Non-Fungible Tokens - New Era of Digital Asset Ownership
Non-fungible Tokens (NFTs) are tokenized digital assets, embedded on blockchain networks that are non-interchangeable and establish proof of ownership.
What are NFTs?
Non-Fungible Tokens are unexchangeable tokens that represent ownership of a digital asset on a blockchain network. These tokens can represent the digital version of any form of asset- ranging from claims over physical assets such as a building or digital commodities like music, essay, art and so on. Each token is coded with a unique range of data that is embedded on the blockchain network to establish originality and verifiability of ownership.
NFTs are powered by blockchain networks and the properties of Blockchain technology such as ownership, authenticity and immutability also apply to these tokens. NFTs are a certification as to the ownership of a digital asset in a decentralized network.
Through the Blockchain network, ownership of these tokens is verifiable, transferable and secured by cryptography.
Each NFT is encoded with metadata that is specific to that token, making it unique. This helps differentiate the original asset from any duplicates. These tokens are on-chain representation of off-chain assets making the process of transferring these assets more transparent and efficient using blockchain networks and smart contracts. NFTs are also gaining popularity owing to its ability to remove intermediaries in the process of collecting, owning and selling these assets. NFTs have opened up new ways of interaction between creators, curators and collectors of digital assets.
How do you own NFTs?
NFTs exist on blockchain networks. So, to own NFTs, one must have access to a Blockchain network which also holds a cryptocurrency wallet for transacting with the NFTs. NFTs are created or “minted” from digital objects. These could be digital art such as music, design, videos etc., or it could be a representation of a real-world object such as a house, car, passes to a concert or so on.
These tokens can be owned by one owner only at any given point in time.
The ownership of the NFT can be tracked using the public digital ledger of the blockchain network that the NFT is embedded in. Each person that was assigned ownership can be traced on the ledger using the unique identification code and metadata coded into that specific token. Smart contracts are employed for management of the transfer of ownership of the NFT.
What distinguishes NFTs from Cryptocurrency?
Unlike cryptocurrency, one NFT cannot be exchanged equivalently for another NFT.
Though cryptocurrencies and NFTs are built with similar programming, they have their differences. In economic terms, fungible objects are those that can be replaced with identical and similar objects of the same value. Applying the same in the context of cryptocurrencies, 1 ETH will always be equal in value and the same as another 1 ETH. As such, these are fungible tokens. However, NFTs differ significantly in this aspect. Each token is given a special and unique identification and a random set of metadata with a value that is specifically attached to the asset that token represents. Owing to this, one NFT cannot be exchanged equivalently for another NFT as they could represent different assets or they could be of two different values.
How do NFTs create value?
Value in the NFT landscape is linked to the concept of scarcity and market demand.
Creators of the asset decide the degree of scarcity of the asset. They can either decide to have only the rare original token or a several hundred replicas. The collectors then add value to the NFT market by participating in the buying and selling of these tokens. Market demand in the community of collectors for a particular asset made by the creator determines how healthy the dynamics of the NFT market performs.
NFTs depend invariably on the community of collectors as their interaction with the token determines how much value the token fetches in the market.
There can be a wide range of reasons as to why NFTs are collected- for example, a loyal fan owning the original artwork of an upcoming artist or a photograph with high cultural significance or the opportunity to reap profits by reselling an asset, the value of which is bound to shoot up in the future. The more people that get involved in this market and the more engagement there is with the creators and the collectors, the more value the market accumulates.
Why are NFTs gaining traction?
NFTs have particularly taken the digital content community by a storm. Be it gaming, art, music, videos, memes or the like, it’s ability to be stored digitally has catalyzed the adoption of NFTs by the digital community. NFTs are a game changer for creators of content by helping them earn profits at an unprecedented level with more transparency and returns that have never been seen before. As NFTs completely remove the need for any intermediaries, the creator's work is directly bought and the value is entirely exchanged between the two parties to the transaction.
NFTs are acting as an incubator for the Creator economy where ownership of a creator’s work is not surrendered to the distribution platforms but, the ownership and value remains within the asset.
Creators can continue to earn revenue from their work even after their initial ownership has been transferred by way of royalties that accrues to them each time the asset is sold to others because the creator’s information is encoded in the assets metadata which is immutable.
Ownership of a creator’s work is not surrendered to the distribution platforms
In-app purchases in the gaming community have also been elevated by usage of NFTs. In fact, the trading between players of a game has led to an “in-game economy” that is picking up pace. This way there is creation and transfer of items of value between the developers and users of the game through the NFT market that is ultimately beneficial to the whole community.
NFTs also have several positive use cases in Decentralized finance.
These tokens can act as collateral to loans and owners can even create “shares” in their NFTs wherein other collectors are allowed to invest or own parts of a token without purchasing the entire token. As both landscapes are steadily growing, their intersections are going to result in exciting developments in the future for various sectors.
Future of NFTs
Though minting NFTs has been criticized for its heavy carbon footprint, most platforms are evolving to find ways to be more climate conscious and energy efficient in the near future. NFTs can also empower modern finance systems of trading and providing loans by enabling digitization of physical assets to restructure current models. With the security and integrity of blockchain networks and smart contracts, NFTs can render intermediaries redundant and drastically reduce hurdles in business processes. The most exciting and promising aspect of the future NFTs is the formation of new markets and novel forms of investment in several sectors such as real estate, gaming, art and entertainment.