NFTs are in news often. Do you know what exactly is an NFT? Read to know more about Non-Fungible Tokens (NFT).
Think of brand-new cars and used cars of a particular model.
Is there any difference?
While the brand new cars of the model may be identical to each other, the used cars differ in multiple aspects. Each used car differs from the other in terms of kilometres run, wear and tear, accessories and so on. Each of the used models is unique.
Fungible Assets vs Non Fungible Assets
In the above example, as the brand new models are identical, they can be exchanged with any similar models. However, since the used models are unique, the value differs and cannot be interchanged.
This introduces us to the concept of Fungibility.
Fungibility is the ability of an asset to be interchanged with other individual assets of the same type.
In the above example, brand new models of the same car are fungible assets.
However, used cars are non-fungible.
Examples of Fungible Assets and Non-Fungible Assets
- Fungible Assets: Currencies, Bitcoin, Stocks, Mutual Funds
- Non Fungible Assets: Paintings, Real Estate, Non-Fungible Tokens (NFTs)
Non-Fungible Tokens (NFTs)
The figure shown above is the first tweet by the Co-Founder of Twitter Jack Dorsey which is sold for $2.9 million.
Not only this but several other artworks like Beeple painting, Cryptopunk, Save Thousands of Lives etc have been sold for millions of dollars.
How is that possible?
It is possible through NFTs.
Several digital artworks and minted physical artworks like audio, cartoons, videos etc can be sold and brought through NFTs.
What is NFT?
Non-fungible tokens are unique and digital forms of any assets (both tangible and intangible items) backed by blockchain technology.
Examples:- Drawings, photos, videos, GIFs, music, games, essays and even a tweet.
The main significance of it lies in the increasing popularity it gained through its unique opportunity to showcase and thereby sell any digital artworks by artists.
How can you buy NFTs?
In order to buy Non Fungible Tokens, you need
- A cryptocurrency wallet
- Access to NFT marketplace such as the open sea.
NFT vs Crypto Currencies
Even though both NFTs and cryptocurrencies are built on blockchain, they are not the same.
Cryptocurrency is fungible (i.e. they are interchangeable and can be used for transactions) whereas NFTs are non-fungible (they are not interchangeable as the value of each one differs from one another). Eg:- Painting of Monalisa has its unique value and cannot be exchanged with another artwork.
How do Non-Fungible Tokens work?
NFTs function like tokens or a unit of data recorded in form of a blockchain.
Owning an NFT doesn’t mean it in its legal sense as it does not grant copyright or any other intellectual property right but it grants proof of ownership (exclusive ownership).
Anyone can convert a digital asset into an NFT.
Once converted he/she will get the ownership of that NFT which can be sold in an NFT marketplace.
Reasons for the popularity of Non-Fungible Tokens
- The normalisation of cryptocurrency.
- Customers see them as an opportunity for investment.
- A novel way of status symbol.
Negative Aspects of Non-Fungible Digital Assets
- Selling and buying them requires high energy usage which will lead to greenhouse gas emissions. This will cause other environmental impacts.
- It can be used for money laundering like other blockchain assets.
- Frauds relating to them are emerging with fake marketplaces and fake sellers misusing the names of real artists.
- NFT boom may be a bubble.
UPSC Question from the topic
Qn). With reference to Non-Fungible Tokens (NFTs), consider the following statements:
- They enable the digital representation of physical assets.
- They are unique cryptographic tokens that exist on a blockchain.
- They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions.
Which of the statements given above are correct? (UPSC CSE Prelims 2022)
- [A] 1 and 2 only
- [B] 2 and 3 only
- [C] 1 and 3 only
- [D] 1, 2 and 3
Answer: [A] 1 and 2 only
Non-fungible tokens are unique digital assets backed by blockchain technology.
The value of most NFTs is connected with their social status. There are apprehensions about an NFT bubble in future.
We may need to wait and watch how the bull and bear cycles work in these marketplaces in the coming future.
Article written by: Krishnapriya JR