Meghana Manjunath What could tacos, music, digital art, and toilet paper possibly have in common? Hint: it’s in the title of this blog. Yes! You guessed it right, NFT! It is all the rage right now. We can’t seem to scroll through social media or browse news without coming across this intriguing acronym. Not to mention the many NFT memes shared all across the internet.
Whether you are someone with a decent understanding of economics or know nothing in matters of finance, NFTs are everywhere now. So let’s dip our toes into the shallow end of the rabbit hole that makes up NFTs.
Though NFTs seem to have exploded out of nowhere in the last couple of years, that is definitely not the case. In fact, they’ve been around since 2015 at the least. A few experts seem to be of the opinion that it’s yet another hype that won’t possibly withstand the test of time. On the other hand, some say that this could change the course of investing in the future.
But before we get into that debate, let’s learn about NFTs, shall we?
What is an NFT?
Let’s start with the bare basics. So, the acronym NFT stands for Non-Fungible Tokens. You might be going, “what the funge?!” in your head right now, and we understand. Bear with us for a little bit longer. An NFT is a kind of digital asset that exists in the virtual world and corresponds to real-world objects like art, music, or videos. What makes an NFT stand out is its innate uniqueness. It could be one of its kind or part of an exclusive yet limited run. What all NFTs do have in common is a unique identifying code that sets each one apart.
You might be wondering how that translates into something worth investing in, and here’s the scoop. Fundamentals of economics dictate that cutting off supply should hypothetically raise the value of a product that’s in demand. And that is precisely how NFTs work.
Arry Yu, Co-founder and Chair of Cascadia Blockchain Council, says,” Essentially, NFTs create digital scarcity.” This statement goes against most digital creations, which are extensively available and seemingly infinite in supply. That is what sets an NFT apart and what makes owning one so covetable.
NFTs are bought and sold online, often with cryptocurrency. Hence, many times, people confuse the two. Let’s look at what sets NFTs apart from cryptocurrency.
Difference between NFTs and Cryptocurrency
NFTs and cryptocurrencies are built with similar programming. Many NFTs are actually encoded with identical underlying software to that of cryptocurrencies. Yet, the similarities end at this point.
As we know, an NFT is a Non-Fungible Token. By contrast, currencies, even the digital ones, are fungible by nature. Which is to say that they are of equal value to each other and are hence interchangeable. This is an inherent quality of currencies that make them useful as a medium to sell or purchase items. One rupee is equal to one rupee. One ETH will always be equal to another ETH. The value of currencies might differ in the exchange rate. Still, one unit is the same as another within a type of currency.
Now, coming to NFTs, each one is unique in its own right. Consequently, you can’t simply trade one for another. Even if the owner or creator is the same, the NFT itself will be different, unique, and have its own valuation. For example, take Leonardo Da Vinci’s Salvator Mundi, which sold for a little over a whopping $450 million at an auction in 2017. Could the new owner simply walk into the Louvre and try to exchange it for Mona Lisa? The answer is absolutely not. It’s ridiculous even to consider. However, if you had a twenty-dollar note and needed change, you could easily exchange it for a couple of ten-dollar notes.
That is the difference between NFTs and cryptocurrency.
How Do NFTs Work?
NFTs are supported by blockchain technology. It’s the same magic that allows for the existence and trading of cryptocurrency. NFTs are present on a blockchain. A blockchain is a publicly distributed digital ledger. It keeps a record of digital transactions such as those made with digital currencies.
NFTs are held commonly on the Ethereum blockchain. Similarly, other blockchains may also support NFTs. At an elemental level, an NFT is a digital file with a signature token that makes it unique. This means that while one can potentially make thousands of copies of the file, only the original contains the unique data to identify it.
NFTs are essentially collectibles. So instead of collecting famous paintings or rare baseball cards, you get a digital file as a buyer. Moreover, you get exclusive ownership rights, as NFTs can only have a single owner at a time. The unique data stored inside the NFTs allows for easy verification of ownership and transfer of tokens from owner to owner. NFTs can be used to store specific information like an artist’s signature within its metadata.
Not so complicated, is it? Now we sort of know how NFTs work. So, let us explore the different types of NFTs possible.
Types of NFTs
NFTs comprise of digital files. We know that is a pretty broad description, but it is apt. You may be wondering how that translates into the different types or use cases for NFTs.
Here are some of the different types of NFTs in existence:
- Digital Art: This includes screen prints of original art, digital drawings, gifs, generative art, etc.
- Music: This includes album art, digital merchandise, music, etc.
- Video: This includes sports clips, animated video clips, clips from music videos, etc.
- Games: These include in-game assets, avatars, virtual skins, etc.
- Film: This includes digital posters, exclusive artwork, digital merchandise, etc.
- Collectibles: This is a broader category that represents collectors’ items.
Apart from these general categories, NFTs cover a wide spectrum of digital objects. These NFTs range from memes to parts of virtual worlds. Many of these virtual worlds or metaverses incorporate NFTs to facilitate the trading of virtual real estate or items.
Nike patented CryptoKicks in 2019 that uses NFTs to verify authentic Nike sneakers and even provide a digital version to customers. The applications of NFTs are simply boundless. But what are they used for?
Uses of NFT
Artists and creators have often gotten the short end of the stick concerning their work. And this is not just in recent times. Sadly, the stereotype of “starving artists” has been true for most of history. Many of the famous artists we know today dealt with rejection. Claude Monet’s works were critiqued for being formless and seeming unfinished. Today his paintings sell for millions of dollars and are coveted by art collectors around the world.
NFTs offer more autonomy to artists and creators. For instance, artists no longer depend on galleries or art auctions for their daily bread. Instead, an artist can sell their work as an NFT directly to the customer and take home a bigger piece of the pie. NFTs also allow an artist to program royalties such that they get a percentage each time their work is sold. This is revolutionary considering that for physical art, the artist only gets remuneration for the first sale.
In a unique situation, someone burnt the original art by the graffiti artist Banksy to shift the art purely into the NFT space.
Weird or revolutionary? We’ll leave it up to you to decide.
By the way, it’s not just artists who benefit from NFTs. Celebrities like actress and singer Lindsay Lohan, rapper Snoop Dogg and actor Amitabh Bachchan have all released NFTs that capitalized on their celeb status!
Famous NFTs from Recent Times
Here are some of the most famous NFTs that sold for millions of dollars in recent times!
- Nyan Cat: We all remember this viral cat with the pop tart body, zooming through space with a rainbow-colored trail. IT was sold as an NFT for about $590000 ten years after it first came out!
- Human One: This 3D video sculpture and digital creation by the famous digital artist Beeple sold for $28.98 million!
- The Merge: Featuring “Code as art,” The Merge by Pak is the most expensive NFT ever to sell, fetching a whopping $91.8 million! The unique point about this sale is that 28,983 collectors pooled together to buy 312,686 total units.
- The First Tweet: Twitter Co-founder and CEO Jack Dorsey sold his first-ever tweet as an NFT for just over $2.9 million.
Are NFTs Worth It?
We’re sure that these jaw-dropping numbers have made you feel like you’re ready to start investing in some NFTs yourself. However, before you run to set up a crypto wallet, consider if this is something worth investing in.
Experts say NFTs can be risky as their future is still quite uncertain. NFTs are also relatively recent. So there isn’t a lot of history to judge their performance on. There are other things to bear in mind when dealing with NFTs. NFTs are not subject to the usual technical or economic indicators that help you while investing in the stock market. They are solely driven by demand. When you own an NFT, you don’t own the original artwork or copyright. Those belong to the artist. All you essentially own are bragging rights as the current owner of an NFT.
Taxes are another factor to consider while investing in NFTs. They are subject to taxes just like any other asset. Furthermore, even the cryptocurrency you use to purchase NFTs are subject to taxes. Recently India proposed a 30% tax on income through NFTs and cryptocurrencies. This comes at a time when a great deal of uncertainty surrounds the regulation of cryptocurrency in the country.
Experts say that the best way to move forward is to slowly dip your toes into NFT. You could start by investing small amounts of money to begin. And see how it goes. As with any investment, you must do thorough research, understand the risks, and proceed with utmost caution.
That was quite a journey into the world of NFTs. We hope this blog answered some of your questions about NFTs. It doesn’t end here. We’re sure there are many more exciting things coming up with respect to NFTs. It’s a new dawn in investments, and we can’t wait to see what the future holds. We’ll be back soon with more on NFTs. In the meantime, let us know your thoughts on NFTs in the comments below.
