Author : Shreya Srinivasan
The invention of bitcoins in 2009 introduced the concept of a decentralized digital currency. Since then, several other forms of cryptocurrencies have emerged like Litecoin, Ethereum, ZCash, Stellar, etc. With the help of blockchain technology, programmable digital scarcity of cryptocurrency is possible.
The above mentioned currencies are fungible, meaning each token has equal value. Here’s where NFTs stand out amongst the rest.
What are Non-fungible tokens?
Non-fungible tokens, or NFTs, are unique digital assets that are not interchangeable. It is used in enabling the purchase and sale of crypto art, digital collectibles and online gaming.
Source : CryptoPunk
It was popularised in 2017 through the creation of CryptoPunks - one of the first NFTs on the Ethereum blockchain. It consists of 10,000 unique characters or ‘punks’ that one can buy and sell. CryptoKitties, a blockchain game about digital pets, also garnered attention in 2017. In fact, it became so popular that it congested the Ethereum blockchain.
Key characteristics of NFTs
● Non-interpolable : A CryptoPunk character cannot be used in CryptoKitties or vice versa. This goes for other types of digital assets as well.
● Indivisible : They cannot be divided into smaller denominations, unlike rupees, which can be further divided into paise. NFTs exist as a whole asset.
● Traceable : NFTs hold the records of every transaction. This means that the asset would be verifiably authentic and not a counterfeit.
● Indestructible : Since NFT data is stored on the blockchain system, the tokens cannot be destroyed, removed or replicated.
● Set ownership : Collectors fully possess their NFTs, as opposed to the companies that created it. Instead of purchasing licenses, buyers have ownership rights over the NFT.
The Sudden Rise of NFTs
Source : Nyan Cat
A few days ago, the Nyan Cat internet meme was sold for nearly $600,000 as a unique crypto art. As people are confined to their homes due to the pandemic, there has been a rising momentum for digital tokens such as NFTs. According to nonfungible.com, NFT assets grew from $40.9 million in 2018 to more than $338 million in 2020. The reason NFTs are valuable is scarcity. No two assets are the same, hence the demand for a particular asset is high. This increases the monetary value of the NFT. Consumers have bidding wars over their desired item.
Critics do argue that assets such as digital paintings are merely bought and held rather than traded. However, with the maturation of the industry, more and more investors like Elon Musk, Mark Cuban, Micheal Saylor are investing in cryptocurrency.
While it is easier to purchase NFTs, selling them could be a cumbersome task. Since the assets are one-of-a kind, they require a buyer who shares the same aesthetic sensibilities. Nonetheless, we do see a market for niche digital assets. The newest trend is purchasing virtual land. Recently a buyer bought nine virtual plots for $1.5 million dollars. The aim is to also link real-world property and other assets to NFTs. It might seem far-fetched, but it’s a collective vision of the digital world.
While the cryptocurrency market is currently seeing a flood of investors and key players, it is still relatively new. The potential of NFTs will largely depend on its stability over time, and the evolution of adjacent markets.