What is a Non-Fungible Token (NFT)?

what is nft

October 11, 2021

Reading Time: 5 minutes

Fungibility is a term used in economics to refer to the interchangeability of units without causing them to lose their original worth. Non-fungible assets are ones that cannot be traded for another asset, thus classifying them as non-fungible in the first instance. Non-fungible tokens are data units that are kept on the blockchain and are used to represent a digital asset, an artwork, or a physical item in the physical world. Non-fungible tokens (NFTs) are tokens that have no intrinsic value, which renders them non-fungible in the first place. Non-fungible tokens (NFTs), in contrast to cryptocurrencies such as Ether or Bitcoin, cannot be traded for one another.

Individuals are paying millions to acquire exclusive rights to digital art, music, and pictures, like Beeple’s Everydays: The First 5000 Days, which is valued at $69.3 million.

According to Reuters, NFT sales volume increased to $2.5 billion in the first half of this year, almost 200 times the level in the first half of 2020.

What are NFTs all about?

Bitcoin (CRYPTO:BTC) is a cryptocurrency, whereas non-fungible tokens are not. Cryptocurrencies employ blockchain for their ability to track financial transactions and are designed to be used on the internet as cyber currency. However, NFTs, which are similarly based on a blockchain, are used to ensure ownership of assets instead of transactions. An NFT can be thought of as a certificate that proves ownership of an auto or real estate, but in digital format instead of a paper title. Ethereum (CRYPTO:ETH) is the most popular blockchain platform for NFTs.

As the name implies, an NFT is a one-of-a-kind asset that cannot be replaced by another asset of like value (thus the name). Fungible tokens, by contrast, are replaceable with another identical copy. When it comes to the Ethereum network, the Ether token is fungible, which means that one Ether token is exactly the same as another. Bitcoin is no different. Due to their equivalence, Bitcoins can be exchanged for each other. The same principle applies to physical currencies. There is no difference between one dollar bill and another. On the contrary It isn’t possible to find another NFT like it.

These digital tokens have digital codes that are encoded into them and recorded using the blockchain network they’re based on (usually Ethereum) to determine historical ownership and the current owner of a digital asset. Besides representing digital creations like music and videos, NFT can also represent written work.

NFTs: How do they work?

Essentially, non-fungible tokens serve as a digital asset’s certificate of ownership in the digital realm. One of the most important factors in determining an asset’s long-term value is its collectibility and potential selling price. It is possible to buy and sell NFTs on the open market. They are beneficial when NFTs are used in conjunction with visual arts and crafts. A record-breaking $69.3 million was paid to digital artist Beeple for their piece Everydays – The First 5000 Days, which was sold at Christie’s auction house in February of 2021.

Upon purchasing the NFT, the purchaser becomes the owner of the corresponding digital art. NFTs can in turn be used as a means of selling artwork to collectors. An artist or owner of a NFT could collect royalties for copying or using the artwork online. So far, NFTs appear to hold promise as tools of enforcement for digital copyrights and trademarks.

Additionally, there are numerous real-world applications. In order to make sure sneakers are unique, Nike (NYSE:NKE) has patented NFTs. Furthermore, in addition to their worth as collector’s goods (which is a kind of contemporary fine art speculation), NFTs may also have certain practical uses in daily life. You recall the titling of physical assets like cars and real estate a bit ago, right? The availability of blockchain-based tokens could serve to guarantee ownership of physical property, thereby reducing the need for costly intermediaries. There’s still a lot more to be discovered about NFTs, so there may be more on the way.

Final Thoughts

NFTs serve as a way for digital artists and others to monetize their work, as well as contribute to the development of a new asset class dedicated to cryptocurrency investment. Because a NFT collection will always be unique, there is a slim chance the price of the collection could increase (as was the case with Beeple’s digital artwork). An online market like OpenSea makes it easy to purchase and sell NFTs if you’re an art collector. In addition to Binance, Coinbase Global (NASDAQ:COIN) might launch an NFT marketplace (it has invested in Rarible, among other NFT marketplaces).

The NFT market, however, represents a class of highly speculative investments that should probably be avoided by most average investors. Although an NFT’s usefulness is important, the value of an NFT is determined from the value of the media that it represents (digital art, video, music, etc.). A price can only ever be put on something like art which is extremely subjective, unlike valuing a stock which represents ownership of a company and a claim on its future profits. Because the blockchain of the Ethereum network is used by the vast majority of NFTs, investors who desire some indirect exposure to NFTs in any case may wish to consider adding a small amount of Ether to their portfolios. However, Ether is also a risky investment, even if its value increases with time if the Ethereum platform is more widely used.

Still, non-fungible tokens have the potential to prove useful. In a new digital era that blends the physical with the virtual, there will be an increased need to find ways to track ownership and distribution of digital assets online. Tokens based on blockchain technology may also disrupt financial intermediaries and reduce the cost of buying and selling items such as autos and real estate. Investing in highly speculative NFTs isn’t imperative, but, at a minimum, it’s worth keeping an eye on their development.

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