NFTs Non Fungible Tokens have been around for some time, but the sudden rise in popularity led many people to have different opinions
Blockchain technology is trending. Any innovation related to it instantly becomes the headlines of renowned news outlets. One such phenomenon, known as NFTs, also gained immense popularity in the world of art last year. It happened when many people started spending millions of dollars on ‘digital assets’
NFTs have been around for some time, but the sudden rise in popularity led many people to have different opinions. Some believe that they are ephemeral, while others consider them the next future of investment. And, well, among all these people, there are still many who are unaware of the very notion of NFTs. So, before coming to any conclusion, one should thoroughly explore what NFTs are? How do they work? And if they can provide any benefits?
What are NFTs?
NFTs or non-fungible tokens are irreplaceable, unique, and one-of-a-kind digital assets, the ownership of which is recorded on a blockchain. Their popularity suddenly exploded in March 2021 when Beeper, a South Carolina-based graphic designer, sold an NFT for a record $69 million1 at a Christie’s auction.
Since non-fungible tokens utilize the same technology as cryptocurrency, the blockchain, you might consider them similar to the cryptocurrency. But no! They are not! Cryptocurrency, like bitcoin, is fungible, implying that they can be exchanged or traded over one another. NFTs, on the other hand, are ‘non-fungible’ and one-of-the-kind tokens that cannot be exchanged or replaced. Think of them as a rare trading card that is unique, different, and irreplaceable.
What makes an NFT unique? Each non-fungible token is distinct with a digital signature, making them unique. Their rare design makes them unduplicable.
What if we can download the art or videos that are sold as NFTs?
Even though people might spend millions of dollars on these digital collectibles, you can still download them, implying that you can copy a digital file, including the NFTs, as many times as you want! That is what some people find strange and awkward.
The thing is NFTs grant you ownership of the work. The original owner, however, retains copyright rights and can reproduce the work.
How do NFTs work?
Most non-fungible tokens are part of the Ethereum blockchain. Ethereum (ETH) is a cryptocurrency with blockchain that also supports NFTs. The additional stored information in this blockchain makes these NFTs work differently from an ETH coin.
Anything digital, including art, drawings, fashion, certifications, licenses, collectibles, etc., can be a non-fungible token. They are now used in art auctions, where images, animations, and even tweets have been sold for millions! Furthermore, they have expanded their horizons beyond the world of digital art and have made their place in real-life applications, including games, videos, and music clips. They can even be a ticket to an event like sports or a movie.
Recently, photography and prints have also entered the realm of NFTs. Photographers are extensively using the online platform to promote their work as NFTs.
What do NFTs offer?
The non-fungible tokens offer certain benefits to content creators, sellers, and buyers based on the platform of their creation. Let’s have a look at them.
To the artists and content creators?
Artists and content creators may use NFTs to sell their content since they provide them the opportunity to sell their work. For instance, they can directly sell their work as NFT without any hassle compared to physically selling the art.
Furthermore, NFTs give the creators a further opportunity to make more profits with a built-in Royalty Feature. Enabling this feature gives them a percentage every time their work gets sold to a new owner. In short, it will benefit them if their work becomes famous.
NFTs also allow the artists to keep the actual copy of their work recorded on the blockchain and authenticate the actual ownership.
With proof of ownership, the buyer gets the true ownership of a work they buy as an NFT. Since the ownership and authenticity of a digital asset can be verified, its value enhances. That allows the work to be bought and sold again and again.
Non-fungible tokens are easy to track because they have unique identifiers. These identifiers allow the verification of a copy of the work with the record on the blockchain.
Additionally, with blockchain, the work has become unique, rare, and irreplaceable as NFTs and is now providing means to those who want to support the original creators for their work.
NFTs also offer utility benefits implying that the owner of an NFT can flip it or sell for profit. Other benefits include growth prospects, value preservation, and access to decentralized finance (DEFi) NFT services.
What are the drawbacks of NFTs?
The benefits that the non-fungible tokens offer to buyers and collectors might make people believe that they are the future of investment. However, it has some downsides also that will determine whether they can last long or not.
Market risk is one of the most substantial risks associated with the NFTs. Even if the NFT market is flourishing, it does not guarantee a safe investment. People interested in investing in them must keep in mind the possible risks, including volatility, liquidity, and fraudulent activity.
NFTs can lose their value massively and are highly volatile. Because as of now, no proper mechanism is there to assist people in pricing the digital collectibles. Some experts believe that NFTs are way much riskier than cryptocurrency.
Since the market for NFTs is in a relatively immature stage, it lacks liquidity. Many people still fail to understand anything about them, and there are fewer potential sellers and buyers. Every seller has to look for a potential buyer who is ready to pay a certain price for a specific work. This makes NFT trading difficult, especially during times of distress.
Similar to cryptocurrency, the rise in the NFT market has also attracted cybercriminals. That has led to fraudulent activity and hacking. Incidents like fake websites have come to light, where NFTs hosted on the platforms have disappeared, and trade and copyright infringements have occurred. Moreover, some impersonators list and sell the work of some artists without their permission. Some may even own an unoriginal version of the digital content as an NFT.
Additional cybersecurity and fraud include copyright theft, copying famous NFTs, fake airdrops, and NFT giveaways.
What are the Challenges?
Widespread adoption is crucial for NFTs to sustain for longer. However, multiple challenges come in the way of their widespread adoption. The most important one is the lack of regulation. There is still confusion regarding the proper definition and classification of NFTs, making directives difficult. The increasing number and types of NFTs have made it tough to find a proper compliance base. Various countries classify and define them differently.
Another factor limiting their adoption is the absence of uniform and universal infrastructure for NFTs. For example, their verification processes for the artists and NFT listings exhibit inconsistency across platforms.
There is also an issue regarding the accessibility to non-fungible tokens. Creators may have to pay fees via cryptocurrency for creating NFTs. Also, only a certain kind of digital content is famous in the NFT market.
The popularity of non-fungible tokens suddenly exploded in early 2021 but seemed to fall a few months later. With so many people still unaware of them, no one can say for sure what the future holds for them. what the future holds for them. While some people favor them, critics still feel skeptical about their success over time.
NFTs may benefit the creators and collectors, but their risks overshadow their advantages. Currently, they are facing many global challenges regarding their regulation, legalization, and compliance. Addressing these challenges and risks might pave the way for their long-term success. Or else, their popularity bubble will burst any time soon!
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