If you have been following the news, you would have noticed that there’s been quite a talk about NFTs, about how the YouTube Star Logan Paul sold something called NFT and managed to garner 5 million USD in the process. And if you haven’t been following the news, that’s okay too! This article will demystify NFTs and why it is the talk-of-the-town now!
NFT (non-fungible token), as the name implies, is a non-interchangeable token. What does that mean?
Bitcoin, which runs on the principle of the decentralized distributed ledger technology of blockchain, is a popular cryptocurrency that has gained wide traction in the past few years. Bitcoins are fungible, which means that all bitcoins are alike, equivalent in value, and cannot be distinguished from one another. They are like fiat currency, because each bitcoin is interchangeable with another bitcoin, just like how a one-dollar bill can be interchanged with any other one-dollar bill, as each one-dollar bill has the same value. This quality is imperative for any asset that aspires to act as a medium of exchange.
Now, if we create digital assets similar to bitcoins and add a unique feature that distinguishes each one from the other, we would have created NFTs. NFTs too, work on the principle of blockchain. An NFT is a digital asset on blockchain and is a type of cryptographic token that represents something unique. Since it lies on the blockchain, all of the principles of blockchain apply to it – immutability, transparency, and decentralization. However, in contrast to bitcoins and other tokens on the blockchain, NFTs are unique, which means that each NFT is distinct from the other, and hence, each one is easily verifiable and can be traced back to the original issuer. Since each NFT is unique, it is limited in quality and this scarcity leads to the elevation of its rarity.
You can think of NFTs as identification cards. Each card has a unique ID or number tagged to it which makes it different from each of the other cards and no card can be swapped with any other card. Thus, when you purchase an NFT, you acquire an unerasable ownership record of the asset as well as access to the actual asset.
NFTs are commonly produced and issued following the standard ERC-721 or ERC-1155, which are standards on the Ethereum blockchain for issuing and trading non-fungible assets. NFTs can be found in open marketplaces that connect buyers with sellers, such as OpenSea. NFTs are prone to price changes in response to market supply and demand.
Why are NFTs trending now?
Just last week, a Nyan cat meme was sold for close to 5 million USD. How can a meme be worth so much and why are people paying so much for it? Who is the buyer? Well, the buyer is someone called “oxy7eb2…3f6b” and now this person is the sole owner of the digital meme. The Nyan Cat is not a one-off case. There has been a surge in the sales of crypto art on Ethereum, with these assets being sold for millions of dollars. In December 2020, the digital artist Beeple sold an NFT art collection for over US$3.5 million.
NFTs are valued high because, just as with any other valuable item, the value isn’t inherent to the object itself but is rather assigned by people who deem it valuable. Crypto investors believe that it is the scarcity of NFTs that attaches such exorbitant values to them. On the Internet, everything can be shared easily. Often original creators lose out on royalty payment for the content they create, since the content gets replicated and shared, without approval from the original creators. One major application of NFTs is that they can protect digital identity. Due to blockchain’s principle of immutability, the records of the original creator remain firm on the blockchain network and it is easy to track who has the NFT at any given point in time. We can also see the trail of the accounts that have held ownership of the asset. This can help in the copyright protection of the digital asset and a system can be established to provide royalties to the original content creators every time the asset is transferred to different hands. This way music composers and artists can always earn off the content they produce.
NFTs also have the potential to transform the collectibles arena. NFTs represent the future of collectibles, by providing a means through which users can prove ownership of goods via unique digital tokens recorded on blockchain. The world has always been a fan of collectibles. Stamps, coins, robotic cars, people collect various kinds of items. Similar to how people love to hold possession of the original signed copies of their favorite books, proponents of crypto-collectibles place high emotional value on digital collectibles. Since these collectibles can be purchased and sold on an open online marketplace, some people also think of them as speculative investments. For example, an NBA Top Shot digital collectible card of basketball star LeBron James was recently sold for $100,000. Mark Cuban, an American billionaire, recently sold one of his tweets minted into an NFT, for almost 1000 dollars. The tweet had bids ranging from $77 up to $777.
The gaming space is another sector that has seen a surge in the application of NFTs. In traditional games, the gaming assets bought could only be used within the game. Even though you paid and bought the asset, you don’t technically own it and the game company had full rights over it. Once you are done with the game and delete it, your asset would be lost. Now, NFT can help get the ball into the gamer’s court, quite literally maybe! Through blockchain technology, gamers can reserve their in-game purchases, transfer them into games that support NFTs, or hand them over to other players. Also, users lose all of their in-game purchases when a traditional online game shuts down. NFTs, however, exist independently of a specific gaming platform and live on the blockchain itself. Blockchain-enabled game assets cannot be duplicated or tampered with because of the permanent record each NFT generates upon issuance.
According to Nonfungible.com, the value of NFT assets grew from $40.9 million in 2018 to more than $338 million in 2020 and is estimated to touch close to $1.3 billion by the end of 2021. However, the present applications of NFTs are just the tip of the iceberg. NFTs can open blockchain technology to a whole new sphere and they have the potential to transform blockchain and its use cases. With the speed at which this technology is evolving, it sure isn’t going to be a long wait to see more exciting and novel innovations come up!
-Rekha Chander (Freelancer)
Picture Credits: blockchain.news