Like most people, you may have come across the term NFT but might not be aware that it’s an abbreviation for non-fungible token – the proper definition for the digital asset.
Well, given that the definition itself does not appear to be any clearer than the abbreviation, we will simply go ahead and explain just what ‘non-fungible token implies’. So what is a non-fungible token?
Understanding an NFT…
Already, we have established that an NFT is a digital asset, but to describe what it really stands for, we must first break down the term “non-fungible”.
To begin with, fungibility – according to Wikipedia – is used to describe an item or commodity whose individual units are essentially interchangeable and each of whose parts is indistinguishable from another part.
In other words, fungible items have the same values as one another and may be used in replacement of one another. A $10 bill, for example, can be used interchangeably with another $10 bill or even two units of $5 bills, depending on the situation.
Non-fungibility, on the other hand, describes a unique object or commodity that, unlike a fungible item, cannot be used interchangeably even with something of the same form.
A non-fungible object is assigned a unique value. For example, a new club jersey may be purchased for $20, but the same shirt might also be purchased for $100 elsewhere because it has a superstar footballer’s autograph on it. As easy as that!
Similarly, an NFT is a unique asset that, while not physically present, depicts real-life objects in the digital domain, such as art, film, music, and in-game items. Simply defined, NFTs are one-of-a-kind assets stored on a digital ledger called blockchain that give collectors absolute ownership over the items.
These digital assets could also be a representation of a wide range of unique tangible and intangible items including collectible sports cards, virtual real estate, digital sneakers, and many more.
Overall, the digital asset may be bought and sold just like any other valuable item, with cryptocurrency serving as the primary medium of exchange.
How does an NFT work?
The way an NFT works is similar to how regular cryptocurrency works, albeit, with a few differences in the underlying infrastructure. For instance, the majority of NFT tokens are built using either ERC-721 or ERC-1155 Etherum (ETH) token standards, both of which are hosted on the Ethereum blockchain.
The aforementioned are the commonly used ETH token standard because of their compatibility with the broader blockchain ecosystem, including exchanges and wallet services like Metamask. Although, more recently, FLOW blockchain has also positioned itself as a fast, secure, and developer-friendly alternative blockchain for next-gen blockchain projects including NFTs.
Unlike cryptocurrencies, NFTs cannot be swapped directly with one another even if they are hosted on the same blockchain platform, highlighting their non-fungibility.
The reason for the absence of exchangeability is attributed to the fact that no two NFTs are identical, given that each one is encoded with unique information.
In context, unlike traditional (physical) artworks which are one of a kind, digital arts can be duplicated, making it hard to know who is in possession of an original copy.
To address this issue, the NFT plays a critical role in issuing a kind of certificate of ownership for an original copy of an art piece.
As a result, artworks may be ‘tokenised’, or transformed to a unit of a unique digital asset that doubles as a digital proof of ownership.
The ownership of this asset, however, can then be transferred subsequently. For exmple, it can be bought and sold from or to other interested parties.
Notable characteristics of NFTs
Although NFTs are characterised by different factors, the prominent ones include the following:
- Non-Interoperable – Otherwise referring to the non-exchangeability of NFTs. The most unique characteristic of an NFT is that it cannot be swapped.
- Indestructible – Because each NFT’s data is encoded on a blockchain via smart contracts, it is very difficult to delete or duplicate them. Furthermore, ownership of digital assets is irreversible, so that collectors – rather than the corporations that generated or minted them – maintain complete control over each NFT.
- Indivisibility – Just as the NFTs cannot be swapped among each other, they cannot also be divided into smaller units as in the case of cryptocurrency.
- Verifiability: NFTs can be verified in the same way as a barcode scan. This is achievable because they are stored on a blockchain network which provides a record of every transaction that takes place on each asset stored. This also makes it simple to trace the origin of a digital asset back to its creator, allowing for authentication without the intervention of a third party.
How much are NFTs worth?
While NFTs have only recently gained prominence, they have been around for more than half a decade. Specifically, the first NFT – entitled “Quantum” – was an octagon-shaped animation created by New York-based artist Kevin McCoy. It was issued on May 2 2014, and later sold for $1.4 million.
NFT have attracted enormous sums of money over the past few years with more than $2.2 billion spent on the sales of digital assets so far. According to Nonfungible – a platform that provides real-time stats for the NFT market – at least $577.3 million worth of NFTs have been sold so far.
However, while ‘nonfungible’ does not account for all market activities, a CNBC report revealed that NFT sales in the first quarter of 2021 alone topped $2 billion.
According to the publication, prominent activities, such as the $69 million NFT sold by Beeple at Christie’s in March, as well as the sales of NBA Top Shots which have also raked in more than half a million USD contributed significantly to the figure.
Ultimately, NFTs are attributed value based on the owner’s discretion and of course public perception. NFT projects, just like the broader cryptocurrency concept, are still emerging. However, despite being around for a short while, have been very instrumental to the ongoing revolution within the creative community.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.