If you have interacted with, or at least heard about cryptocurrencies like Bitcoin or Ethereum, then you’ve probably heard about non-fungible tokens (NFTs) too. But what are they, and why is there so much buzz about them? You have come to the right place if you’ve had these questions on your mind and you are looking for answers.
In this article, we’ll examine all you need to know about these digital assets. By the time you’re through reading this piece, you would have understood the hype around NFTs in detail. Let’s dive right in!
KEY TAKEAWAY:
- NFTs are ‘non-fungible’ because they are unique and irreplaceable.
- They live on the blockchain, and they can represent anything, including artwork, music, virtual real estate, and even tweets.
- NFTs are criticized because of energy-use concerns and the volatility that sometimes exists in the market.
- Despite the criticism, NFTs are still transforming how we value and own digital content.
What Are NFTs?
NFTs are digital assets with ownership certificates that live on the blockchain. Although they are also virtual assets, the ownership of NTFs differs from cryptocurrencies. For example, you can exchange Bitcoin to get another Bitcoin, and they both retain their value. However, the transfer of NFTs is exclusive and irreplaceable, hence the word ‘non-fungible.’ While blockchains like Binance Smart Chain and Flow have become popular for minting NFTs, they are primarily built on the Ethereum blockchain.
An NFT can represent anything, from artwork to music, virtual real estate, and even tweets. The blockchain serves as a public ledger where the transfer of ownership of this token is monitored. This immutable record prevents duplication and piracy, which ensures trust and authenticity. Here’s a breakdown of how it works:
- Tokenization: The digital asset undergoes a process called tokenization. This involves the conversion of the asset to a unique NFT on the blockchain.
- Smart contracts: Smart contracts are self-executing contracts on the blockchain that govern the creation, ownership, and transfer of NFTs. They eliminate the need for an intermediary, which helps to streamline transactions and enhance security.
- Ownership tracking: Every NFT transaction is recorded on the blockchain to have an immutable evidence of ownership to further ensure easy verification of authenticity.
The NFT Hype
Many factors have contributed to the massive growth of NFTs. The COVID-19 pandemic was one of them because, during that period, people spent more time online trying to find a new form of entertainment and investment. Also, the increased use of cryptocurrencies and the blockchain technology made the ground fertile for its adoption. Check out the different use cases where NFTs have become relevant:
Digital Art and Collectibles
Artists and creators now use NFTs as a way to monetize their work. Since they can bypass traditional art gatekeepers like galleries, they can reach a global audience. Also, they can retain more of their profit and even earn royalties from secondary sales.
Music and Entertainment:
By tokenizing their albums, concert tickets, and other exclusive items, artists can provide unique experiences for their followers. Apart from creating another opportunity to have a close connection with their fans, entertainers can also enjoy a new stream of income. For example, King of Leon released their When You See Yourself album as an NFT, giving fans exclusive content alongside limited-edition vinyl.
Gaming and Virtual Worlds
In the gaming industry, in-game items like characters and virtual real estate can be tokenized and owned by players. This allows for true ownership and transfer of these NFTs across different games. Platforms like Decentrland and The Sandbox have made it easy to create virtual worlds where users can develop, buy, and sell virtual lands and assets.
Real Estate and Fashion
Beyond digital art and entertainment, NFTs have found their way into real estate and fashion. Virtual real estate platforms like Upland allows users to buy, sell, and trade virtual properties tied to real-life locations. Fashion brands are also looking to use NFTs to provide digital clothing and accessories that have physical counterparts.
The Criticisms of NFTs
Although the value that NFTs provide is undeniable, it has come with some criticisms. Environment concern is one of the most significant issues that critics have raised. The energy-intensive nature of how transactions are verified on platforms like Ethereum has led to numerous debates about the carbon footprint of minting and trading NFTs. Ethereum’s transition into the proof-of-stake (PoS) consensus mechanism instead of the previous proof-of-work (PoW) method is helping the development of more energy-efficient blockchains.
Another criticism is the rapid rise and speculative nature of some NFTs in the market. There is the fear that the prices are driven by hype rather than an intrinsic value, which poses a risk of volatility for new investors. Moreover, there are questions about intellectual property and copyright infringement because some people mint NFTs of digital content that doesn’t belong to them.
Finally, How To Approach NFTs
Despite the criticism, NFTs show no signs of disappearing as they continue to evolve with new use cases and applications. If you are a newbie to the market, there are some things to keep in mind while navigating the NFT landscape. First, conduct thorough research on any NFT you want to buy to understand the inherent value of the digital asset itself. Also, don’t get carried by inflated and irrational hype about a collectible in the market. NFTs hold the promise of a brighter future beyond the current buzz, and it is posed to truly transform how we interact with and value digital content.
