NFTs are a particularly intriguing development in the world of crypto.
In the realm of blockchains and digital assets, changes unfold rapidly and unexpectedly, and innovations continue to emerge at an accelerated pace. NFTs, or non-fungible tokens, are a particularly intriguing development in the world of crypto. In March 2021, the founder of Twitter put an autographed tweet up for sale as an NFT. A few days later, a digital-only artwork was sold at the Christie’s auction house for an astonishing $69 million.
The winning bidder of the artwork will not be receiving a sculpture, painting or even a print, however, and instead, they will be given an NFT. The concept of an NFT is one that many of us are only just beginning to hear of, and it can be a difficult one to grasp.
If you’ve wanted to learn about this latest trend in the crypto-economy, then you’ve come to the right place. We’ve written this brief and simple guide covering everything you want to know about NFTs – their history, purpose, and why they’re a source of much excitement and anticipation.
What are NFTs?
An NFT is a non-fungible token. Fungible is an economic term describing an asset that is comprised of units that can be easily interchanged. Money is one such example because you can interchange one $20 bill for two $10 ones, and it will have the same value as it had before. However, when something is non-fungible, it can never be interchanged because there isn’t anything equivalent to it in terms of value.
A non-fungible asset has properties that are so unique that they belong only to it, and physical examples would include an original painting or a genuine diamond. NFTs are the digital version of a non-fungible asset because they can be brought and sold like any other physical possession, but they don’t actually have any tangible form of their own.
How does an NFT work?
A non-fungible token is a unit of data stored on a digital ledger or a blockchain. The majority of NFTs are part of the Ethereum blockchain. Ethereum is a cryptocurrency, but its blockchains have the facilities required to also support these NFTs alongside the additional data which distinguishes them from an actual Ethereium coin in terms of attributes and function. Although NFTs are associated with Ethereum, other blockchains can also build their own versions of NFTs, and some actually already have – TRON being one such example.
Technically an NFT can be any digital asset, whether it is a digital drawing, a domain name, a gif, a collectible or even a ticket that gives you access to a particular event or coupon. However, most of the current excitement surrounding NFTs is centered on the sale and purchase of digital artworks.
Why are NFTs unique?
At first, NFTs sound like a bizarre concept. After all, it is easy to understand why a painting such as the Mona Lisa or a precious diamond would be non-fungible because they are irreplaceable and unique. On the other hand, digital files can be easily and endlessly duplicated, and it would seem that a digital file can never be truly irreplaceable or unique.
When it comes to NFTs, however, it is not as straightforward or as simplistic as this. One example of an NFT would be an artwork that has been ‘tokenized.’ The artwork’s non-fungible token then becomes an official certificate of ownership which can be brought or sold and belongs only to the individual who has purchased this token.
This is an important distinction because digital files can be constantly replicated, and the digital assets of an NFT are no exception. Instead, an NFT is giving you ownership of the digital asset because that can’t be transferred to anyone else. In terms of physical assets, anyone can own a print, or a replication, of the Mona Lisa. Only one person, however, can ever own the original. NFTs work much in the same way.
As with cryptocurrencies, a record of the seller, the recipient, and the transaction's value is then recorded on a blockchain. So a digital file itself is infinitely reproducible, but its NFT is recorded and tracked within its underlying blockchain and provides those who own it with proof of ownership of the NFT. NFTs are secure because there is no way that the records on a blockchain can be forged. Interestingly, NFTs can also come with a smart contract wherein the artists will receive a commission from any future sales of the token.
Are NFTs a worthwhile investment?
NFTs haven’t necessarily been around long enough to really understand the trends, implications and viability of these assets. This unpredictability means they’re not immune from criticism, which has arisen on a number of grounds. First and foremost, serious concerns are surrounding the environmental impact of maintaining the blockchain for NFTs.
This reflects identical criticisms of cryptocurrencies because NFTs run on a proof-of-work blockchain rather than a proof-of-stake one, which results in a higher carbon footprint and reduced energy efficiency for NFT transactions. What’s more, numerous economic and financial experts have warned that the recent interest surrounding NFTs is an unsustainable bubble.
On the other hand, there is considerable potential for NFTs to become a permanent aspect of the crypto world. There’s no doubt that NFTs are the latest trend to have taken the spotlight, and this phenomenon has certainly made for some fascinating headlines. NFTs enable people to purchase a unique piece of digital art or any other online collectible item which they have complete ownership of – they’re the only ones in the world to own that original asset.
NFTs may not have been around for a particularly long time, but some have already sold for tens of millions of dollars. They can certainly be lucrative, but the question is whether they are a fleeting trend or the future of the crypto-economy.
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