1% of the total collectibles market.

NFTs are still just a few years old, so while they’re relatively small today, it’s reasonable to say it’s still early. A good analogy could be to compare NFTs today to e-commerce in 2000. Just as NFTs represent 1% of the total collectibles market today, e-commerce represented 1% of the US retail market in 2000. Look at how it has grown since:

Today, e-commerce represents more than 15% of the US retail market. Could NFTs represent 15% of the total collectibles market in 25 years? Neither the US retail market nor the total collectibles market is staying stagnant either, so the digital piece is not just a growing slice of the pie, but a growing slice of a growing pie. In fact, while e-commerce has increased from 1% to 15% of the US retail market, the actual value of e-commerce sales has increased from $5.7 billion in the first quarter of 2000 to $289 billion in the first quarter of 2024. That’s a 50x increase in about 25 years.

I don’t know if digital collectibles are going to represent 15% of the total collectibles market in 25 years, or if the total value of all digital collectibles is going to increase 50x in the next 25 years. I don’t even know if they’ll still be called “NFTs”. All I know is that I will be extremely surprised if the digital collectibles market does not increase significantly both as a percentage of the total collectibles market, and in terms of its total value in the years to come. If you have a good argument for why the digital collectibles market should not represent at least 5% of the total collectibles market or increase at least 10x in value, I would love to hear it. As with most things, I’m open to changing my mind.

I hope this was helpful, and that you now feel you have a decent understanding of NFTs. Now that I have written this, I plan to write about my project specifically in a follow-up post. I believe it is something fundamentally new and interesting, but it is easiest to describe it simply as an NFT project for now. If you are curious to check it out, go to basecolors.com, where you can buy and name colors as digital collectibles. There is only one NFT for every digital color in the world. So there are 16,777,216 colors, but no two people can own the same color, and no two colors can have the same name. We made it easy enough so that anyone should be able to get a color. And if you have any questions, you can email me at jake@basecolors.com and I’ll be more than happy to help. As always, thank you for reading. I appreciate your support.