In recent months, NFTs have received a lot of media attention. NFTs have been almost inextricably linked to popular culture thanks to the likes of Bored Apes, CryptoPunks, CryptoKitties, and Reece Witherspoon’s ventures into the sector. NFTs are considered a must-have investment by some. To some, they’re nothing more than nerdy name-a-star vouchers. But what exactly are NFTs? And why are they so divisive?
Table of Contents
- 1 What Are NFTs and How Do They Work?
- 2 Tokens vs. Crypto Coins
- 3 Non-Fungible Tokens
- 4 What are the current applications of NFTs?
- 5 What Does the Future Have in Store for NFTs?
- 6 Is it a Good Idea to Invest in NFTs?
What Are NFTs and How Do They Work?
Non-fungible token (NFT) is a term used to describe a token that is not fungible. An NFT is a transferable digital asset that is stored on a blockchain. Between cryptocurrency wallets, these digital assets can be purchased, sold, and swapped. Some NFTs are treated as traditional pieces of art, with one Beeple NFT selling at Christie’s for about $29 million.
A Non-Fungible Token’s Anatomy
To comprehend NFTs, you must first comprehend the blockchain and cryptocurrencies. There are hundreds of cryptocurrencies available today, which can be classified into two categories: crypto coins and tokens.
Tokens vs. Crypto Coins
Bitcoin is the most well-known cryptocurrency. In the Bitcoin introductory paper, the pseudonymous creator Satoshi Nakamoto characterized Bitcoin as a “pure peer-to-peer version of electronic cash.” Bitcoin is made possible via a proof-of-work system that runs on its own blockchain. In and of itself, a bitcoin is a digital asset that symbolizes the underlying value.
Bitcoin and other similar currencies are fungible in theory. The value of one bitcoin or satoshi (a fractional unit of a Bitcoin) is the same as the value of another bitcoin. Things aren’t quite as straightforward in practice. As John Carvalho, former product designer for Bitrefill explained, “Each satoshi is its ledger history just as much as a unit of account, and none of them can be interchanged with another as they all have distinctive histories, permanently.”
Because of this traceability, coins with an unknown past may be considered less valuable than those that have been “freshly mined” and never been moved.
Tokens vary from other cryptocurrencies; in that, they do not have their own blockchain. Instead, they run on top of a pre-existing blockchain like Ethereum. A token is moved from one address to another when it is spent by a user.
Some tokens are purchased and sold in the same way that cryptocurrencies are, and they function as a currency. The fungibility of these tokens is taken into account. Others, on the other hand, are thought to be non-fungible.
It doesn’t matter which crypto coin you have when it comes to crypto coins; all that matters is that you have one. Non-fungible tokens, on the other hand, are unique to the person who holds them.
The Ethereum Blockchain now hosts the most well-known NFTs, although they’ve represented differently than currencies thanks to the ERC-721 standard, which states: “A non-fungible token (NFT) is a type of token that is used to uniquely identify something or someone. This type of token is ideal for platforms that sell collectibles, access keys, lottery tickets, and numbered seats for concerts and sporting events, among other things.”
Each NFT has its own unique identifier and a finite supply. A person or organization might create a single token to represent a one-of-a-kind piece of art, or 100 tokens to represent show tickets. The tickets can then be moved from one location to another.
“A non-fungible token (NFT) is a type of token that is used to uniquely identify something or someone. This type of token is ideal for platforms that sell collectibles, access keys, lottery tickets, and numbered seats for concerts and sporting events, among other thing.”
On the Ethereum system, one of the most intriguing features of NFTs is the ability to add more functionality in the form of smart contracts. Developers can use this feature to provide royalty options.
If an NFT were to represent a work of art, the artist could negotiate a smart contract with the buyer in which the artist earns a percentage of the sale price in royalties anytime the NFT changes hands.
What are the current applications of NFTs?
NFT technology is still in its early stages, and most projects on the market are focused on digital collectibles.
The increasing popularity of art collections like the Bored Ape Yacht Club propelled NFTs into the public consciousness in 2021. The concept, on the other hand, has been around for much longer.
Games with Virtual Pets
The CryptoKitties game, for example, was one of the first to adopt the ERC-721 standard, launching in 2017.
According to Garrick Hileman, a computer researcher and visiting scholar at the University of Cambridge, the game, which allowed users to breed and exchange virtual kittens, was so popular that the volume of cats being traded overloaded the Ethereum network.
Axie Infinity is another well-known NFT-based game. Players create teams of Axies and utilise them to battle other players, similar to Pokémon, and each Axie is a unique tradable NFT.
Although the entry barriers to Axie Infinity might be extremely high, it is commonly known as a play-to-earn game.
NFTs are commonly used for trading digital art outside of video games. The following are a few examples of collections that have gotten media attention:
- Bored Ape Yacht Club
- Flower Girls NFT
When consumers buy an NFT, they’re not so much buying an image as they are joining an exclusive club. This is especially evident with the Bored Ape Yacht Club, where customers are given a QR code that allows them to join private parties.
What Does the Future Have in Store for NFTs?
NFTs, according to blockchain advocates, may be used for more than video games and digital collectibles. Collecting royalties for musicians, managing ownership and supply chain difficulties, and expediting ticket sales with the purpose of decreasing scalping are all possible use cases.
Several companies are exploring the possibility of tokenizing performance and play tickets. NFTs, according to developer Kasper Keunen, might “make trust-free and friction-free ticket trading conceivable.” He described how to make an NFT that can generate a ticket-like time-locked QR code.
According to a recent study published by Cornell University, up to 70% of cryptocurrency trading volume on major exchanges is false.
NFTs have a lot of potential in a wide range of industries. However, there are a few drawbacks to the innovation.
Cryptocurrency markets, unlike traditional financial sectors, are still mostly unregulated and plagued by wash trading. According to a recent study published by Cornell University, up to 70% of cryptocurrency trading volume on major exchanges is false. It’s difficult to know whether the prices of popular NFTs aren’t artificially boosted by wash trading because NFTs are bought and sold using bitcoin wallets — and big platforms don’t require traders to authenticate their identities.
The environmental impact of NFTs is a major problem. According to data collected by Statista, the Ethereum blockchain, a key NFT player, uses an estimated 104 terawatt-hours per year. A large number of miners work in countries that rely on nonrenewable energy sources.
Is it a Good Idea to Invest in NFTs?
It is a personal choice whether or not to invest in NFTs. Anyone can create an NFT collection, and no one can predict what a given piece of art will be valued in a year or two.
People are making a lot of money buying and selling popular tokens in today’s speculative market for NFTs. The money, on the other hand, is wholly dependent on demand. The value of an NFT plummets once someone is no longer willing to buy it.
Those considering entering the NFT market should be aware of the possibility of price fluctuations. If the buzz dies down, you can be left with a monkey painting that no one wants to buy.
Written by Guest Writer – Angel Dias