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What are NFTs and why are they getting so much hype ?

What are NFTs and why are they getting so much hype ?

This is Nyan cat. He is a part cat and part pop-tart. The gif of a rainbow casting feline was a viral meme back in 2011. Fast forward to 2021 the original gif was sold at an online auction for 300 ether, the cryptocurrency that powers the cryptocurrency etherium network. That was equivalent to nearly $600,000 at that time . I know you must be wondering how can such a absurd thing can go to such high value – Let’s explore further and know what are NFTs and you will surly get your doubts cleared

But how can someone own a gif that was pervasive around the whole internet ?

That’s because it was sold as an NFT or non-fungible token which acts like a digital certificate of authenticity. The market for NFTs ballooned in 2020 climbing to a market capital of 338 million from  about 41 million in 2018. But are these asset really worth the value they are acquiring especially when all it takes to view them is an internet connection.

How does NFTs work ?

What are NFTs in the crypto space ?

NFTs or Non-fungible token are cryptocurrencies based on Etherium but unlike fungible assets like bitcoin they are completely unique entities. They exist as a network of numbers and letters stored on a blockchain ledger. This information can contain who owns the digital asset, who sold it and when it was sold. This information is also encrypted ensuring the NFT’s authenticity and scarcity. In doing so they fix a difficult problems for digital creators on the internet and that is how to make your creation scares and therefore more valuable.

Why are NFTs being valued at so much high price ?

It is facilitating the buying, owning and selling of digital goods. NFTs have emerged as wonderful enabler for independent artist around the world to have value for their work.

This unique digital asset is build on blockchain so it means that you are buying and selling this original digital file. So blockchain keeps a log of its original seller based on the token system. So there is history of ownership, there is only one original and there is a limited quantity that cannot be multiplied so that’s why they are so valuable

Due to this nature of non-fungibility they end up being scares  which help to drive up the price in the market.

Examples:

  1. One of the early application of creating scarcity was the digital collectibles game Cryptokitties which emerged in 2017. Users were able to buy, own and trade digital cat collectibles where each cat was an NFT which certified its originality and ownership. Since then NFTs have been applied to video games, digital art and sports memorabilia.
  2. One example being NBA top shot. This allows users to procure collection of digital basketball highlights, like a video clip of an iconic dunk. All highlights are NFTs and have become big business. By mid march NBA top shot has clocked in over $338 million dollar in sales since it went live in October 2020.
  3. Non-fungible tokens are making their ways into mainstream art world as well. Auction house Christie’s opened bidding for its first purely digital art NFT. Bids rocketed into the millions of dollars.

What is fungibility ?

The ability of an asset to be exchanged or substituted for similar asset of the same value. A simple example of a fungible asset can be currency. If you have a five $1 dollar currency in your wallet then you can exchange it with single $5 dollar currency. The value of which will remain with you is still $5 dollars regardless of the fact that it is now in a different form. Non-fungible assets are the opposite. Each one is unique and they can’t be exchanged or substituted for something similar.

For example “The Monalisa” which is an original piece of art and it couldn’t be swapped out for like a monalisa poster from a gift shop because the poster doesn’t hold the same value.

Thats how fungibility works.

Is there a catch to this trending digital token ?

  • These NFTs are double edged swords which can give you a lot of money or lose you a lot as well. That’s because the value of the NFTs are not constant or always increasing. The value of a NFT can increase or decrease in value depending on demand , hype around the art or the artist or any such external factors
  • People are hyping these NFTs but the fundamental aspect of this setup is that there should be a seller who sells and a buyer who needs to buy it. So the concern around it is what if after a point when one has invested so much on these NFTs but now to cash out everybody wants to sell them but there are no buyers for these owned NFTs. (NFT Bubble)
  • Not all NFTs verify the person selling a digital art piece is actually the original creator. This is difficult particularly in online marketplaces.
  • Much like its predecessors like Bitcoin, .com or any such viral trend it might end up loosing value when there is no trade happening in the market or the trade for digital artistic content fades out. Another thing to keep in mind while owning an NFT is that it doesn’t limit other users in the internet to not see the piece of NFT which can be a wallpaper or art or a gif or a video etc. It just gives you a stamp of ownership.

Future of NFTs

This is a very new marketplace and you are getting a certificate of authenticity. You can find NFTs which you believe in and have a great track record. Later you can sell that depending on the. Market value. But at present its not something you can blindly trust and put your hard earned money over a digital content which might loose value later on if it turns out to be a fad.

There’s a lot which can be done with NFTs. You can set terms with your creation such as the original creator upon each resale of this asset will get an x amount. Or you can have an NFT that itself mints other NFTs. This winds ups having all of these untested applications which has just been scratched upon its surface.

Suggestion: For the time being you can play cautiously with NFTs at the moment by picking low value NFTs which have potential to reach a higher value later when this trend grips the Indian market as well. On the other hand if you are a creator you can also create your own NFT and sell it in the market as well.

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