Non-Fungible Tokens (NFTs) are the latest trend in the crypto and digital asset world. But before we analyze their use, let’s dive into some basic definitions in order to be able to understand the scope of this article.
“Fungibility” is a term referring to things that you use on a daily basis. Consider these things to be physical money... or even Bitcoin.
Therefore, since bitcoin is fungible this means that you can exchange one for another and get exactly the same thing; only instead of holding money, they use technology to buy or sell digital collectibles, including art, music, video games, concert tickets or anything else related and comes in digital form.
The same term, also refers to the fact that something is original and cannot be replaced by anything else.
NFTs became popular in 2017 with the release of the game called “CryptoKitties”, which allowed players to purchase and "breed" limited-edition virtual cats (eye-roll!) that “lived” forever on the Ethereum Blockchain .
Following that, game developers embraced NFTs in a major way, allowing players to earn in-game goodies like digital shields, swords, or similar prizes, as well as other game collectibles.
Soon after their release, Cryptokitties went viral, with some Cryptokitties fans spending $20million of ether purchasing, feeding, and nurturing them and since 2017 a total of $174 million has been invested on NFTs.
Overall, NFTs validate an item's ownership by storing the data in a distributed digital database known as a “blockchain”, which is stored on computers all over the internet, making it almost impossible to lose or damage and can be used to trace an object's digital origin, as well as cannot be replicated or duplicated (well basically they can, but the authentic piece is owned by just one owner; just like a rare painting made by a famous artist years ago).
Unlike traditional cryptocurrencies they cannot be directly traded, due to the fact that no two NFTs are alike – including those that exist on the same website. Consider this like a concert ticket that has its own unique number, purchaser's name, etc., making it difficult to trade with another.
So why are NFTs important?
Non-fungible tokens are a step up from the comparatively basic idea of cryptocurrencies and one of its main advantages is market efficiency; gaining access to a global marketplace without the high friction associated with cross-border Payments . For example in the real estate market, when a real estate NFT is transacted, it will automatically submit its details to a land registry.
NFTs are a step forward in the reinvention of this infrastructure because they allow digital representations of physical assets.
Converting a physical asset to a digital asset streamlines procedures and eliminates intermediaries. The use of NFTs on a blockchain to reflect digital or physical artwork enables artists to interact directly with their audiences and enhance business processes.
As a result, a painting does not always have a single owner. Its digital counterpart can have several owners, each of whom is responsible for a “portion” of the painting. Such agreements could boost the artwork’s value and the artist’s revenue.
Additionally, NFTs have the potential to eliminate intermediaries, simplify transactions, and build new markets.
As NFTs become more advanced and incorporated into financial infrastructure, it could be possible to combine the same idea of tokenized pieces of property, each with a different value and location, in the physical world.
Having said that, non-fungible tokens are also useful in identity management. Take a look at the case of physical passports.
These may be converted into NFTs, each with its own unique identifying characteristics, allowing jurisdictions to streamline entry and exit processes more easily in the digital world.
Apart from all the excitement, there are concerns that NFTs are not environmentally friendly because they are based on the same blockchain technology as other cryptocurrencies.
As such, each NFT transaction on the Ethereum network consumes the same daily energy of two American households. Nevertheless, the pace at which blockchain technology is transformed into a newer, more eco-friendly version may well determine the future of the NFT market in the short term.
Whether or not the current NFT trend will be sustainable, NFTs have already intensified a broader trend of digital economic innovation as well as opening up new business opportunities.
While there are already a few extremely promising applications for the technology in a few key industries that should slowly see growth over the next three years, some argue that the NFT “madness” will be short lived, mainly in the art sector.
Since any digital information can be easily "minted" into an NFT, which is a highly efficient way of managing and securing digital properties, there’s a high optimism that the NFT market is expected to grow further.
Sources:
-https://www.euronews.com/2021/04/02/what-are-nfts-and-why-are-they-suddenly-so-popular
-https://www.morningstar.co.uk/uk/news/211301/what-are-nfts.aspx
-https://www.bbc.com/news/technology-56371912
-https://www.investopedia.com/non-fungible-tokens-nft-5115211
-https://finance.yahoo.com/news/nfts-202525670.html
-https://www.reuters.com/business/nfts-are-hot-so-what-are-they-2021-03-17/
