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Jack Dorsey, co-founder and CEO of Twitter on April 11, 2016 in Melbourne.Fairfax Media/Getty Images

A day after Twitter’s 15-year anniversary this month, its founder Jack Dorsey earned a sizable sum: US$2.9-million. That was how much Sina Estavi, an executive based in Malaysia, paid for Mr. Dorsey’s first tweet. What Mr. Estavi bought wasn’t the tweet itself, but a non-fungible token, or NFT, giving him a certificate of authenticity, license to display the tweet, and whatever bragging rights come along with it.

Mr. Estavi bought his prize on Valuables, a platform where users can bid on tweets and acquire them as NFTs. Cameron Hejazi, the chief executive officer and co-founder of Cent, a “digital identity” startup that created Valuables, says NFTs are a new way of allowing people to interact with their favourite personalities.

“Every fan wants to be the best fan they can be,” he said in an interview. “Being able to buy some merchandise or memorabilia is one of the ways that they do that. That’s nothing new. I think what is new is that notion that the content itself is something that you can transact around and transact on and use that as a way of expressing your fandom.”

Fandom may be driving some people to purchase tweets, but many others see NFTs as an asset class from which to profit. Big-name investors are betting on the NFT boom to continue, and content creators are seeing their work sell for substantial sums, sometimes for millions of dollars. All the while, detractors see the NFT craze as a product of unsustainable hype, and have raised questions about what people actually own when they purchase a token. NFTs are becoming one of the newest – and most controversial – asset classes for speculators.

By purchasing an NFT, the buyer gains certain rights to the underlying asset, including a licence to display it. The content of an NFT can be nearly anything, from a short sports video highlight to a Kings of Leon album to a photograph. People are “minting” – the term for turning their work into an NFT – and selling them through online platforms, with millions of dollars changing hands every day.

NFT sales have exploded in recent months, generating headlines about deals that range from staggering to absurd: A digital “house” sold for US$500,000; an artistic collage by an artist known as Beeple sold for $US69-million; a series of audio clips of a man passing gas sold for US$85.

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Everydays: the First 5000 Days, a collage by digital artist Beeple that sold for $US69-million.CHRISTIE'S IMAGES LTD. 2021/BEEP/Reuters

Even NFT marketplaces, where people can buy and sell tokens, are earning major interest from investors. Andreessen Horowitz, a Silicon Valley venture capital firm, recently led a US$23-million funding round for OpenSea, which markets itself as the world’s largest NFT marketplace.

Creators can earn large sums from their works as NFTs. Much like house flippers browsing real estate listings, NFT speculators scour online marketplaces such as Nifty Gateway for opportunities to buy low and sell high. It’s a trend that fits well in the era of the GameStop stock mania.

NFTs are unique digital assets that cannot be replicated, much like a house or an original painting is a unique non-fungible asset. (A fungible asset, by comparison, is interchangeable, like a $20 bill is interchangeable with other $20 bills, or two $10 bills). The content of an NFT can be copied and made into another token, but the two would still be distinguished by the underlying code. Similarly, you can buy a house that looks identical to another, but it will sit on a different parcel of land.

The real value of NFTs, according to Boris Wertz, founder of Vancouver-based investment fund Version One Ventures, is that they have created a completely new category of products.

“When the internet came about, digital content went from scarce to abundant,” Mr. Wertz said. “Now with NFTs, you are making content unique, because each NFT has its own special code and thus digital content has become much more valuable.”

A key feature of NFTs is that they exist on a blockchain, a digital ledger – often public and decentralized – where transactions are recorded. Most NFTs today are on the blockchain of Ethereum, a cryptocurrency conceived by Russian-Canadian programmer Vitalik Buterin in 2013.

Mr. Wertz has made two investments in the NFT space, doling out millions for a stake in digital art marketplace SuperRare and Dapper, a Vancouver-based company that built NBA Top Shot, one of the most popular NFT marketplaces.

On Top Shot, users can buy and sell short video highlights from National Basketball Association games. Dapper has a licensing agreement with the league and its players’ association, allowing buyers to add these video “moments” to their collections the same way one would a traditional trading card. Users can search the marketplace for moments, and filter by team, price and other categories. Once a user buys a moment, it goes into their collection. They can relist the moment for sale any time in the future.

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Toronto Raptors OG Anunoby drives against LeBron James #23 of the Los Angeles Lakers on August 1, 2020 in Florida. Video clips of Toronto Raptors OG Anunoby are for sale on the NBA Top Shot marketplace.Ashley Landis/Getty Images

For example, a Top Shot collector can buy a clip of Toronto Raptors forward OG Anunoby soaring to the rim for a dunk. That clip has 2,681 copies, but each one has its own serial number to distinguish one from another. Generally, a moment’s value is determined by the popularity of the player featured, the scarcity of the moment (some moments have as few as 50 copies), and its serial number – the lower, the better. The highest-selling moment to date is a LeBron James dunk for US$208,000.

Top Shot also does “drops” where users join a digital queue in hopes of snagging a “pack” of moments, which can cost anything from US$9 to US$999. Like a sealed pack of trading cards, the contents aren’t revealed until a user acquires and opens a pack. During some drops, there have been more than 100,000 users lined up vying for 5,000 packs. The experience is like lining up at the mall to get a rare pair of sneakers, except that the people waiting with you are at home in front of their laptops, and your place in line is randomized by an algorithm.

Top Shot already has more than 680,000 users and more than US$400-million in sales since its launch just five months ago, according to a company spokesperson. There have been more than two million transactions on the marketplace, most of which are under US$50.

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Images created for the launch of NBA Top Shot, an online platform which allows users to buy and trade videos of basketball highlights.DAPPER LABS/Reuters

Dapper plans to try to replicate its early success in basketball when it launches an NFT marketplace for the Ultimate Fighting Championship later this year. But Top Shot’s growing pains are clear: The website is frequently under maintenance and has had to impose limits on purchases and sign-ups to manage demand. The company says the limitations are necessary to manage its rapid growth.

NFT skeptics such as Charlie Lee, who created a cryptocurrency called Litecoin, have cited Top Shot to argue that NFTs provide limited value. Moments on Top Shot, he argued on Twitter, are valuable because they’re backed by the NBA, not because of any inherent value in the tokens.

Mr. Lee also argues that NFTs have limited value because they don’t give the buyer ownership of the actual content.

“Part of the value of owning a collectible is the prestige to be able to say only I own it,” Mr. Lee wrote. “NFT reduces that value to only I own and can display the certificate of authenticity.

Tara Parker, a partner in the entertainment law group at Goodmans LLP, says when someone buys an NFT, they aren’t buying the digital asset itself, or its copyright, but a certificate representing ownership of the asset, and limited rights to sell and display it. A buyer is not necessarily allowed to alter the asset, or use it for commercial purposes.

Creators can still maintain “moral rights” to their work after they sell an NFT, Ms. Parker explained. Those rights can prevent the work from being used in a product, service or cause even after its NFT is sold.

Ms. Parker, however, sees an upside for NFTs, especially as they relate to the creative community. Many NFT marketplaces give creators royalties on secondary sales, usually between 5 per cent and 10 per cent. An artist selling a painting at traditional auction wouldn’t see a cent for it after the first sale.

“What a fantastic opportunity for artists who too often toil away without adequate remuneration for years and years to find new buyers, new fans, new investors to participate in the market,” she said.

Raine Maida, frontman of Canadian rock band Our Lady Peace, is also an NFT true believer, so much so that he is the chief product officer of S!NG, a startup that allows creators to mint NFTs free. Usually, minting an NFT requires the artist to pay fees, often between US$50 and US$100.

“I think the easiest way to describe what NFTs are for the creative community is it’s finally giving us some superpowers,” Mr. Maida said.

Some critics see NFTs as another cryptocurrency fad that will pass quickly, like the initial coin offering did after a flash in the pan in 2017. Mr. Hejazi of Cent thinks NFTs will continue to be useful even if the hype dies down because they have so many potential uses. He cites a podcast host who auctioned one of his own tweets on Valuables, with the highest bidder winning an appearance on the show.

“What really excites me is to see the future of NFTs and that they’re not just like a digital receipt,” said Katie Geminder, a Cent co-founder who led product design at Facebook in its early days. “There’s a wide spectrum of opportunity.”

With a report from Vanmala Subramaniam in Toronto

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