A digital artwork sold at Christie’s auction for an eye popping $69m, we start imagining a huge party where the owner lavishly shows off this huge asset. But wait a minute, here is the twist because the winning bidder did not receive a sculpture, painting or even a print. Instead, they got a unique digital token known as an NFT.
You may have seen the term NFT in the headlines lately, mostly in relation to some whopping sums of money.
This piece of art is not alone in this category, do you remember Nyan Cat from 2011, in february of this year, a one-of-a-kind digital rendition of the Nyan Cat meme was sold for 300 Etherum or about $590,000. Now the question arises, how someone could own the video/GIF that has been copied and shared across the internet for nearly a decade.
This was possible because Nyan cat was sold as a Non-Fungible Token or everyone’s new favorite acronym, NFT. Hard to digest? Indeed.
But the examples of NFT don’t end here, the founder of Twitter, Jack Dorsey, has promoted an NFT of the first-ever tweet with bids reaching as high as $2.5 million.
NFTs have become an investing phenomenon, with everything from GIFs to sports highlights selling for millions of dollars.
Any unique digital “asset” may get an NFT and an instance valuation in the current bubble. The assets include kings of leon album, NBA selling digital recordings of slam dunks, cat cartoons (in the name of digital art), etc.
What exactly is NFT?:
It is a Non-Fungible Token.
Imagine you have 20 $1 bills. You can exchange those 20 $1 bills for one $20 bill or for 20 different $1 bills, the value remains the same. The value of your money is still the same even though it is in a “different form.”
Similarly, common crypto currencies like Bitcoin and Ethererum are considered fungible tokens. If you send somebody a Bitcoin and they send you one back, it doesn’t have to be the same Bitcoin.
However, if something is non-fungible, which means it has unique properties so it cannot be interchanged with something else.
It could be a house, or a painting such as the Mona Lisa, which is one of a kind. You can take a photo of the painting or buy a print but there will only ever be the one original painting.
NFTs are “one-of-a-kind” assets in the digital world that can be bought and sold like any other piece of property, but they have no tangible form of their own. The digital tokens can be thought of as certificates of ownership for virtual or physical assets.
How does NFT work?:
Once a digital asset is “minted” with a few lines of code, it is published on a blockchain ledger maintained by thousands of computers around the world.
Once on the ledger, you can see who owns the digital asset and when it is sold. An NFT code has a signature from its originator that authenticates the token on any server, browser, or platform. This information is unhackable, cannot be forged, and is safe.
That’s not to say there’s only one digital version of an NFT art available on the marketplace, though. In much the same way as art prints of an original are made, used, bought and sold, copies of an NFT would also be easily available, but they will not hold the same value as the original.
In theory, NFTs solve the problem of how to compensate creators for digital content, either by direct sales or through royalties.
Does it even matter in the real world?:
Well remember UPS has barcodes for all its packages? Did UPS get a massive valuation for these barcodes?
NFTs are no different, fundamentally speaking.
NFTs are similar barcodes
arguably decentralised (why does it matter)
and blockchain based (hence inefficient)
on ethereum network (whose gas transaction costs are high and supply is not limited)
Is it just another Crypto Hype?:
Undoubtedly, there’s a lot of money to be made in the NFT market with influencers like Jack Dorsey, Elon, Naval etc. pushing such fads on us. Remember previous bubbles created by crypto / blockchain communities
ICO boom of 2016 and 2017
STO boom of 2018-19
Defi of 2019-20
NFTs of 2021
Artificial Scarcity:
One of the biggest knocks against NFTs is that it’s a market with artificial scarcity, as there’s no limit to how many NFTs you can create. Literally any bit of data can be authenticated and sold.
Unlike NFTs, real world art is not zero cost. It takes effort and time to create a piece. This is effectively Proof of Work. Limitation creates scarcity, which helps keep the value high.
NFTs, on the other hand, create artificial scarcity. Because of the near zero cost to create another NFT, the market will eventually be flooded with NFTs from artists trying to cash in on this craze. Supply will overwhelm demand and the prices may eventually crash.
Certificate of Authenticity:
Nothing at the moment is stopping people from creating an NFT for an asset that they did not create. If the original owner never created an NFT, there is no real way of verifying that they own it.
Imagine you created a digital art piece years ago and decided to turn it into an NFT today. If someone already created an NFT for your art. There is very little you can do about it.
Above all the true appeal of NFTs is in the certificate of authenticity, which will have limited value in the long run.
Unsustainable:
Cryptocurrency and NFT transactions are highly unsustainable. One cryptocurrency (bitcoin) transaction consumes as much energy as 700,000 Visa transactions. Ethereum gas transactions are slow and expensive
NFTs are allegedly worse. A single NFT requires multiple transactions, the creation, buying, selling, and reselling. These all require energy. “The average NFT has a footprint of upto around 340 kWh, 211 KgCO2”.
Another uncertainty around nfts’ value is that they can in practice be separated from the digital good to which they are tied, undermining their worth. A creator can change the image even after sale. One crypto artist recently “pulled the rug” on some nfts to highlight the flaw. (according to the economist)
If you’re thinking about buying NFTs, consider whether the hype is sustainable, and only invest an amount you’re comfortable losing. After all, unless you’re a creator, NFTs don’t provide any cash flow or necessarily a real asset (barring a few real art collectibles), and the only way you can make money is through more buying and selling which means if the market crashes, bragging rights might be all you have, until the bubble bursts.