NFTs have been the biggest buzzword in the cryptocurrency world for over a year now, attracting even more hype than Bitcoin and Ethereum. However, many are still mystified by what NFTs are, what they do, and how they work, and there is a lot of misinformation out there. To help you get to grips with NFTs, here’s Gomoon’s guide to this new, and promising, technology.
What are NFTs?
NFT stands for ‘non-fungible token’, which is a long winded way of saying something that cannot be exchanged like for like with another. For example, one whole bitcoin is worth the same as any other whole bitcoin - they are interchangeable. However, one NFT is not automatically worth the same as any other NFT, even if they are from the same collection, so they are not interchangeable.
What is confusing for newcomers to the space is that when you buy an NFT, you aren’t actually buying all the rights to that asset. When you buy a physical piece of art you have all the rights transferred to you, meaning you can do what you want with it - you could even destroy it if you wanted to, and the artists couldn’t stop you. With NFTs however, your level of ownership doesn’t stretch that far - you are, in effect, borrowing the ability to use the NFT for your own devices. The person who created the asset still legally owns it however, and in some cases they could amend or destroy it if they wanted, leaving you owning nothing.
It may seem therefore that NFTs are not worth the binary code that created them, but this sort of thing doesn’t happen - mainly because it would be counterproductive for everyone involved. Instead, NFT creators are pushing the boundaries of what NFTs can do and the ways in which they can be used, and we have only begun to scratch the surface of their capabilities.
What can NFTs be used for?
In their most basic form, NFTs allow the buyer to ‘own’ something digital that they like the look of or that means something to them. Take for example the 1962 arrest warrant for Nelson Mandela. This was turned into an NFT and auctioned off by the Liliesleaf Museum Heritage Site and Museum, the site where Mandela was apprehended by police and which owns the physical copy of the arrest warrant. The buyer paid $130,000 for the NFT of the arrest warrant, and they now own a digital version of a slice of history. Of course, anyone can right-click-save an image of the warrant, print it off and put it on their wall, but they know that they don’t have any link to that document more than the person nextdoor. Only one person in the world owns the official digital copy of that arrest warrant, which is why the NFT of the arrest warrant is worth more than a printed off version.
NFTs can also represent a share of ownership. In December 2021, a group called Particle purchased the 2005 Banksy painting ‘Love is in the Air’ for $12.9 million. Rather than displaying it on the walls of their office, Particle announced that it would split ownership of the painting into 10,000 slices, with each slice being an individual NFT. Anyone who wanted to own a slice of a Banksy painting could now do so by buying an NFT, knowing that the value of each slice (and the collective slices) would be directly influenced by the perceived value of the underlying asset - the painting - which was locked away in a vault.
This process, which has also been used on residential property, hotels, and other artworks, is a way for everyday people to invest small amounts in assets that normally they would have no chance of doing, knowing that they can sell them on the open market whenever they want.
NFTs have also allowed musicians to blend the audible with the visual, with albums turned into NFTs and sold alongside collectibles relating to the artists and the album. In the future, concert tickets could be sold as NFTs, completely eradicating fraud in the sector.
NFTs also have a huge future in gaming, with purpose-built NFT games such as Axie Infinity being worth billions of dollars. Mainstream game developers are also working on ways to offer in-game NFT rewards to players while also allowing players to buy game items as NFTs and use them in-game.
The uses to which NFTs can be put is only limited by the creativity of those who are building the next evolution of the internet, such as Web 3.0 and the metaverse. We can compare NFTs to the internet in the early 1990s, which was mocked by many who simply didn’t understand the new technology and the potential that suddenly lay at their fingertips.
What are the advantages of NFTs?
Each application of NFTs has benefits over the existing way of doing things, which naturally vary with the sector itself. For example in the case of tokenised shares (e.g. the Banksy painting), buying, selling, and storing digital shares is much easier and cheaper than doing so with physical ones.
In the world of collectibles, associations of all kinds, from sports clubs to clothing stores, now have the ability to get closer to their fan base by issuing unlimited amounts of collectible items cheaply and easily. Digital collectibles are a natural step for the next generation following hundreds of years of physical collectibles, many of which simply end up gathering dust on the shelf or in sitting in boxes in the garage!
However, one thing that binds all the different use cases is the issue of immutability. NFTs have the potential to eradicate fraud, given that every NFT has its own cryptographic reference number issued by the creator which is registered on the blockchain. No one, even the creator themselves, can amend an NFT once it has been launched on the blockchain, and NFTs cannot be added or removed. In short, no one can fake an NFT.
A simple scan of a QR code is enough to tell whether any digital asset is genuine or not, and when we’re talking about everything from event tickets to slices of Banksy paintings, the benefits are obvious.
What are the disadvantages of NFTs?
As with any new technology, there are kinks with NFTs that need to be ironed out - and let’s not beat around the bush, some of them are big ones. The first is that the market for NFTs is in its very early stages and there is not a lot of variety out there yet. The potential of NFTs outweighs what is currently on offer, with art being the predominant medium used for NFTs at the moment, most of which is simply a variation of what is already out there.
The limitations associated with this lack of variety mean that the use case also suffers, with the vast majority of NFTs only being purchased in the hope of making a profit. The world of NFT-based gaming is growing, with NFTs having use cases in-game, but this is still very small. The ‘digital collectible’ concept is very much the driving force behind the NFT market at the moment.
Another disadvantage that comes with holding an NFT is that there is the potential for it to disappear. To explain this we need to remember that an NFT is not a digital asset but a link to an asset somewhere on the internet that someone else has created. If that asset were to disappear, this link would be rendered obsolete. Compare this to a bookmark on your browser - if the webpage it links to goes down, the bookmark is useless, but it still remains on your bookmarks bar. With NFTs, this could happen if the owners of the assets accidentally (or intentionally) delete them, if the server or hard drive holding them fails, if hackers gain access to the file system and wipe everything, or if an NFT project can’t afford to pay the bills for its web hosting services and they get turned off.
Thankfully this rarely happens, but it is not unknown. There are however technologies emerging that will allow NFTs to link to an asset that cannot be deleted by one person or group of people, so in time these outcomes should be eradicated. It is, however, something to bear in mind.
As we have mentioned, developers have only started to scratch the surface of the potential behind NFTs. Unfortunately they have attracted a bad name out of the gate because of their obscene valuations during the 2021 hype cycle, their limited use cases to date, and the fact that you’re not getting a tangible thing for your money.
However, this first incarnation of NTFs is already making way for the second and third generations, which promise to fulfil more of the potential of this remarkable technology. Time will tell which incarnations have the most staying power, but once you look beyond the headlines and consider the technology itself and what it represents it’s easy to see why so many people are so excited about them.
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