What are NFTs?

Introduction

Mike Winkelmann who makes digital arts by the name of “Beeple” sold a collage of his first 5000 artwork at $69 million through an NFT Auction, which is roughly around “500 crores” in Indian Rupees. The man who bought it is a crypto investor “Metakovan” although his original name is Vignesh Sundaresan.

A few seconds video clip of slam dunk by NBA star LeBron James was bought by a fan for 208,000 dollars, A GIF by the name “Nyan Cat” was sold for $580,000 and Twitter CEO jack Dorsey’s first tweet was sold for $2.9 million.

From October to December $93million worth of NFTs were traded and this number increased to $2 billion in the First quarter of year 2021.

All these items can be seen on the internet for free and people buying these will not get any distribution rights or royalty for selling the copies, so why are these items suddenly selling for millions?

In this story we will explain the hype behind the new digital asset NFTs. How it works, the technology behind it and why they are valued so much in the market.

What are NFTs?

These massive transactions are a part of the new digital asset known as Non-Fungible Tokens or NFTs. These are collectable items such as video, music, GIFs, etc. available for auction in the digital space. These assets are non-fungible meaning you cannot get one in exchange for another. In other cases like currency, you can trade a 500 rupee note for another note or you can get five 100 rupee notes and their value remains intact.

If you understand fungibility it means you got the first part, now the later word token, Tokens are literally the alphanumeric code assigned to an asset that provides authentication of its originality and acts as a digital signature.\

What gives value to these NFTs?

Still you must be wondering why someone would pay $69 million for an artwork that can be downloaded and set as desktop wallpaper for free. Well here is the catch, why would anyone pay any money for physical collectables like painting and antiques? Because it has emotional, historical or some similar type of significance and they see it as a valuable item, also they can show it to others that they own the original painting or antique. Similarly, a NFT owner just does not have any other copy, rather they own the original piece of work.

Having the only piece makes any item unique and therefore gives value to it as the one and only piece of work.

Technology behind NFTs

Ownership of these assets are recorded on the block chain ledgers in the form of unique codes. In this way, the information regarding the owner along with all the previous transactions is kept in a block attached in a chain. This information is encrypted and thus represents the authenticity. These ledgers are also decentralised and are not present in a single place but in different data storage facilities.

What's in it for us or perhaps what's in it for the artists and the content makers?

The rise of the internet gave us access to all the songs, arts, videos and made entertainment virtually free for us. But, at the same time artists are getting peanuts for their hard work.

Every time you share a GIF, Photo, or song on WhatsApp, that file is shared as a copy of that original work and in this way the artists who produce these did not get the deserving rewards. Also the big platforms like Spotify, iTunes are often accused of paying very less to the artists as they just get pennies for the music they produce.

This all can boil down to a single word ‘Piracy”, It is the illegal distribution or duplication of digital media, many steps have taken to prevent digital piracy but none of them were proven successful. But, NFTs can prove to be a silver bullet for this problem as it can stop the illegal spread of digital contents. For example; some music bands have started to release NFT only albums and on distribution the source can be identified in case of piracy because of the block chain encryption.

Now with the rise of this technology any piece of art, photograph, video clip, song, animation, items in video games and even virtual real estate can all be sold as an NFT.

● NBA top shot, a website for official NBA collections sells video clips, player cards etc.

● Aston Martin Cognizant Formula 1 team is the first one to launch a collection of clips from their 60 years history.

● Rob Gronkowski the Super bowl champion raised $1.8 million from NFTs.

● Linkin park’s “Mike Shinoda” sold digital art for $30,000.

● Kings of Leon are releasing an NFT only album.

Celebrities are making millions from these NFT auctions and people buying it have two different intentions, they are either buying it as a collectable or as long-term investments for future resale. Whatever it may be, the market is growing really fast.

How to buy one?

To buy or sell NFTs you need a platform or an exchange just like any other asset to facilitate the trade, Opensea, Nifty Gateway, NBA Top Shot are just a few examples of NFT platforms. Next you need a crypto wallet where you can keep your cryptocurrencies, it works like the Demat account you need for share investment.

Next up is buying one of the cryptocurrencies and because most of the NFTs are Ethereum based (it is a network of block chain technology) therefore you need Ethers (this is the digital currency to buy NFTs) up next in exchange for money.

Critics of NFT

NFTs are clearly seen as the next big thing for all forms of digital art and will surely change the way artists sell their work. But some people are buying these art-forms as digital assets and are keen to cash-in from the unconventional growth in prices. The NFTs market is growing very fast and some experts are seeing it as another “tech bubble in the making” because of unconventional growth and lack of stability.

Another argument against this is that it does not verify the initial seller and this could be tricky especially in the online marketplace. Besides these issues, the energy required to operate NFT transactions is huge because block chain technology requires big warehouses and it contributes to the carbon emission in our environment.