What's A Non-Fungible Token (NFT)?

What's A Non-Fungible Token (NFT)?

What’s A Non-Fungible Token (NFT)?

The cryptocurrency craze has been going strong for years and shows no signs of slowing down. These digital assets involve more than just rampant speculation. Non-fungible tokens (NFTs), for instance, are cryptographic tokens based on blockchain. They cannot be replicated and represent ownership of a digital asset. The enthusiasm for NFTs revolves around digital art and creation. They can be used to represent real-world items such as art, music, and real estate. By tokenizing tangible real-world assets, they can be traded more efficiently with a low probability of fraud. 

NFTs can represent people’s identities, property rights, and much, much more. Unlike physical money and cryptocurrencies that are fungible, NFTs are not fungible; that is what makes them so attractive. This means that an NFT cannot be traded or exchanged for another one. They are also not equal in value: each NFT has a digital signature that makes exchange impossible. Fungible assets can be traded for one another and are equal in value. For instance, one dollar has the same worth as another dollar, just as one Bitcoin is worth as much as another. Because they are fungible, cryptocurrencies are a trusted means of carrying out transactions on the blockchain. Investing in NFTs is the next step in the evolution of digital collectibles. If you’re looking to invest in these special crypto-items, keep reading for more information. We’ll discuss what NFTs are, what they’re worth, the risks involved, and why they’re important. 

What Is an NFT? 

NFTs are digital assets that represent real-world objects such as music, art, video, and in-game items. They are traded online, typically using cryptocurrency, and are encoded with underlying software that is similar to many cryptos. Although NFTs have been around since 2014, they are becoming more popular because people are now able to buy and sell digital art. Statistics show that since November 2017, a whopping $174 million has been spent on NFTs. Each NFT is exceptional and has a unique identity code. Essentially, NFTs create digital scarcity, a characteristic that sets them apart from most of other digital creations, which are in effectively infinite supply at all times.  Hypothetically, the scarcity generated by NFTs increases their value, especially when there is high demand. NFTs are not totally new; they are digital creations that have long existed in other forms elsewhere. Examples of NFTs include iconic video clips from NBA games and securitized versions of digital art that appears on Instagram. Renowned digital artist Mike Winkelmann (Beeple), for instance, crafted a composite of 5,000 daily drawings to create one of the most famous NFTs yet: “Everydays: The First 5000 Days.” This NFT sold at Christie’s for a record-breaking $69.3 million. The individual images or the entire collage of Mike’s NFT can be viewed free online. Are you wondering why people spend millions on something that they could easily access free of charge online? The answer is that, with an NFT, you buy the original item. In addition, the item contains built-in authentication, which is proof of ownership. Digital collectors attach more value to the digital bragging rights than they do to the item itself. 

How Does an NFT Work?

NFTs exist on the blockchain, a distributed public ledger that records all transactions. Specifically, NFTs are held on the Ethereum blockchain, although they are supported by other blockchains.  NFTS are created – the technical term is “minting” – from digital objects. These objects represent both tangible and intangible items such as art, music, collectibles, GIFs, virtual games, video games and videos, sports highlights, and designer sneakers. Even on Twitter, the tweets made on a particular item count. For instance, Twitter co-founder Jack Dorsey sold his first-ever tweet as an NFT for over $2.9 million. NFTs are much like physical collectors’ items, except they are digital. Rather than procuring an actual oil painting for your wall, you’ll get a digital file with an NFT. That may come with exclusive ownership rights, which means that the NFT can have only one owner at a time. Due to its unique data, it is easy to verify the ownership of a NFT and to transfer tokens between owners. In addition, the NFT’s creator can store specific information inside the NFT, such as an artist’s signature. 

Advantages of NFTs

Ownership of a Unique Item

NFTs are irreplaceable. The excitement that comes with knowing that you own a unique item, be it an audio clip, image, painting, video, or any other digital asset, is unrivaled. By purchasing an NFT, you’re taking part in the evolution of digital collectibles, which can be fulfilling.

Value Growth

NFTs, like any other investment, have the potential for growth. As such, the value of your investment can increase when you buy these tokens.  

Market Efficiency 

By converting physical assets into digital ones, processes are streamlined and intermediaries eliminated. NFTs that represent digital or physical artwork on the blockchain remove the need for agents and directly connect artists with their audiences. Through smart contracts, commands on sales can be issued on blockchains without any human intervention. This shows the improved efficiency of blockchain markets and saves a lot of time for artists and their audiences. 

Improved Business Processes

NFTs can improve business processes. An NFT for a particular product makes it easier for different actors in a supply chain to interact with a product and help track its provenance, production, and sale through the entire process. 

Identity Management and Data Record

NFTs are also excellent for identity management and authenticity. For instance, if individual physical passports are converted into NFTs, each will have a unique identifying characteristic that streamlines all processes when the passport needs to be produced. This also applies to the digital realm.

Simplifies Asset Ownership

NFTs are a good way to democratize investment by fractionalization of physical assets such as real estate. It is much easier to divide digital real estate among multiple owners than physical land.  This can also apply to other assets, such as artwork. One digital painting can have multiple owners instead of a single owner, each responsible for a fraction of the painting. In this arrangement, the painting’s worth is elevated, which increases revenues. 

Disadvantages of NFTs

Non-Tangible Nature

The main disadvantage of NFTs is that they are non-tangible. Since they live in the digital world, some people have trouble considering them to be objects in their own right. More importantly, the underlying technology is too complicated for most laypeople to understand or even use on their own.

Environmental Concerns 

There has been rising concern about how much energy is used to process digital assets. It has been established that the platform on which NFTs sit, the Ethereum blockchain, is outdated and lacks the capacity to adapt to the increasing number of people adopting the medium.  More perilous is the fact that the energy used to mine cryptos has been estimated to be equivalent to the annual carbon emissions of countries like Ecuador. Unless this energy can be obtained from renewable sources, the impact of NFTs’ on the environment will be highly detrimental.

Physical Art Cannot be Digitized

The excitement that comes with owning physical art is different from that of owning digitized art. The is that physical art cannot be digitized. If the allure of seeing a unique painting appeals to you, NFTs can’t provide that. 

What Makes NFTs Valuable?

NFTs are valuable because of their reliability. The blockchain technology that is employed in NFTs enables ensures that the full provenance of the work and copyright details are known. It can also include additional information that is always part of the code, making it inseparable from the work. This feature makes counterfeiting and theft of works nearly impossible, so artists can be compensated more reliably. In the art world, the impact of NFTs has been enormous, and they have generated boundless new possibilities for digital art. NFTs have deemed part of a collection, investment, or commodity that can be traded with their originality and value guaranteed. They make it possible for artists to sell their artwork directly to their customers, which increases the revenue they earn from their work. 

Where Are NFTs Used?

NFTs are mainly used for digital art. However, they can be used across different sectors, including music, cinema, sports, fashion, collections, and video games. 

Why are NFTs important?

NFTs have evolved beyond the simple cryptocurrency concept. Today’s finance system is made up of sophisticated trading and loan systems for diverse assets, including artwork and real estate. Enabling digital representations of such physical assets makes NFTs a superior model in the reinvention of digital infrastructure. While the idea of digital representation of physical assets and the use of unique identifiers are not new, NFT presents a tamper-proof blockchain that makes it a potent force for change. 

NFTs vs Cryptocurrency  

Fungible tokens like Bitcoin, Doge, and Ethereum are digital assets, and NFTs are also digital assets. However, cryptocurrencies carry monetary value, while the value of NFTs is assigned by their uniqueness, similar to physical collectors’ items. Due to the uniqueness of each NFT, one cannot be swapped for another; they lack equivalency. This is unlike cryptocurrencies, which are identical to each other and can be used as a medium for commercial transactions. 

Conclusion and Recommendations

NFTs have been a boon for the creative industry by helping to provide a new source of income for artists while protecting their intellectual property. For investors, NFTs provide a new platform for their money.  NFT is a fun concept that has generated a lot of interest because of its many potential benefits. However, the technology is still in its infancy and needs close monitoring to evaluate how widely it can be used in the future.  The bottom line is, whatever the hazards, the future looks bright for NFTs. By the end of July 2020, for instance, the market had hit $100 million. We project that NFTs will be the entry point for 40% of new crypto users. If you want to partake in the digital evolution, NFTs presents a perfect opportunity. By all means, go for it!