The issue of Non-Fungible Tokens is trending nowadays. Since this is a part of current affairs as well as science and technology, this is very important for competitive exams like UPSC, SSC, Banking, and many others. This is a technical topic, students need to focus more on concepts and try to understand them thoroughly.
Non-Fungible Tokens: An Introduction
- NFTs are “unique” assets in the digital world, they can be bought and sold like any other asset, but they do not have their concrete form.
- Digital tokens can be viewed as proof of ownership for virtual or physical assets. Anything that can be converted to digital form becomes an NFT. Anything from drawings, photos, videos, GIFs, music, in-game items, selfies, and even tweets can be converted into NFTs and exchanged for virtual currency online.
- However, what sets NFTs apart from other digital formats is their use of blockchain technology. A blockchain is a distributed ledger that records all transactions. It’s like a bank passbook, but all transactions are transparent, and visible to everyone, and once recorded they cannot be changed or modified.
- Non-fungible tokens (NFTs) are therefore designed to be i) cryptographically verifiable, ii) unique or rare, and iii) easily transferable.
- By leveraging the blockchain-specific cryptographic signatures issued by NFTs, the provenance and current ownership of the asset in question can be determined in seconds.
Working Mechanism of NFTs
- Traditional crafts such as paintings are valuable because they are unique. However, digital files can easily be reproduced indefinitely.
- NFTs allow the artwork to be “tokenized” to create a digital proof of ownership that can be bought and sold.
- NFTs work with blockchain to give users full ownership of their digital assets.
- Similar to cryptocurrencies, a blockchain is a record of who owns what is stored on a shared ledger because the ledger is maintained by thousands of computers around the world, and the records cannot be tampered with. For example, when sketch artist converts a digital asset into an NFT, they receive blockchain-backed proof of ownership.
Legally, these tokens are hybrids of deeds, certificates, and memberships.
Difference between Cryptocurrency and NFTs
- Like physical money, cryptocurrencies are convertible. That is why they can be traded or exchanged with each other. For example, Bitcoin will always have the same value as any other Bitcoin. Similarly, one unit in the ether is always equal to another unit.
- This fungibility makes cryptocurrencies suitable as secure mediums of exchange in the digital economy However, NFTs are not interchangeable. In other words, the value of one NFT is not equal to another NFT. Each art is unlike any other, irreplaceable and unique. NFTs change the cryptographic paradigm by making each token unique and irreplaceable, making it impossible for a non-fungible token to resemble another token.
- NFTs have been compared to digital passports because they are digital representations of assets and each token contains a unique, non-transferable ID to distinguish it from other tokens.
- NFTs are also extensible. This means that one NFT can be combined with another NFT to “grow” the third NFT of its own. Anyone with a cryptocurrency wallet can buy her NFTs. That’s the only requirement to purchase an NFT. No KYC documents are required to purchase art. All you need is a cryptocurrency wallet powered by Meta-Mask and an NFT marketplace where you can buy and sell NFTs.
Uses of NFTs
1. Smart Contracts – NFTs can also contain intelligent contracts. For example, you can give artists a cut in future token sales. Art isn’t the only thing being tokenized and sold.
2. NFT Event Tickets – Businesses can use NFTs to distribute and sell event tickets, reducing friction in verifying ownership and authenticity, and preventing fraud. Plus, there are endless opportunities to collect tickets after purchase through exclusive experiences and digital art.
3. Fan/Customer Loyalty – A brand or organization represents voting right in the future development of exclusive collectables, products, experiences, or products or services to increase customer/fan loyalty to the brand/organization that may be issued or sold.
4. In-Game Items – Today’s video games are walled gardens, players don’t own digital items, and secondary market implementations are difficult. NFTs can be used to create a broad ecosystem of in-game digital items. Rather than being tied to the game, these items can be bought, sold, and traded on an open secondary market and used in the broader game ecosystem.
5. Digital Collectibles – Organizations or individuals with distinct brands can create NFTs that can be sold on the open market to fans and loyal customers as collectibles. Some of these sell for millions of dollars.
6. Credentials – Issuing credentials such as a driver’s license or professional credentials, as NFTs to reduce the burden of proving those credentials and eliminate the isolated nature of today’s credentials. nature can be eliminated.
7. Royalties – NFTs can track ownership or royalty claims for pieces of media, content, or art.
8. Real Estate – It also serves as a digital representation of physical assets such as real estate. NFTs can democratize investments by dividing physical assets such as real estate. Dividing digital real estate assets among multiple owners is much easier than physical assets.
Major Concerns:
1. Rapid innovation: The rapid pace of innovation in the NFT ecosystem and the blockchain networks they are published on creates challenges for those adopting the technology in the form of consistent change. Agility and modularity are key.
2. Complexity: The technology and tools behind non-fungible tokens and their underlying decentralized applications are still in their early stages despite increasing adoption by startups and enterprises. Many of the complexities in creating NFT-related solutions have not yet been abstracted in quality tools.
3. Fake Marketplaces: A security risk with NFTs is that if the platform hosting the NFT goes out of service, you may lose access to non-fungible tokens. Recently, there have been several reported cases of NFT scams, including the emergence of fake marketplaces, unidentified sellers posing as real artists, and selling copies of the artwork for half price.
4. Environmental Impact: Another risk associated with NFTs, which cannot be concealed, is the negative impact on the environment cannot be denied. Cryptocurrency mining is performed to validate transactions. This requires high-performance computers that run at very high capacity, ultimately impacting the environment.
5. Regulatory/Legal Implications: There are concerns that it may be used for money laundering mechanisms and illegal fundraising activities. These speculative or high-value assets also make people gullible to investing for quick returns. For all these reasons, distinct regulatory and legal concerns have been raised by governments.