What is NFT? (History, Pros, and Cons)

what-is-nft

An agglomeration of pixels could change the way digital assets are bought and sold. Say hello to NFT, the phenomenon that has left us awe-struck and skeptical at the same time.

It all started in 2021 when Christie’s Auction House used NFT to complete digital art sales worth $69 million. Soon celebs and marketplaces jumped into the bandwagon, rendering it a hype that refuses to wane. The use case has also expanded significantly. Digital arts, real estate, music, video games, collectibles, sneakers, and GIFs, you name it.

NFT seems to be a futuristic technology at the face value but what is it anyway? Why does it matter, if at all? Is it riding the hype or a concept here to stay? Let’s discuss it all, one at a time.

What is NFT?

Ownership rights are central for markets to operate. The selling is smooth and transparent if the buyer knows exactly who owns the given sellable. Once the deal is done, the transfer of ownership rights from the seller to the buyer should happen seamlessly. That’s where NFT kicks in, helping establish ownership of assets (typically artwork) traded digitally.

NFT, an abbreviation for Non-Fungible Token, is a unique pattern of pixels. Think of it as a “digital ownership document” of a particular tangible or intangible asset, transferrable from the seller to the buyer. Hitherto, a system to establish the rightful owner of a digital artwork didn’t exist. And, NFT solves that issue, which makes it significant.

Call it a digital form of a collector’s commodity. Instead of purchasing a physical artwork to grace your walls, you get a digital file that is likely to stay within the digital world. Much like cryptocurrencies, an NFT owes its existence to the blockchain. While the Ethereum blockchain is the most favored option, almost all blockchains are compatible with NFTs.

Thanks to blockchain technology, each transaction is recorded. From selling price to each owner, every detail stays on the blockchain forever, which makes NFTs easy to validate and verify.

So, each time you fetch an NFT, rest assured of its authenticity, provenance, and exclusive ownership. Mind you, no single NFT can have two owners simultaneously.

Even the creator is free to store any specific information in the NFT metadata, including digital signatures. That largely addresses the circulation of fake collectibles, ushering transparency into the market, which otherwise is dubious for duplicity. Plus, these assets are extensible. You are at liberty to blend two NFTs to birth a new, distinct NFT.

NFT Etymology

Non-Fungible Token is a self-explanatory term, meaning something that isn’t fungible. For the uninitiated, fungible assets are easily exchangeable and fetch the same value. Take, for instance, a one-dollar bill, which can be traded for another bill of the same value. Simply put, the one-dollar note matches another one-dollar bill in terms of value.

On the contrary, non-fungible assets are distinctive and non-interchangeable. You can neither find an exact replica of a non-fungible asset nor can trade it for anything of similar value.

Besides NFTs, the prime example of a non-fungible asset is a diamond. A diamond is distinguishable from the other in terms of cuts, colors, and carrots. With all said and done, no two non-fungible assets are the same, making them unexchangeable and irreplaceable.

Buy it or Mint it

NFTs can be either created or bought.

For each freshly-created digital asset, which could be anything from digital artwork to music, you require minting the NFT at marketplaces, such as OpenSea and Mintable. The minting expenses might vary from $1 to $500, subject to multiple factors. On the downside, minting is a painstakingly slow process, taking three years or more to mint a single token.

Conversely, buying involves an artwork that the creator has converted into an NFT. Just spot an NFT, click on it and you’ll come across “sell” and “list for sale” options. It is up to the owner to decide how he/she would sell the NFT, through auctions or direct sales. However, having a digital wallet is required to park your NFTs after a purchase from an exchange. Mind you, exchanges will charge fees, which is a certain percentage of the transaction.

Interestingly, a majority of NFTs are already hovering within the virtual world. Think “Bored Ape Yacht Club”, “Doodles” and other images that can be viewed and downloaded for free. You might even have a copy of it saved on your PC or gadget. Then why do such commonly available items attract mind-boggling sums?

The answer is provenance and the right of possession. You’ll earn the ownership rights of the original item. And, the bragging rights come by default that might be way more valuable than the commodity itself.

NFTs: The Evolution History

Origin – 2016

NFT has a short yet eventful evolution history, dating back to 2012-13 when colored coins surfaced on the Bitcoin blockchain. These coins established the right of possession of any physical asset (think vehicles and precious metals) on the blockchain. Though in its infancy, it was an innovative idea that laid the foundation of NFTs roughly a decade back.

Come 2013-14, a peer-to-peer financial platform and open-source Internet protocol burst on the scene. A vision of Robert Dermody, Adam Krellenstein, and Evan Wagner, they called it Counterparty. The platform paved the way for the creation of tradable currencies and the trading of memes while addressing the duplicity concerns.

The very next year, BitCrystals saw the light of the day, which was an in-game currency. It was the result of a collaboration of the makers of Counterparty and Spells of Genesis. The other epoch-making event happened in August 2016 with the launch of the Force of Will cards on the Counterparty platform. Two months later, memes jumped into the blockchain bandwagon via Counterparty with users increasingly adding assets to “Rare Pepes” memes.

The “Rare Pepes” memes, depicting a comic character, Pepe the Frog, soon went on to be a rage with Ethereum making inroads. The Rare Pepes Wallet paved the way for CryptoArt, allowing artists to showcase and vend their works digitally.

2017 – Present

In 2017, we saw the emergence of Cryptopunks, a cross between ERC20 and ERC721, on the Ethereum blockchain. The total characters here didn’t exceed 10,000 with each character being distinct from the other.

NFTs surfaced in 2018 and went mainstream with the million-dollar auction of “The Forever Rose,” a sought-after CryptoArt by Kevin Abosch. The artist went on to push the frontiers of creativity with the “IAMA Coin,” an artwork featuring his blood.

With the adoption of NFTs, digital asset transfers just got simpler, smoother, and more fluid. Also, we saw the emergence of platforms, attracting a deluge of digital artists, art connoisseurs, and brokers.

Should You Invest in NFTs?

For some, NFTs are a passing fad while others perceive it to be a futuristic concept. Sounds confusing? Not when you consider the pros and cons of NFTs. Here’s your checklist.

Pros of NFT

First things first. Let’s walk you through a few reasons why NFTs make sense.

1. Streamlines Marketplace

NFT has the power to transform markets, making them more fluid and efficient. When you convert an asset into NFTs, the processes get efficient. Plus, the middlemen are pushed out of the equation, and security and supply chains get a boost. As an artist, you can connect with the patrons directly while skipping the hefty agent fees and clumsy transactions.

2. Seamless Transferability

It’s perhaps the most prominent benefit of NFTs. You can buy or sell them at any NFT exchange with trading options galore. However, a digital wallet that supports NFTs is a requisite. All selling/purchases are done via a cryptocurrency in the digital wallet. Once the transaction is over, you receive the NFT in a digital form. Transfers can’t get any simpler!

3. Safety Ensured

Powered by blockchain technology, NFTs address your safety concerns head-on. With all pertinent information saved permanently on the blockchain platform, the possibility of hacking, alteration, or deletion is eliminated. With the chain of ownership recorded, the authenticity and provenance of assets are ensured, allowing markets to operate smoothly.

4. Possibilities Galore

NFTs have the attributes to stay significant in the future. The use case may extend to physical passports. Once the passports are converted into NFTs, travel management would be easy, efficient, quick, and cost-effective. Also, the technology could help manage sensitive data. As the technology gains traction, the possibilities are simply endless across sectors.

6. Royalties Come By Default

Digital artists are leveraging NFTs for creating a continuous revenue stream that would last forever. As the NFT changes hands, the artist could earn a certain percentage of the selling price as royalty. Simply put, royalties come by default each time the NFT is resold. Mind you, the amount is payable only if it is outlined in the smart contract.

7. Portfolio Diversification

Though in its infancy, NFT could be a safe bet to diversify your investment portfolio. Why? Well, we are consistently exploring and comprehending the advantages of NFTs just like we did with cryptocurrencies.

Those who started early are reaping the benefits now with their investment skyrocketing. In conjunction with the conventional asset classes, NFTs may help you rake it in the long run. Mind you, it’s always good to balance your risks and returns.

8. Tide Over The Walled Garden

As a gamer, the “Walled Garden” issue may have bothered you. The use case of in-game items you buy is limited to the game itself. Plus, the investment goes in vain once the game becomes obsolete. Breathe easy, NFTs have the answers.

You can hold NFTs in your digital wallet and use them outside the game environment as well. Moreover, you are at liberty to dispose of them for a profit through a smart contract that outlines the transaction details.

9. Democratizing Investments

Imagine a physical asset that needs to be divided among multiple owners. Fractionalizing it is cumbersome but when converted into an NFT, multiple ownership is possible. It means a piece of art can be owned by several owners at the same time, each having a unique NFT that authenticates his/her share. The tokenization can apply to a growing number of assets.

Cons of NFT

Regardless of the technology, trade-offs are always there.

1. Small and Volatile Market

These are early days for NFTs. As such, public awareness is limited and the market is volatile. Presently, you might face difficulty in disposing of your NFTs for a favorable price, especially when it’s a distress sale. Also, the market volatility might undermine your profits.

2. No Income Generation

Let’s face it. NFTs aren’t like any other asset class. They will earn bragging rights but not profits unless the market solidifies and expands and the price appreciates significantly. As any seasoned investor will tell you, the behavior of a new market is hard to preempt.

3. The Threat of Fraud Looms

Blockchain is immutable, but what if someone creates an NFT of your digital asset and puts it on the market without your consent? The exact situation plays out for an increasing number of artists and collectors day in and day out. The integrity of blockchain is simply pushed out of the equation when the token represents a fake copy of the original work.

4. Environment Concerns

NFTs are an environmental hazard, accounting for an unprecedented increase in carbon emissions. Cryptocurrency mining costs immense computing energy, which is detrimental to the planet. However, NFTs enthusiasts argue that it eliminates the requirement for travel and office space, thereby helping restrict environmental pollution and resource utilization.

Takeaways 

  • NFT, standing for Non-Fungible Token, is a set of data generated on the blockchain.
  • NFT’s entire existence is digital. It’s minted, traded, bred, and stored digitally.
  • It serves as a digital proof of ownership for artworks, cars, real estate, and so on.
  • Existing on the blockchain, NFT is distinctive, irreplaceable, and non-manipulatable.
  • You can buy or sell it using cryptocurrencies, typically Ethereum at NFT exchanges.
  • The ownership is exclusive, meaning no two people can own a single NFT.

The Bottom Line

NFTs are gaining ground consistently with steady adoption rates. At the face value, it’s a futuristic technology capable of transforming markets and their transaction methods and practices. As the technology is in the early stage, it shouldn’t be considered as a surefire investment. That said, some early adopters are minting money with NFT collecting.

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