What are NFTs?
NFT is a short form of non-fungible token. It means that it is a certificate of digital commodity ownership. Other than domains, it is not possible to own any type of digital media without going through the legal patent and copyright process. However, with the help of NFT, anyone can become an exclusive owner of a digital object like media, artwork, videos, images, content, audios, or even tweets. The NFTs have caught the attention of the users since they are being sold for millions of dollars on the digital market.
Where did these NFTs Come from?
The NFTs were not introduced in the refined shape that they are present today. The most primitive form of NFTs is believed to be Colored Coins. The first mention of Colored Coins was introduced in a blog post by Yoni Assia in 2012. Colored Coins were small denominations of Bitcoin that could be as small as one Satoshi. These values were capable of representing a vast number of asset classes. However, if one person would not agree to the value of the entire system, it would seize to offer any value.
This fragile asset valuation system laid the foundation for the NFTs. In 2014, three colleagues Adam Krellenstein, Robert Dermody, and Evan Wagner, co-founded Counterparty. It was a peer-to-peer digital fintech platform that was open-sourced and built on top of the Bitcoin blockchain. In 2016, the infamous Rare Pepe memes started to found their way onto the counterparty protocol.
In 2017, while Ethereum blockchain was gaining much appreciation in the markets. The first dedicated NFT market place Peperium, was launched. However, an actual NFT market was incidentally invented later on by John Watkinson and Matt Hall. Both creators started an ERC20 and ERC721 hybrid token and went on to produce about 10K unique characters and named them Cryptopunks on the Ethereum blockchain. All of these cryptopunks were promptly acquired, creating a formal platform for buying and selling the NFTs.
The Introduction of ERC720 Ethereum Token Standard Protocols
In the past, other than Cryptopunks, most of the NFT like digital commodities were following the standard of ERC20. This old system was not very suitable for creating a unique and completely distinct token protocol. Many people know that other than ETH, the native token of the Ethereum blockchain, the ecosystem can host several other altcoins. Each altcoin uses a specified ERC (Ethereum Request for Comment) to get its distinct identity. The ERC721 was authored by William Entriken, which is also open-sourced, but it gave the digital token the non-fungible functionality.
Do All NFTs Exist on the Ethereum Blockchain?
The Ethereum blockchain hosts a majority number of NFTs that are present in the crypto universe today. The major use of this ecosystem is due to its high popularity and vast networking capabilities. However, many other blockchains can host NFTs and offer a different hosting protocol than ERC721. The investors have started to explore other options like Polkadot, EOS, and Tron. In short, any blockchain that offers smart contracts functionality can host NFTs. Some third-generation blockchains like Cardano have introduced a dedicated NFT platform by the name of Cardano Kidz.
How can a Person make/buy/sell an NFT?
Just like digital assets, any person who wishes to put up their digital content for sale is capable of creating a non-fungible token. The best way to do this is to visit the NFT marketplaces like OpenSea, SuperRare, Rivex, Decentraland, Rarible, MakersPlace, Nifty Gateway, and many more. Without the presence of an NFT marketplace, it would be quite difficult to own, sell, or purchase any NFTs. The users can register on NFT marketplaces and use the platform to mint their digital assets into NFTs. Any person can mint just about any digital media that they think is worth selling. So far, artists have been able to convert memes, gifs, audios, images, and even tweets into a non-fungible commodity.
What Makes NFTs Valuable?
The NFTs are as valuable as artwork. For the most part, their evaluation is speculative, and it depends on the buyers that how much money they are willing to pay the artists. There are also many NFT marketplaces where the digital art galleries are piling up with one after another NFT artwork. It is all about getting exclusive ownership of the product that an artist produces. The famed artist Beeple made history when his NFT artwork was sold in an auction for $69.3 million.
In the same manner, a famous game by the name of cryptokitties has earned its creator an average price of $65.76, where a single unit has been valued for as high as $3 million. In the same manner, the tweet auction by Twitter CEO Jack Dorsey also turned many heads when he auctioned and sold his first singed tweet for $6 million. Even though the public can see the digital copies of the original artwork, but it does not bring down the feeling of owning an original creation. The same can be said about real-life art, like paintings whose posters can be pasted anywhere, but the real painting is under the ownership of one person only.
Is it Easy to Steal the NFTs?
There has been one unique advantage of owning an NFT artwork that is discussed quite often. It is much easier to steal a painting or a collector’s item from a museum than it is to steal an NFT. The protocol behind NFT makes it completely irreplaceable. Although it also depends on how the owner is choosing to store their artwork, and there had been incidences where blockchain like Ethereum has been hacked. However, it is still considered a more secure way of owning an asset.
Are NFTs a Good Form of Investment?
The owner of the NiftyGateway, where famous NFT artist Beeple auctioned his creations, says that if a person owns one of a kind product and the company that creates that product goes out of business. The value of the artwork that has been salvaged would increase many folds. It seems like that the careful storage of NFTs could result in a possible spike, and it would end up becoming profitable. For the most part, the NFTs are purchased with cryptocurrencies which seems a more conventional method since both assets exist on the blockchains. There are also many platforms where the conmen are posing as well-known artists and cheating investors out of their money. It is not easy to determine credible sources from fraudulent ones. For the most part, NFTs are purchased by collectors and billionaires who are not much concerned about the loss of a few million dollars. NFT, as a rule, are not divisible entities. There have been some artworks that were designed in a manner that they could be sold into fractions by being tokenized. However, just like Fabergé egg, the unit does not value in its distributed phase as much as the entire collection. When it comes to NFT artwork, the buyers should do their homework before making any purchase.
Legal Implications Related to NFTs
Some pressing legal issues have started to surround the NFTs. The NFT, in reality, is a digital ownership contract. However, there are no places in the law where theft of the NFT is punishable, and its status is defined precisely as a legal asset class entity. The NFTs have stepped out of the realm of the art world and begin to be presented as collateral. On the other hand, the owner of any NFT is free to transfer or reserve the rights of selling and distribution while trading. In short, the fastest-growing digital asset market lacks an obtuse amount of regulatory infrastructure around it. Nevertheless, some standards for royalty payments and licensing fees are underway.
Sport and Music in NFTs
Sports fans and music artists are two major industries that are taking a huge interest in the NFTs. The music talents like Grimes, King of Leon, Shawn Mendes, Weeknd, Jay Z, and many more have started to take a keen interest in digital technology. The NFT technology allows artists to create their music and sell it without having to sign with a record label. It is also up to the artists to value their creations as they want. Sometimes these artists prefer to include distribution rights to their work as well. Many well-known names in the industry have said that the platform provides artists with better control over their creations and allows them to work independently and with more freedom.
On the other hand, sports fans are obsessing over the NBA sports cards that are created in bundles just like original trading cards. These cards are available at DapperLabs since 2020 and have become a huge success in the market. The cards feature star NBA players like Lebron James and Steph Curry. Trading cards have been a long-standing tradition among sports fans, and they are considered collectors’ items. According to an estimate made by CNBC, the NFT sports memorabilia have managed to generate an estimated revenue of $230 million which is incredible.
Things that the Buyers of the NFTs Artwork should Note
There have been many incidences where investors who have purchased the artwork have lost it forever since they do not understand how the technology works. The important thing to do is to understand the basics and increase the security of the subject. For the most part, NFTs are hosted on IPFS (InterPlanetary File System). The IPFS allows the digital asset class to be hosted on several servers at the same time and makes it more secure as a result. This is important because once the seller cuts off the hosting from their side, the NFT would cease to exist forever. This is where the investor with non-technical backgrounds tends to make a mistake.
When a person purchases an NFT, they should download it first. If they fail to download it and the host stopped support, the NFT worth in millions would be lost forever and is very unlikely to be recovered. It does make it seem like a fragile entity, but it is all about understanding how the system works. The author of the ERC721 protocol Entriken also suggests that it is better to host the NFTs on IPFS, which would make them more secure, and it would be easier to salvage them during bidding or sales. In many cases, the NFT itself could be a URL that redirects the users to the website where the original artwork is being displayed. However, if that website goes offline at any given time, the real artwork would be lost.
The Implications of the NFT Technology
The utility and use cases for NFTs are only starting to become open to the digital explorer. The developers are sure that this technology offers great potential and can create a new dimension in how it would be used in the digital realm and in terms of a Fintech solution. The virtual real estate applications are taking a great interest in the NFTs. The idea is that with the help of an NFT, the users would be able to access a secret location on the internet where only they would be able to visit and make use of the place.
The luxury gaming industry is also not far behind in the NFT uptake. The game developers agree that they would be able to use the technology to allow the gamers to purchase unique gaming accounts and gaming equipment that are only one of a kind. The possessors of these entities would also be able to sell and purchase these entities in the open marketplace at their disposal. While some primitive forms of such digital programs may exist, the non-fungible quality of these new features stands to increase the effect and make it unequivocally irreplaceable.
Bio-hazard due to NFTs
NFTs on their own are not dangerous to the environment. However, the blockchains that they use as an ecosystem consume a lot of energy in lieu of proof of work consensus. To understand this better, it should be understood that the majority of the Ethereum present in the world is based on the ERC721 protocol and hosted on the Ethereum blockchain. The founder of Ethereum, Vitalik Buterin, has claimed many times that the blockchain would switch to a more efficient type of consensus protocol called the proof of stake. The PoS takes much less computing power and energy in comparison to the PoW system.
Many artists have become anti-NFT due to the pollution problems related to this medium. The creator of Space Cat NFT artwork, Memo Atken, where a cat was seen heading towards the moon in a rocket ship, also took down his website cryptoart.wtf. Atken’s decision was affected by the incidents of fraudulent entries on the marketplace and the fact that the carbon footprint of his artwork is larger than the EU resident’s electricity for two months. The problem is that the PoW consensus requires a huge amount of computing power to validate the transactions that are taking place on the blockchain by solving a complex cryptic puzzle. These puzzles get more and more complicated as the transactions are branched out further.
Is there a way to Solve the Environmental Hazard Issue?
The first and the most obvious solution are to convert the blockchains from Proof of Work to Proof of Stake consensus. In this manner, a lot of computing power would be cut down, and the NFT transactions would only use a fraction of the energy that they were consuming before. Another proposed method is to create a second layer on top of the blockchain that could act as a peer-to-peer transferring platform that is dedicated to NFTs. The new layer would allow the NFT transactions to occur off-chain, and in this manner, it would become a much more acceptable amount of computing power.
There is also the possibility to switch to a renewable energy source that would support the blockchains. At this point, it is not clear if NFTs are responsible for generating additional clutter and pollution or they are part of the regular mining process that is done for fungible digital tokens. It should be noted that blockchain is the primary environment for digital currencies and the miners would still be decrypting and using energy if NFTs do not exist. The presence of third-generation blockchains like Cardano and Polkadot also stands to make the use of NFTs much less gullible to the environmentalists’ critics.
Conclusion
Despite the fact that NFTs have not become mainstream art mediums yet, many artists, investors, developers, and lawmakers are exploring its possibilities and trying to find new uses that could popularize this concept. There is a real possibility that NFTs would be around even after decades from now; it is up to the users to make their choice. Like every new technology, the NFTs are also going through the initial phases of growing pains, and only time would tell that if it is only a fad or a bubble that will eventually pop.
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