What are NFTs?
Time and again, the media flashes with the news of an explosion in the world of Blockchain. From Nyan Cat being sold as a one-of-a-kind piece of crypto art to Jack Dorsey (Twitter’s Founder) selling his first tweet as an NFT for over $2.9 million, it leaves us questioning what is it all about and why the value of certain insane virtual items is skyrocketing?
To understand this, acquainting ourselves with the concept of NFTs or Non-Fungible Tokens is essential.
An item is fungible when another homogeneous item can replace it. For instance, a Rs. 50 note can be interchanged with
another Rs. 50 note, without making any difference to their values.
NFTs, on the other hand, are a type of cryptocurrency asset which are unique, making them appropriate to be collectables. Think of them as a painting that is one of its kind, like the Mona Lisa by Leonardo Da Vinci. One can visit the Louvre Museum to see the painting, take its pictures and perhaps reproduce it.
However, there will never be another original painting. Similarly, NFTs are the exclusive property not in the tangible but virtual form.
How do NFTs function, and what is the purpose?
Most of the NFTs are a part of a blockchain called Ethereum, which is similar to cryptocurrencies like Bitcoin or dogecoin. Blockchain is a kind of a digital ledger of transactions where the information is duplicated and distributed to the computers that form a part of the blockchain. This makes it next to impossible for anyone to cheat the system and forge the records.
This explains the exact purpose NFTs serve. NFTs confirm the ownership of the item and make this information indestructible by taking advantage of the blockchain’s function.
Where does the absurdity lie?
The story of Mike Winkelmann (the digital artist known as Beeple) being “among the top three most valuable living artists,” by selling his “Everydays – The First 5000 Days”, has taken the world of fine arts by a storm.
However, here is where the craziness starts. The music, videos, digital artwork, et cetera present in an NFT are available to the general public, which can be viewed, heard, experienced, and even downloaded! Does that mean that ordinary people can consume something people are buying for millions for free?
Technically, yes. The only difference is that the individual buying the NFT also receives something that cannot be copied: the Certificate of Authenticity (COA) and the Ownership of the NFT.
What makes them valuable then?
There are two main reasons behind it. Firstly NFTs are designed to be rare, which is revolutionary in the field of the virtual economy. There is no doubt that the resource can be duplicated online; however, it is not the art that has the value here. It is abundant. Instead, there is a scarcity of the COA associated with a specific artist, with a specific meme or specific moment.
But mere scarcity does not make the NFTs valuable. Any ordinary individual can produce a banana and duct tape art and sell it as an NFT, but it does not assure him millions of dollars.
Or something to be sold as an NFT and being scarce must also bring the collectors or investors some value that can be maintained in the future.
One of the reasons why Nyan Cat’s meme was sold at such a high price was because it is a meme that most people have viewed, and it has left an imprint in their mind
The investors know that people will remember this meme, and this NFT will retain some sort of value or salience.
Therefore, if they sell this asset in the future, it will maintain its value or appreciation since there will always be a demand for such assets.
The surge in prices is nothing compared to what NFTs will be worth down the road, and the graph below explains it.
In fewer than three months, the market cap of some of the major NFTs has increased by more than 1000%. With Beeple’s NFTs selling out in the blink of an eye, many well-known individuals have added to the hype of NFTs by selling their flagships as NFTs. The emanation of high profile NFT projects and companies across various blockchain system is a hint of the potential market growth.
Impact on the Stakeholders:
- Artists: “There are some artists making bank on this stuff… it’s just that you probably won’t,” David Gerard, author of Attack of the 50-foot Blockchain. Although NFTs benefit artists to get recognition and monetise their artworks, not all artists selling their art as NFTs would benefit from this platform.
- Investors: Since NFTs work like speculative assets, investors do take advantage of buying the NFTs at a lower price and selling them for profits once the prices rise up. The only drawback is that the prices going up or down is subjected to the dynamic market conditions, which provide no certainty to the investors.
- Peripheral Service sectors: NFTs marketplace, insurance, trading, and indices are some of the areas which have experienced significantly rising investments along with the growth of NFTs, which in turn has opened doors to various ob opportunities for crypto-enthusiasts.
- Government: Cryptocurrencies, to a certain extent, make the banking system irrelevant, which is concerning for the governments as this directly impacts the implementation of fiscal policy. Additionally, the loss of government control invites crime-related concerns surrounding the NFTs. Nevertheless, governments are now working upon the laws to gain more control in the world of cryptocurrencies and regulate them to ensure no malpractices are occurring over the platforms.
- Society: Along with NFTs, the entire blockchain system is gaining a lot of popularity amongst the public, specifically investors. This, in turn, has started an intense, competitive race of computers across the globe to build the next big block in the chain.
Regardless of the profitability and benefits of such projects, the costs involved are generally paid by society. A massive amount of energy is burnt up to support the functioning of such algorithms. This energy is not environment friendly causing significant damage to it and contributing to climate change.
The years-old debate about whether to develop the technology or to sustain the environment has sparked yet again. The solution requires the middle ground to be identified and worked upon.
What have they changed?
When perceived more broadly, the value of NFTs as a concept is huge. They are bringing cryptocurrency into the mainstream in an acceptable way. Generally, cryptocurrency as a medium of exchange has been unpopular amongst the public due to the involvement in illicit activities. NFTs have become a way through with collectors and investors storing value for the artists and organisations, but it is also expanding the horizons for cryptocurrencies and virtual economies.
By Shaily Birla