Your quickbite to understanding NFTs

I have recently come across a lot of news with the buzzword “NFT” and it appears to be the latest blockchain trend to make money off it. All the celebrities and companies are converting their valued and sometimes strangely unique artefact and converting it into a digital format called NFT and selling it for thousands of dollars.

Jack Dorsey (Founder and CEO of Twitter) sold the below tweet for $2.9 million. This was the very first tweet on twitter back in 2006.

The below cat meme got sold for $509K. This was one of the earliest viral memes when memes had just begun to become a trend.

Yes, these got sold at a very high price — the same ones you can watch on Twitter and YouTube without paying a single penny. You can find more such examples here.

It got me curious about what NFT really is and can a common person like me make money off it. It took me a while to get a grip of what this new technology is all about. So I decided to write an article to break it down and explain in the simplest terms possible to make it easy for others. Let’s jump into it.

What is an NFT?

NFT stands for “Non-Fungible Token”. There are 2 upfront keywords in it: “Fungible” and “Token”. But there is another term that is not part of the acronym but is equally if not more important. That term is “Status”

Fungible

Fungible means anything that can be replaced or substituted without losing its value. To better understand it, read “Exchange” instead of “Fungible”.

What is exchangeable?

• If I have ten notes of Rs. 10 each, I can offer a friend to exchange it with one note of Rs. 100 and the value will still remain the same
• I can also exchange 1Kg of gold bar in exchange for two 500g gold bars and I will be perfectly fine with the transaction as the market value is still the same

What is non-exchangeable?

• Monalisa’s painting is non-exchangeable. There is only one like it. You can’t buy a Monalisa poster from the corner shop and consider it of the same value as the original.
• Your first car. You have an emotional value attached to it and another car, even with the same model and color, cannot be considered replaceable.

Video Credits: YouTube

Understanding transactions is easier in the physical world. I can draw a painting, make it go viral and sell it to an art collector for a price. The art collector keeps it in his collection and becomes the sole owner of it.

Things start becoming complicated when transactions happen digitally. Now, can I draw a digital painting, publish it on the internet, ensure absolute ownership and sell it to an art collector for a price, while having no restriction on anyone downloading the painting from anywhere on the web? Sounds impracticle, right? The problem with any digital artwork is that it can be easily copied and shared with millions of people on the web at no cost. So how can something be digital and yet non-fungible? This is where tokens play a role.

Tokens

Tokens are digital certificates of ownership. Consider it like a legally stamped document that guarantees ownership of a physical asset to the owner. These tokens are unique and managed by multiple servers across the world so that they are impossible to be stolen or compromised. Tokens (read certificate of ownership) can be assigned to a digital asset and anyone possessing the token owns the digital asset. Pretty simple, isn’t it? Yes, as long as you don’t worry about how these tokens are generated and managed.

Write in the comment box if you want me to explain how tokens are managed through blockchain in a separate article.

So digital content creators can assign a token to their artwork and claim absolute ownership of the content. If they choose to sell the artwork, the token gets transferred to the buyer. Creators can also set the terms of the transfer such that they can claim royalties whenever the artwork gets further sold for the second time, the third time, and so on.

This has started the trend of converting digital content into NFTs and sell them on marketplaces like OpenSea, SuperRare, Nifty Gateway at whooping prices.

National Basketball Association (NBA) and its players union (NBPA) entered into a partnership with Vancouver-based blockchain company Dapper Labs to develop NBA Topshot, an NFT marketplace where fans can buy, sell and trade NBA moments, which are packaged highlight clips that operate like trading cards. Below dunk from LeBron James was sold for nearly $400K

Does this mean that any content converted into an NFT can no longer be viewed or accessed online? No, it does nothing to restrict the free access. You won’t necessarily even get the video delivered to you through a physical or cloud storage. It’s closest analogy is to consider that you have purchased/adopted the most endangered siberian tiger kept in a controlled environment on some remote continent. The tiger will not be delivered to you and you will have to see the photo or video of the tiger on the web, just like anyone else. All you will have is a receipt of ownership and some bragging rights.

Then why are people paying so much for digital content which is anyway available free of cost? This is where the third term “Status” plays the role.

Status

Answer to why anyone would pay so much for exclusivity lies in the human psychology and this human nature is not new. There have been cases where physical artefacts with debatable value have been sold for millions of dollars.

The below painting was sold for $20million

The below Violin was sold at over $9million

The below Pokemon card was sold for $369K.

If you look at each of the above items from an objective lens, the price is never justified. Check out the story behind each of the above and some similar examples to understand why they were able to sell them for such a high price.

In short, when you attach a historic value to the artefact, you attach a sense of exclusivity to it. Humans want to do things which can raise their status in the society and possessing exclusive one-of-a-kind collection helps them earn those bragging rights. The same proclivity to elevate their status guides people to purchase and be the sole owner of the very first tweet ever in the universe, or the first viral cat meme ever or the only one official legendary slam dunk video by LeBron James.

Celebrities and businesses are jumping on trend with innovative applications of NFT by connecting physical world objects to digital collectibles.

• Nike was granted a patent for “CryptoKicks,” a system for releasing digital footwear that could entail linking physical shoes with virtual versions that can be sold, traded, or stored in an online blockchain “locker.”
• Gaming companies are selling virtual lands and game characters through NFTs. When the users stop logging in, they lose all the rewards they earned in the game. But with NFTs, they can sell virtual land or a gaming character and earn money. Playing mobile games soon starts feeling like investment.

If other companies start adopting NFTs, you may come across marketing campaigns to purchase the super limited edition iPhone linked with NFTs to guarantee its authenticity.

This makes my inner Product Manager think. Can SaaS products reward their power users with certain in-app NFT rewards which they can sell and make good money? Would someone not pay good price to get NFT ownership of Facebook’s “Top Fan” badge?

Hmm, I will think on this for a long time.

Benefits of NFT

• Artists are the biggest beneficiary for now. Now they have a platform where they can publish their art and earn royalties over it.
• Companies and content creators can now attach a token authenticity to their creation and buyers can avoid fake products

If you want to learn how to make your own NFT, watch this video

Drawbacks of NFT

NFTs are built on top of Ethereum cryptocurrency blockchain technology. Cryptocurrencies rely on the proof of authenticity. It’s more like a security system since there is no third party like a bank to ensure transactions are secure and transparent between the seller and the buyer. To keep transactions secure without a third party, the blockchain system involves miners running complex micro calculations to maintain the ledgers across multiple servers. The miners get transaction fee as reward and the requester is charged a fee, ironically named “Gas Fee”. These complex micro calculation running systems are extremely energy hungry and the amount of electricity required to keep the system going is huge. As a result, Ethereum uses 42 Twh of electricity in an year, about as much electricity as the entire country of New Zealand. Contribution to carbon footprint is nearly 20 Mt CO2e, as much as the entire carbon contribution of country of Bolivia.

This means whenever you purchase an NFT, you are directly contributing to climate change and global warming. For this reason, many artists have refused to go the NFT way until a safer substitute is available. All blockchain technologies are trying hard to provide a more safer option. But until then, NFTs have a significant effect on the environment.

My Opinion

While some experts consider NFTs as a bubble, some feel that these are initial days for the technology and could have a huge potential in the future. I seem to agree with the latter at the moment. I feel the below would be the direction in the interest of NFTs.

• Even though NFTs are having adverse impact on climate due to nature of Ethereum, more blockchain technologies are in the race to support NFTs. With more options, it would be easier for artists to publish more digital content
• There will be a push to move towards more environment-friendly mechanism of generating NFTs. If there is a need, there will be supply. NBA TopShot uses a proof of stake mechanism based on Flow blockchain which doesn’t use enormous amounts of electricity. Ethereum has also expressed plans to move to proof of stake model.
• There needs to be an open platform where even amateur but talented content creators can create digital art which can be recognised
• Companies need to innovate and come up with solutions where NFTs are deeply integrated with the workflow of the software to provide real world value to the users

Blockchain as a whole has a lot of promise where there is bipartite secure mechanism of transaction and NFT is another add-on to it. I am hopeful to see explorations on the use of NFTs by companies rather than regular individuals (except the artists).