Non-Fungible Tokens (NFT) Explained!

There was a time when the disruption by a new idea or technology used to take a century or at least a few decades as its acceptance became a new practice. The dawn of the Information age in the late 20^th century minimized the time between these disruptions from decades to, at times, a couple of years or even months; this has been especially true with Blockchain technology. Just when I, as an average joe, had wrapped my head understanding blockchain technology, the concept of cryptocurrency, and the reasoning behind the new historical rise of Bitcoin, the world of crypto threw a new curveball in the form of NFT or Non-Fungible token.

The recent rise in the sale value of digital art or NBA dunk highlight video utilizing NFT technologies for hundreds and sometimes millions of dollars has led to many individuals being perplexed and asking questions.  What is an NFT? Why is there a rush to buy the said NFT? Finally, what is the real-world utility of this technology? But, before we answer all of these questions, we must first understand what fungibility is? An asset or commodity is said to be fungible when a single unit of the product represents the same value as another single unit of the same product. Here neither of the two assets intrinsically more or less valuable than the other and are interchangeable and could be used in place of the other. A common example can be money, say, Rs. 20 note is identical and interchangeable as any other Rs. 20 note where at the same time two Rs. 10 notes also represent the same value. All of these assets are not unique and have the same value, and this creates the niche where NFT can thrive.

An artist who makes any visual art or creates music or makes videos can generate an NFT out of this very same art form. Through NFT, if an art lover likes his favorite artist’s work, he gets to own the original copy. Since the NFT is encrypted upon the blockchain ledger technology, this ensures there can only exist one original copy of that artwork. Even in artwork resale, this digital ledger keeps track of the different owners that digital art has had over its lifetime.

The question still plagues everyone’s minds trying to make sense of the craze behind the NFT, that are these NFT indeed as valuable as the prices they fetch on the online auctions. You may raise another argument that one can easily make any number of digital art copies via a simple screenshot, and the NBA dunk shot sold for millions can also be easily be viewed over YouTube. Can an intangible digital asset hold any intrinsic value? But the same counter-argument can always be made for owning a real-world art piece. The act of actual ownership of the original NFT and a digital copy is the exact difference between owning the real Mona Lisa and a printout of its copy one can just easily download, take a printout and have it framed in one living room.

Finally, as an artist, the prospect of selling their digital art as an NFT becomes a lot more enticing. The NFT currently is primarily based upon Ethereum, which has a built-in mechanism that allows for any digital art to be made into an NFT. NFT allow for a two main benefit for an artist, i.e., first you as a lover of individual artist work can now support your favorite artist directly by buying their artwork, and for every resale of the same work to a new owner, the NFT has a feature that allows for an artist to get fixed percentage for his artwork new resale value. This latter feature makes them extremely attractive to an artist as this is not possible for any real-world art piece he may have produced or sold. Lastly, NFT has also been seen by the artist where they give back to their community of supporter as like how one owns a part of the share of their favorite company they wish to support. Thus, as and when the artist grows in influence and stature, the same NFT offered to his initial supporter becomes more valuable with time.

There is also a growing concern about the environmental footprint that these NFT generate. Any mining activity undertaken to authenticate an NFT is done by proof of work concept rather than the more energy-efficient proof of stake used for cryptocurrency. This effect of NFT on the environment needs to be kept in mind as NFT will become more widely accepted and used in the future.

The NFT would have relatively stayed a niche if it was not for the attention it garnered when hundreds of dollars were spent on the Digital Art and NBA dunk videos. Investors realized if they could buy the suitable artwork, there is money to be made in this new venture. But one must remember any investment made in NFT at this stage is primarily speculative, just like how the initial days for cryptocurrency were where one or two like Bitcoin and Ethereum proved their worth many more failed.

One also needs to remember the value driver behind the ballooning prices of Art sold as NFT is the act of value association. Like how any historical art like the ones found in auctions, displayed in museums, or part of a billionaire private collection is said only to hold value until people believe that it is indeed that much valuable. If such an artifact ceases to be valuable in the eyes of those around it, it is then when the drop in the price of artifact will happen. If the prices indeed hold no intrinsic value is when a bubble is recognized to have been formed and may burst at any time.

In an ever-changing world where cryptocurrency brought forward a debate on the need and relevance of the traditional monetary transaction, NFT can be the gateway into a new venture which were previously unimaginable. Just like how the craze behind Bitcoin has calmed down to an extent, this current craze behind NFT will die down as well, and it is then just like how companies have started to accept crypto as an acceptable means of payment, NFT everyday use shall arise as well.