A 5-minute roundup

NFTs, or Non-Fungible Tokens, seem to have taken the world by storm. And if you’re wondering what it is that makes them so special or interesting, this article is for you. But before we go into the details of NFT, it is essential to start from the concept that gave birth to NFTs – blockchain.

The token in NFTs

Blockchains are the reason that digital tokens came into play. As we know, blockchains are essentially decentralized, tamper-resistant databases that are maintained in a distributed network of computers. The first generation of blockchain was built around cryptocurrencies, and the concept of tokenization was introduced with the first-generation blockchains. And it was these tokens that would become NFTs.

Fungible vs. non-fungible

Cryptocurrencies are essentially digital tokens that can be used to trade value. In the simplest of terms, they are equivalent to the coin or currency bill found in any wallet.

Tokens are used to maintain the count of value exchange that happens through a transaction. These tokens might have different names like ETH, Gas, Bitcoin, etc., depending on the blockchain platform. But fundamentally, they are meant for enumerating and measuring a value transfer.

The earliest tokens which were used for value transfer were all fungible tokens. Fungibility is defined as the exchangeability of a token without loss of value. For example, a $20 bill can be replaced by another $20 bill or even two $10 bills, and it will not change the value of the money in the wallet. This is defined as fungibility.

On the other hand, Non-Fungible Tokens are unique tokens that cannot be exchanged with any other token in the blockchain ecosystem. The earliest form of Non-Fungible Token can be traced to the colored Bitcoin experiment. In this experiment, some Bitcoins were created with color properties as their signatures. This meant that a specific Bitcoin could be traced even after multiple exchanges. It was done with the expectation of solving a budgeting problem and resolving the issue of crypto being used for unlawful activities.

This gave way to the idea of creating unique minted tokens. With Blockchain 2.0 and the advent of smart contracts in Ethereum, these tokens could be given features and functions. ERC721 smart contract standard became hugely popular for its simplicity, for assigning ownership to digital assets and, further, facilitate its transfer.

The NFT boom

Some of the major areas where NFT started booming are virtual games, virtual collectibles, and computer game asset transfers. 2021 has begun with the emergence of NFT in the digiart space with Beeple’s $69.4 million sale with Christie’s and Sotheby’s PAK digital art in the queue. This served as the launchpad for the $700 million NFT market in 2020 to be projected to blow up into a $40 billion market by the end of 2022.

Players like Ubisoft, EA, DOTA, Atari, Activision from the gaming industry are expected to leverage the NFT marketplace for building asset exchanges and markets for virtual game connoisseurs. In fact, even today, one could log in to Cryptovoxel (a virtual art city built in Minecraft), walk around, and explore digital arts being purchased, auctioned, and owned. These places are becoming a melting pot where digital art connoisseurs, auction houses, artists, and enthusiasts meet and exchange views.

Is the NFT price hype a bubble or for real?

One of the questions people have about NFT is the exorbitant price for something which could be publicly owned. For instance, you can go to Twitter and take a screenshot of Jack Dorsey’s first tweet, then why pay $2.4 million to own it? Valid. But there are a few ways to look at this.

In the distant future, the ownership of that screenshot will carry value because Jack Dorsey, for public records, sold the screenshot of the tweet to the owner of that NFT which is very different from someone taking the screengrab of it from the internet. The fact that Jack Dorsey sold that NFT gives that NFT value. This can be likened to the jersey from your favorite footballer, which, when autographed and signed by the footballer and given to you, would carry much more value than other mass-produced fan jerseys.

One can argue that there is no inherent value of the commodity attached to the NFT, particularly if it is digital art. But the arts can never be treated as a highly liquid asset. For example, 2265 kilos of gold and the most expensive Picasso painting have a similar valuation, but the gold will always find buyers faster than the Picasso painting. This is because there is a larger market for gold buyers than art buyers, and the fact that gold can be fractionalized while a painting cannot.

Boiling it down to the basics, NFT is a method for trading various digital assets. If it becomes hotter than its true market size, it can create a bubble or a Ponzi scheme. But, say Metakovan, the current owner of the Beeple artwork, is able to liquidate the $69.4 million piece and get a profit, it can be considered the real deal. Considering that there exists a market for digital art, this is certainly a possibility.

Where is the real value of NFT?

NFT is finding its grip in the gaming and art industry, but art can be ambiguous. There are, however, other more tangible use cases in the power exchange industry. In Australia and New Zealand tokenization of electricity generated by residential solar panels and being fed into grid feeders is being tracked using NFTs. Similar programs are being started in Germany. This allows the green energy gains to be quantified better. One can also establish a legitimate case for NFTs becoming digital twins for actual assets like title ownership, car ownership, land registries, inheritance, and personal wills. NFTs could become the representation of a transaction or group of transactions being executed over the blockchain. It brings granularity to not only the result of a transaction, but also the steps that lead to the result.

There are strong signs that NFTs will be one of the foundational building blocks of asset value exchange. What those assets are and how they are used will define the real value of NFTs in the future – it is up to us to imagine it.

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Sudeep Choudhari

Posted by Sudeep Choudhari

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