For the uninitiated, trending news of NFTs’ high prices can seem bewildering. People are buying a single tweet or memes as NFTs, and you may be wondering why. If you have no prior understanding of NFTs, and only happened to read a news article on the topic, or if you had to listen to your friend rattle on about an NFT purchase he made, it might all sound like gibberish. Is NFT a part of crypto? Is it just a random digital asset that sells for millions of dollars? Why would people spend so much money on items that only exist in digital form? Aren’t files easily copied or viewed on the Internet?
In the first half of 2021, NFT sales reached USD2.5 billion, up from USD13.7 million during the previous year. The rapid rise of NFTs seemed to happen out of nowhere and it is understandable that many of us aren’t updated. To help, we have framed this particular article to be everything you need to know about NFTs for a beginner.
What is an NFT?
Since the NFT boom, many parties have been exploring NFT’s functions, including in real estate and play-to-earn gaming mechanisms. Furthermore, NFT usage may evolve to other applications, such as commerce.
However, when NFT gained traction and popularity, its main function was to buy and sell digital art. So it would be helpful to think of art world analogies in order to grasp the concept of NFTs. NFT is defined as Non-Fungible Token. The adjective “non-fungible” means unexchangeable for another item because it is unique. For example, The Mona Lisa by Leonardo da Vinci is non-fungible. You would not be able to exchange it for Michelangelo’s sculpture of David. Both works of art are unique and have different values attached to them.
In contrast, “Fungible” meaning items can be exchanged. If you have a single dollar bill, you can trade it for someone else’s dollar bill and both bills would have the same value. Or you can exchange five RM10 bills for a single RM50 bill and both parties would have exchanged the same value. The same trait applies to cryptocurrency. One bitcoin can be traded for one bitcoin. This is fungibility.
In a way, you can think of NFTs as cryptographic assets. Yet NFTs aren’t fungible the way bitcoin or Ethereum is. NFTs solve a problem: how does one prove authentic ownership of something that’s online and non-fungible (such as digital art) when anyone else can have an identical copy of a file? The solution would be to mint a token on the blockchain that represents ownership of a unique, digital item. This is an NFT.
The Technical Stuff
Once an NFT has been created, it exists as a token stored on the blockchain and would have information on token name, code and symbol, dates of sales, and other relevant information on token transaction history. If you own an NFT, you can sell or transact that token on the blockchain just like you would a cryptocurrency. Most NFTs are stored on the Ethereum blockchain.
Like crypto, being on the blockchain has advantages, including:
- The information stored would be extremely difficult to tamper with;
- There is transparency of information. An NFT would have a record of transactions for the token.
However, it is crucial to note that the artwork or asset itself is not stored within the NFT token or blockchain, just its attributes and properties. Purchasing an NFT serves as ownership. NFTs act as purchasing or transaction contracts that live on the blockchain. Again, think of the art analogy. The NFT is a digital certificate that proves you have rightfully purchased and now own an original artwork. Meanwhile, the digital art creator would maintain copyright and reproduction rights. Online, anyone may still be able to download or view the artwork for free.
How Does NFT Ownership Work?
Confused? Let’s say you are wealthy enough to purchase the original Mona Lisa from The Louvre (we can all dream!). Wouldn’t you insist on proof certifying its authenticity and the paperwork that represents your ownership? NFT serves a similar purpose: to authenticate and show ownership.
Need a real-life example? In March 2021, Jack Dorsey, Co-Founder and ex-CEO of Twitter, sold his very first tweet as an NFT. Anyone online can still see the tweet on Dorsey’s account, but only one person owns it (the NFT buyer, who paid USD2.9 million or SGD4 million!).
Hypothetically, any YouTube video or Instagram post can be sold as an NFT even if it is free to watch or view.
So How Can An NFT Be Worth So Much?
The simple answer? Blame market demand. An NFT can be immensely valued or worthless depending on how much people are willing to pay for it. While some may find it ridiculous to pay so much for Jack Dorsey’s inaugural tweet, someone felt it was worth the value he paid for. Perhaps the buyer wanted it for its historic value, and hopes, like an art investment, that its worth would increase over time.
Also, bear in mind that NFT usage is in its infancy. People are still testing NFT’s potential uses, from selling video gaming items, sports memorabilia, real estate, anything that is unique and needs evidence of ownership. Because of NFTs’ potential, people are entering the market as early investors, hoping prices would continue to rise.
What Are the Pros and Cons of NFTs?
Currently, NFTs provide advantages to two main parties: digital creators and owners. As we discussed, NFT buyers benefit by having a digital certificate of ownership. Buyers can purchase NFTs to invest or simply to support an artist they admire.
For digital artists and creators:
- On the Internet, digital art is often copied, forwarded, or even edited without permission or credit to the creator. NFTs can provide a way for artists to assert their copyright and get paid for their work.
- NFTs can be programmed to provide a percentage of royalties to the creator every time the NFT is sold to a new owner. So if a work becomes popular or highly valuable in the future, the original artist will benefit financially.
Of course, there are pitfalls:
- Unfortunately, not every NFT creator is the original artwork creator. Unscrupulous parties exist and they take advantage of the NFT trend.
- There is a question of where the NFT market would be in the long term. Would people continue to feel that digital art is worth paying for when they can look at the same versions on any gadget? So yes, NFTs can just be a short-term speculative asset. We don’t know yet.
- NFTs have a negative impact on the real world. Power consumption of the blockchain has been exploding since 2020. The blockchain consumes a lot of energy, some of it to transact NFTs. The more we incorporate NFTs into our lives, the quicker we degrade the environment.
NFTs are a controversial topic. Right now, there is a lot of money to be made in the market. You can still become an early buyer and get in the game before it is too late. With its popularity and with NFTs changing hands so often, the marketplace is becoming a playground for the super-rich. Of course, one could argue that the world of fine art is usually limited to the super-rich anyway. NFTs are just a natural extension.
Still, there are many considerations to be made before purchasing NFTs. Is the money really going to artists, who deserve it most? We must also be mindful of environmental impact. Constant creation of blockchain assets utilizes massive amounts of computing power and energy. If you want to enter the NFT marketplace, try to find a platform that offers carbon-neutral options.
If you’d like to learn more about NFTs, Investments, and overall Business banking and financing, check out our articles by clicking here.
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