A Deeper Dive into the World of Non-Fungible Tokens (NFTs)

A Deeper Dive into the World of Non-Fungible Tokens (NFTs)

Taking frequent strolls in the hallways of the internet and not stumbling upon this Shiba Inu meme, commonly known as the iconic Doge meme, is out of the question.

Recently, the Doge meme NFT (non-fungible token) has been sold for a staggering $4 million, becoming the most expensive meme NFT ever sold.

Non-fungible tokens or NFTs have been a thing for a while now and the hype is only escalating. In the third quarter of 2021, the aggregated value of NFT sales volume amounted to around $10.7 billion. Though it is debatable whether NFTs are a fleeting trend or a bright opportunity for artists and creators, NFTs are constantly in the headlines each time they are sold for hundreds of millions of dollars.

But what exactly are NFTs? How do NFTs work? And most importantly, what makes NFTs valuable?

What are Non-Fungible Tokens (NFTs)?

A non-fungible token or an NFT is a kind of digital token that defines ownership of real-world items like artwork, memes, music, gifs, video clips, and so forth.

A common analogy is to think of NFTs as tokens or trading cards that give your digital assets a distinct identity by creating a unique digital signature representing ownership of that asset. We can also think of NFTs as modern-day collectibles that work as digital proof of ownership to digital items and can be bought and sold online using cryptocurrency mostly on Ethereum-based NFT markets.

NFTs – In Simpler Terms

To better understand the concept of NFTs, let us take a look at the case of an aspiring artist that wants to hold an online exhibition. But there is always a chance that someone would forge or replicate your work as soon as you put it up on an online platform. This is where NFTs come into use.

NFTs secure your digital assets and maintain your ownership rights. In this scenario, the artist could buy NFTs for their artwork. NFTs contain distinguishable information like who sold the digital asset and who owns it, making them verifiable and one of a kind – it is impossible to forge them.

NFTs – A Technical Insight

A non-fungible token or an NFT is basically a chunk of data that is owned by an address. The person having the password to that address owns that chunk of data which can be further bought and sold to other addresses.

Therefore, when you are buying an NFT, you are technically buying a chunk of data pointing to a server that holds the digital asset. Buying an NFT is like buying a stock, which means that you do not own the entire company. Plus you are not getting anything from it unless it is a dividend stock.

How Do NFTs Work?

Traditional works of art hold great value due to their ‘uniqueness’. But digital property be it a video clip, a gif, a meme, or a picture, can be replicated endlessly and easily. So, the point of concern here is how artists or creators can prevent their digital assets from being forged or replicated? And the answer is ‘Non-fungible tokens’ or NFTs.

Non-fungible tokens are used to tokenize those digital assets such as artwork to create a unique digital signature of ownership that can be purchased and sold.

NFT creates a blockchain-based digital certificate for your assets including artwork, games, gifs, video clips, music, virtual avatars, and more. This certificate gives your digital assets a unique identity.

Most NFTs are created and stored on the Ethereum blockchain, which is a distributed public ledger that keeps a record of transactions. Although Ethereum is a cryptocurrency just like bitcoin, its blockchain network also supports non-fungible tokens.

How NFTs are Different from Cryptocurrency?

Two types of tokens exist in the crypto world: fungible tokens and non-fungible tokens. The fungible tokens are like a currency. Cryptocurrencies like Bitcoin and Ethereum are fungible tokens which means they are entirely exchangeable with each other.

NFTs on the other hand are unique tokens, which means that each of them holds a different value and a unique signature that makes it impossible for NFTs to be exchanged or equal to one another.

What Makes an NFT Valuable?

The value of an NFT is weighted differently across the factors such as its utility, uniqueness, ownership history, and liquidity premium. Investors can keep these pillars of NFT value in mind to evaluate if it is worth investing in that specific NFT, while developers should consider these factors to think of ways to attract more investors. 

Utility: Real-World Benefits

One of the significant pillars of NFT value is the Utility factor that refers to its real-world benefits. It represents what you can do with NFTs and how easily they can be utilized in generating revenue. What could be a better place to use a digital item like NFT than the gaming world that holds hundreds of opportunities for players to use NFTs efficiently? Gamers can sell, import, and use NFTs in games, whether it is a collectible shield to block enemy attacks, a painting to embellish their virtual house, or a new skin for their avatar. They can sell this digital property to other players too. 

Moreover, when it comes to earnings and content rights, NFTs greatly benefit the digital creators, enabling them to maximize their earnings. NFTs have given more value to digital creations, which means creators can sell their NFTs and earn more money.

Uniqueness

By nature, all NFTs are unique as all of them hold a different value and a unique digital signature but some are more unique than the others. Think of Jack Dorsey’s first-ever tweet that read “Just setting up my twttr” and is sold as an NFT for over $2.9 million, or the TopShots of popular NBA clips. These digital assets are unique and rare, hence holding a great value.

Ownership History

The identity of the initial issuer or owner of an NFT contributes to its value. NFTs created or owned by renowned celebrities, globally recognized artists or famous brands hold a high ownership-history value. Someone might be willing to pay a million dollars for a simple image of a duck that Barack Obama owned at one point.

The American digital artist Beeple is worth mentioning in this case who has blown the minds of the crypto-art fans and has created three of the top 10 most expensive NFTs of all time.

Owing to its increasing popularity, people are now willing to pay hundreds of thousands of dollars for non-fungible tokens. NFTs also hold special perks for aspiring artists and creators on social media and it is high time for them to act on the opportunity today to design the blueprint for the future.

Now that you have the basic idea about the NFTs, we leave it on you to decide whether they are a speculative fad or they are here to stay.