The first tweet put out by Twitter founder Jack Dorsey was auctioned for close to USD 3 million while a work by digital artist Beeple was sold for USD 69.3 million. For items that exists only in the digital format, that represents some serious spending. Non-fungible tokens, or NFTs, have emerged as a new class of digital asset that has sparked interest among investors and seen sales worth billions. Does that mean that you can make money from the meme you created. Why not?
What Are Digital Assets?
When was the last time that you bought a music CD, or went to a photo studio to get a camera reel developed? It’ll be fair to guess that most of us now are happy to stream music from online services and click photos on our smartphones. What if one such photo you’ve clicked breaks the internet and is shared millions of times? That photo would be sitting on millions of phones and you may or may not get credit for it.
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Or, if you are a musician and have released a tune online? You’d have to go through a lot of trouble just to establish that it was you who created it originally. You could, of course, point to the digital file that’s stored on your device to prove that you were the original creator, but anybody who copies that file could also practically claim the same evidence.
How do you establish the uniqueness of your creation? Enter non-fungible tokens, or NFTs, as they are popularly called. It is a sort of copyright for digital assets that let’s an owner prove that she has the original version. How does it help, you might ask, when the same photo can be downloaded by others. Well, how does it help that the Louvre in Paris has the original Mona Lisa portrait? There is something about an original that a copy cannot replace and NFTs are a means of bringing that scarcity to items that exist only digitally, although NFTs can also be used to protect the authenticity of actual physical assets, like real estate deeds, land records, etc.
Why Are NFTs Trending?
There’s no point being in denial. The data is here to prove it. With every passing year we are spending more time online than ever before. And it looks a safe bet to say that it’ll only keep increasing with the coming years. In 2011, the average time spent surfing online via mobile phones was just over 30 minutes; in 2021 it stood at more than two-and-a-half hours. The internet is now mostly a 2D phenomenon. But Facebook is talking about creating a ‘metaverse’, an online space built on virtual and augmented reality where your digital avatar can hold face-to-face meetings with people sitting thousands of kilometres away. There are online games that have already given us a glimpse of this immersive digital life, which is being called the “future of the internet”.
So, then, if the online space has become this palpable, can online assets be far behind? Some games allow players to make in-game purchases in exchange for real money. Now, if a unique item inside such a game is registered as an NFT, then the buyer can later auction it within the game and potentially make a profit from the sale. Just like collectible cards in real life.
So, What Are NFTs?
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Fungibility is a quality associated with items that can be exchanged on a like-for-like basis, say two Rs 10 notes. A Rs 10 note in my pocket is the same as one in your wallet because their worth is defined by the value they represent and not any unique property they may possess. But if the same Rs 10 note was the first of its series to be printed, or was specially issued by the government. That would make that particular Rs 10 note non-fungible, that is, it’s worth becomes greater than the value it represents. Such is the case with NFTs, too.
An artist might create a meme. That meme can be copied and shared innumerably. But if the artist creates a digital record of the original she created, then she can claim for it all the attributes of uniqueness, scarcity and proof of ownership that undergirds commerce in the real world. But then how is an NFT established as a unique item? This is where the blockchain comes in and the tech that anchors decentralised currencies is also used to guarantee the authenticity of digital assets.
If NFTs are the cryptocurrency for digital items, then the blockchain is their verification system.
What Has Blockchain Got To Do With It?
To become an NFT, a digital asset has to be registered on a blockchain. The cryptocurrency platform maintained by Ethereum led the rise of NFTs though other platforms, too, have got into the act. But while NFT is a crypto asset, like any cryptocurrency is, it is not the same as Bitcoin or Ether, which are fungible like any other real-world currency. It is the tech that sets cryptocurrencies apart from real-world currencies which also enables NFTs to exist as a unique class of assets.
The blockchain is a decentralised ledger that enables the exchange of money without the need for a third-party guarantor. The money, or fiat currency, that we hold in our hands is issued by a central bank and its use is facilitated by a bank or a financial service provider that tracks and maintains an account of how much we have spent, where we have spent it and how much balance remains in our hands.
Cryptocurrencies exist without any third-party facilitator with the work of maintaining and updating accounts being accomplished via the blockchain. All holders of a cryptocurrency, say Bitcoins, automatically become part of the online ledger that tracks every transaction involving the currency. It would be more correct to say that all computers or devices — called ‘nodes’ in the cryptoverse — are part of this online ledger. That makes it near impossible to pull off any fraudulent transaction using cryptocurrencies because it is visible to all the nodes on the system. To effect a fraud transaction would require information on all the nodes to be modified, something that would require huge amounts of computing power.
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Now, just as cryptocurrencies are not physical currencies and exist only as lines of code, an NFT, too, is not so much the actual digital asset as the code which establishes its uniqueness and originality. When an NFT is “minted”, that is, when a digital asset is registered on a blockchain, what the user gets is access to lines of code, which exist on an online ledger. For example, the company that ‘minted’ a piece by the digital artist Beeple that sold for USD 69.3 million to become the third-most expensive artwork to have ever been sold by a living artist, told Mashable that what the buyer got was a high resolution file of the artwork itself along with an “indelible signature of the artist and all transactions associated with the artwork — basically digital proof of authenticity and uniqueness”.
How Reliable Is It To Invest In NFTs?
The vast majority of countries across the world view cryptocurrencies with suspicion, but that has not stopped central banks of some of the world’s biggest economies from announcing plans to explore the digital currencies. Although there is still a question mark on whether they will become anything more than a speculative asset, cryptocurrencies have become more visible as crypto exchanges keep coming up to enable people to invest in them.
It can be argued that the success of NFTs will depend a lot on the success of cryptocurrencies, not least because the tech that anchors the digital currency also supports the creation of digital assets. But there is a growing embrace of NFTs among artists, sportspersons and collectors, with one tracker saying that total 2021 sales volume of such assets stands at USD 13.2 billion.
Andrew Steinwold, who launched a USD 6 million dollar NFT investment fund, says NFTs represent the future of digital ownership. “We’re spending a lot of our time digitally, always online, always plugged in. It makes sense to now add property rights to the mix and suddenly we have the emergence of the metaverse,” he said.
Meanwhile, the buyer of the Beeple piece, an Indian-origin Singaporean who goes by the name Metakovan, is upbeat about its prospects. “I think this is going to be a billion-dollar piece,” he told reporters. “I don’t know when.”
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