Missed The Bitcoin Bus? NFTs Are Here For You
While they may seem outlandish or difficult to understand initially, think of NFTs (Non-fungible token) as the digital successor to highly secure collectibles.
The Indian government has not clarified its stance towards crypto assets, but media outlets have consistently highlighted recent developments in this sphere. And if one has even glanced at the news infrequently, there is a new term that is being mentioned with increasing frequency. Termed non-fungible tokens or NFTs, they are the latest digital asset grabbing the limelight.
What is more interesting is that a fair share of NFT participants have yet to celebrate even their 20th birthday. And the market, as an aggregate, went from less than US$1 billion in value to US$41 billion, in 2021.
“Non-fungible” means any commodity that is unique and cannot be replicated. A Bitcoin or Shiba Inu coin, for example, is fungible; it can be traded for another of its kind. Likewise, a traditional music file can be replicated innumerable times. But in the case of NFTs, each one is unique; it cannot be replaced with an identical digital asset since there is only one-of-a-kind.
Most NFTs, meanwhile, are built on the Ethereum (ETH) blockchain. Again, for ease of understanding, think of ETH as the equivalent of the Android or iOS operating system. Just as apps or games are built on the Android or iOS ecosystem, likewise, the foundation for most NFTs is the ETH blockchain. This blockchain can then be used to attach cryptographically secure digital assets to a physical product. Cryptography, on its part, is the process of securing information so that hackers, or other such elements, cannot access one’s digital property.
Jumping onto the bandwagon
The current craze for NFTs is strongest in the art segment — where artists have either created digital equivalents of their physical art pieces or ‘minted’ cartoon-like representations of apes and penguins. These works of art have then been sold, traded or auctioned often for astronomical sums. Critics are of the view that the current NFT obsession is 'meaningless'. But NFT proponents, on the other hand, firmly endorse these digital assets.
In what may seem a more outlandish idea, sportswear maker Nike has introduced its blockchain-compatible sneakers called “CrpytoKicks.” When a sneaker purchase is made, there will be a corresponding NFT created to guarantee its authenticity. This is because spurious Nike products are commonly available. If these sneakers are a coveted pair, and are actually resold to another user at some point, the physical pair of shoes and its associated NFT will also be sold.
Like cryptocurrencies, NFTs are bought and sold on specific platforms. For the uninitiated, Binance is currently the world’s largest crypto exchange. Likewise, the most popular NFT marketplace is OpenSea.
To make an NFT purchase, a user’s crypto wallet must contain enough of the relevant cryptocurrency. With ETH being the most popular one, an NFT buyer would need to have an adequate ETH holding in their crypto wallet. While purchasing an existing NFT is one option, a little more than basic tech knowhow can enable one to make or mint one’s own NFT.
What is fuelling the NFT craze?
The question, I’m sure, that arises here is, “Why would anyone want a digital painting?” Well, the simple answer is to hold bragging rights. Just as investors have long considered paintings and sculptures as stores of value that also highlight one’s socioeconomic status, the same thought process applies to digital art.
An added advantage is the fact that unlike a physical art piece that needs sizable expenses to protect and maintain, digital creations are inexpensive to hold over the long-term. Digital artist Beeple’s creation, meanwhile, went under the hammer at Christie's in March 2021 for an eye-watering US$69.3 million. He’s now among the “top three most valuable living artists”.
Think of an NFT as similar to purchasing a luxury car or a designer handbag. In Generation Z terms, it gives the owner 'flex'. But the exclusivity quotient can be taken a notch higher with NFTs without paying an arm and a limb. Since they are one-off creations just like the Mona Lisa, but at a relatively ‘bargain’ price, the owner has a potential gold mine on their hands. Perhaps, this is what prompted a Malaysian investor to purchase Twitter founder Jack Dorsey’s first ever tweet for a staggering US$2.9 million.
NFTs allow their creator to earn a percentage each time the digital asset is traded. For example, if a musician’s latest recording has become widely popular, he or she can tokenise it and keep deriving royalties.
“But they can already do that,” I’m sure you must wonder.
The difference lies in the fact that there is now no need for platforms such as Apple Music to distribute the musician’s creation. His or her lifetime royalty earnings are, therefore, significantly higher.
From a decentralised finance perspective, NFTs can be used in unique ways. For example, one can use digital artwork as collateral to secure a decentralised loan. It is similar to how one can currently borrow against gold or real estate.
And speaking of real estate, NFTs present a solid use case in this often murky sphere. In India especially, purchasing land is often accompanied by high levels of uncertainty. It is not uncommon to have several claimants to one plot of land, with each even holding perfectly ‘genuine’ looking documents. However, if landowners begin to tokenise their physical asset, where the land deed has been minted into an NFT, a potential buyer can enter into an agreement with that much more confidence. Since the land deed NFT cannot be replicated, only one owner can hold the genuine title to a particular plot of land.
Going forward
Blockchain, and the assets built upon them, have their fair share of proponents and critics. A large share of governments oppose them, but at the same time, policy makers also recognise the highly innovative use cases they present. In India, the government is yet to draft clear regulations governing the blockchain space. And industry stalwarts have called on the administration to develop regulatory frameworks that do not stifle growth in the NFT space.
But all variables aside, the question I am sure on top of mind is, "should I attempt an NFT investment?" My answer would be a firm “yes”. Give it a try with an amount you can afford to lose. If Lady Luck does shine, it will be similar to that plot of land that suddenly shot up in value because a four-lane highway was now being built alongside it.
What is certain is that the NFT space is still in its infancy, just like the iPhone was in 2007. But in less than two decades, this one device forever changed the world as we knew it. NFTs too hold as much potential.
