11 March 2021, it’s another usual day for you. You are happy because your planet did not get hit by an asteroid last night. It feels good to be alive, isn’t it?
You are scrolling through your Instagram feed or watching the news.
Then something happened!
Your notifications and feeds got flooded with some news. Shocking one I would rather say, enough to make you sit up straight on your couch.
“ Digital artist named Beeple sold an NFT for $69 million at Christie’s auction in New York City.”
Whoa! Hold on a second. How much did you say?
Yes, you heard it right, digital art for a staggering $69 million.
As soon as you regain your senses, questions start flooding in.
What the hell is an NFT? and why on earth people are paying such ridiculous amounts of money to buy it?
It’s time you wake up and see what’s going on in this world and what your future looks like.
Let’s see your future ( kidding, I don’t know astrology ).
What is an NFT after all?
An NFT is a unit of data related to digital content or a real-world asset. The data gets uploaded to a digital ledger called the blockchain.
It is an acronym for the Non-Fungible Token.
The assets could be anything. Virtual goods like photos, GIFs, videos, audio, digital land, and in-game items.
You could also make NFTs of real-world assets like collectibles, tickets, paintings, etc.
This is the reason why NFTs took off.
Before NFTs came in, digital content was not that valuable. Digital artists could not authenticate their work even if someone stole it.
Along with the creator, everyone else who had a copy of the work could use them. Anyone can replicate them with a few mouse clicks ( right-clicker mentality ).
But NFTs made it possible for the owners to have proof of ownership of the content they have created. Now they can sell those NFTs like real-world assets.
You can still download those pictures on your digital device for free.
If they are available to everyone for free then why would someone pay for them? This is where things get interesting.
Suppose you have a copy of Leonardo da Vinci’s Mona Lisa.
Owning a copy of the painting doesn’t make you the owner of the original painting. You only have a replica of that painting which is of little or no value.
That same principle applies to NFTs.
They provide the owner with proof of ownership. It verifies that the asset belongs to the owner. Any other copy of that work is not original.
It creates a feeling of scarcity that makes them so valuable.
It is still a mystery why humans have an inclination toward scarcity and value it so much.
Paintings and Collectibles are so expensive because of their uniqueness and scarcity.
NFTs provide the owner with “digital bragging rights” for that property. The more famous the NFT the more credit you get for owning it.
While some people treat it as a medium to flex, others use NFTs as a form of investment.
The terms in NFT are a bit confusing. I know some of you are still struggling with the terminology, let me explain that.
What is the difference between the terms fungible and non-fungible?
The term fungible means interchangeable. You can exchange the commodity for another identical item of the same value.
For example, if you have a one-dollar bill and exchange it with another dollar bill. The intrinsic value of the new bill is the same as the previous one.
The same goes for cryptocurrencies. You can exchange one Bitcoin with another without diminishing its value. This makes Bitcoin and other currencies fungible.
Non-fungible means something is unique and you can’t exchange it with something else. Even if their monetary value is equal the assets are completely different.
For example, two one-of-a-kind collectible baseball cards are not interchangeable. Even if they have the same price, the cards are completely different.
That’s what non-fungible means.
If someone is paying that kind of money for a digital asset, the next question you may ask:
Are NFTs safe and hack-proof?
The identification code that your NFT has uses a Cryptographic Hash Function ( CHF ). This function takes a user input of any length and converts it into a fixed-sized output. The output consists of numbers and alphabets called the “hash” or hash value.
This hash value is then authenticated by other blockchain miners. The authentication process includes solving an encrypted code that requires high computing power.
When the miner validates the transaction it creates a unique block in the blockchain.
The miners add new blocks to the blockchain every few seconds even if they are empty blocks. The number varies for different blockchains.
Each new block links to the hash value of its previous block, hence they form a chain.
Every block created in the blockchain is permanent. No one can delete or manipulate them in the future.
Every computer system connected to the blockchain contains a copy of the ledger.
If someone tries to manipulate a single block, it will affect the values of other blocks.
The validation process compares that data with other ledgers. If they don’t match, it discards the changes.
The blockchain is a decentralized system. That means no single authority controls it.
To manipulate it, you have to hack the entire system consisting of millions of users.
To put it straight, it is too hard or you could say impossible to hack the blockchain and that is why it is safe.
Well, that sounds good to me. You can say that your data will be safe with blockchain.
The ownership of an NFT:
You may be thinking that having ownership of an asset gives you the copyright to that work. Which promises more money in the future.
Sorry, but we have bad news here. That’s not always the case.
The creator will have the copyright and intellectual property rights of that asset. Ownership of an NFT doesn’t grant any of those privileges until it’s in the contract.
The creator of the NFT can create as many NFTs of the same work as they please, which makes it a bit scary. Let me tell you why.
Suppose, you have bought an NFT because it is rare and holds more market value because of its rarity. If the creator makes more NFTs of the same work, the value of your NFT will decrease because it is not rare anymore.
Thus, you should be cautious about the creator of your NFT. The source should be reliable and the bad part is you can’t control it.
Ownership rules, ethics, and morals are good but let’s keep that for another day. Now let’s concentrate on the technical aspects of NFT.
How can you create your NFT?
NFTs represent an asset that is either tangible (can touch) or intangible (Virtual).
To understand the process of NFT creation we need to understand “Minting.”
There are various platforms where you can create NFTs of your work or asset and list them for sale. Let’s discuss how that happens.
The most popular sites for NFTs are:
- Nifty Gateway
New platforms are also emerging in the scene.
Steps involved in Minting:
#1. Connect your Crypto Wallet:
Crypto wallets help you to manage your cryptocurrencies and perform transactions with them.
You have to connect your crypto wallet to the NFT marketplace.
Then you can create a profile in the marketplace and perform further tasks.
#2. Create your first NFT project:
To create your NFT you have to upload the specific file which you want to turn into an NFT.
Then you have to give a name to it and give some description about your project.
After completing the process your first NFT is now minted.
#3. Wallet with some coins in it:
To cover your NFT creation costs you have to pay the platform some money as a “gas fee.”
Make sure you buy some Ethereum or other cryptocurrency beforehand to cover up the cost.
Nothing comes for free in this world!
#4. Listing for sale:
You can then list your NFT for sale and decide a price for it.
You can also opt for a limited-time auction. Choose whichever method suits your requirements.
After the listing is complete you have to pay the gas fees given by the marketplace.
Voilà!, your million-dollar NFT is ready for sale. Pack your bags for Disneyland.
If you are an artist and want to sell NFTs then the above process is for you.
But if you are a collector and want to buy NFTs? Let’s find out how you can do that.
How to buy an NFT?
#1. Digital wallet ( also called crypto wallet ):
The first step is the same as minting an NFT.
Connect your digital wallet to the NFT marketplace to perform the transactions.
#2. Keep enough balance:
You should have enough balance to buy NFTs.
The digital currency could vary according to the marketplace. In most cases, Ethereum will do it.
You could also use your credit card to perform transactions. Various platforms like Coinbase, Kraken, eToro and even PayPal support it.
You have to pay the platform for your transactions.
#3. Buying NFTs:
You can then buy NFTs with fixed prices or take part in auctions and pay with your chosen payment methods.
Well done, now you have your own NFT collectibles.
Now that you know how to create NFTs and buy them. Let’s take a look at what are the perks and drawbacks of NFTs.
Advantages of NFTs:
Digital artists get the price for their hard work:
There was a time when digital scarcity was an oxymoron. Whatever was digital was not scarce.
You could make millions of copies of something and the last copy is still the same as the first one ever created.
NFTs completely changed that. Now you can create an NFT of your digital work and can sell the authentic copy for a price.
How cool is that!
Before the central authorities used to control your work, most often the host website.
They could control your content.
But now, the NFTs are present on the blockchain which is a decentralized system. That ensures you can have complete control over your work.
Reduction in third-party charges:
Suppose, you want to display your work in galleries or auction houses to sell them. You need to pay them to display your work.
But now you can keep that money and maximize your profit.
Artists can get royalties for transactions done even after they’ve sold their work. They can still have the copyrights and intellectual property rights of their work.
Blockchain takes care of the whole process and spares you the headaches.
The flexing opportunity:
NFTs make it more convenient to flex your collections to others. Anyone in the world can check that the asset belongs to you.
Decentralized finance (Defi):
Now you can also take loans with your NFTs. There are Defi platforms that make it possible to take loans with your NFTs as collateral.
Suppose the borrower doesn’t pay back the lender in a given time. In that case, the collateral gets transferred to the lender after the payback time is over.
The creators could also sell “shares” of their NFTs. It enables collectors to own a piece of the work without buying the whole thing.
That’s a long list of perks that make it clear that NFTs do have some use in the real world.
But everything good comes with some drawbacks and NFTs are not an exception. Let’s take a look at some of the drawbacks of NFTs.
Drawbacks of NFTs:
The problem with NFTs is that it only contains some metadata of the transaction that takes place. It does not store the asset in the blockchain.
The real asset stays somewhere else and the blockchain only contains a link to reach the source.
God forbid if something happens to the source site, you are in serious problem.
If you own an expensive NFT you would never want something like that to happen.
So, the NFTs use something called InterPlanetary File System
( IPFS ). It protects the file from getting lost by saving it in different storage units.
God knows how reliable is that.
Bit rot is another problem. The term bit rot means the slow deterioration of integrity and performance of data over time.
We can only hope that doesn’t happen with our NFT asset.
NFTs are expensive:
Not everyone can afford Bitcoin, Ethereum, or $100 gas fees to mint NFTs. Other maintenance costs that come with the technology are also expensive.
It is far from affordable at the current stage for the general population.
The bubble could burst at any time.
NFTs also come with a lot of technicalities which are most of the time confusing.
The get-rich-quick scheme:
A lot of people are stepping into the NFT space to make quick money. It may affect the sustainability of this technology.
The sky-high prices of these NFT assets are attracting a lot of attention.
People are creating NFTs of anything with no long-term plan to maintain it. Their only intention is to make quick money out of it.
This is bad news.
The NFT world relies on the mentality of the seller and buyer.
People buy these things only hoping to get a bigger price in their next transaction.
The prices are only decided by the perceived value of the asset.
Let’s assume the art you bought for a million today and have a huge demand. Later in the future, it loses its demand, because no one finds it interesting anymore.
Then you are in deep, deep trouble.
Your million-dollar art could sell for only a few thousand or may lose its entire value. That will prove to be a very bad investment.
The NFTs are subject to capital gains tax. That means if you sell your NFT for a profit, govt. will take a bite from it ( sometimes a large one ).
In countries like India, the taxes could get as high as 30% which is a hard hit on your profit.
You may earn a huge sum from your NFT transactions but you’ll also have to pay a huge sum in taxes.
To be honest, no one likes to give a large piece of their pie to the other person.
But in this case, no one will ask you to do so, it’s mandatory. You have to follow the rules to save yourself from trouble.
Harsh on the environment with a high carbon footprint:
Let’s face it. No matter how efficient they seem, blockchain technology is power-intensive.
Its carbon footprint has drawn a lot of critical attention in the last few years.
The mining process requires too much computing power, consuming a lot of electricity.
This questions the long-term use and sustainability of the technology.
The potential solutions:
It is a good thing that blockchain developers are accepting the fact. Which leaves room for improvement.
They are currently working on technologies like stacking. It will replace mining and will reduce power consumption by up to ~99.95%.
A promising number.
But it is still in the developing phase and it will take some time to see the effects. Until then the answers are hazy.
Are NFTs here to stay?
Blockchain and NFTs are still in their early and developing stage. But the enthusiasm around it tells a different story. You could sense the fact that it is here to stay.
Experts say blockchain is one of the major inventions in the tech world after the internet. They also named it Web3.
Promises like decentralization and a token-based economy still have to go large scale. But the future looks promising.
The growth of Blockchain is awe-inspiring and the transactions tell the whole story.
Blockchain technology is still in its early stage and needs a lot of changes.
Whether it is going to be affordable and available to the general population time will tell. But still, hopes are high.
Before you buy any NFT my sole advice will be to do adequate research on the topic and then think about buying.
It’s your money after all. You should take every possible step to make your investments profitable.