Context

• Non fungible tokens (NFTs) have, thanks to their ability to assign value to everything from art to music to a simple selfie, taken the world by storm.
• The sales of NFTs surged $25 billion in 2021 as the crypto asset exploded in popularity. However, some experts believe NFTs are a bubble which might pop.

What are NFTs?

• Anything that can be converted into a digital form can be an NFT. Everything from one’s drawings, photos, videos, GIF, music, in-game items, selfies, and even a tweet can be turned into an NFT, which can then be traded online using cryptocurrency.
• But what makes NFTs unique from other digital forms is that they are backed by Blockchain technology. Blockchain is a distributed ledger where all transactions are recorded. It is like one’s bank passbook, except all transactions are transparent and can be seen by anyone and cannot be changed or modified once recorded.
• NFTs are gaining massive popularity now because they are becoming an increasingly popular way to showcase and sell one’s digital artwork. Billions of dollars have been spent on NFTs since its inception—which date backs to 2015.

How do NFTs work?

• NFT works on blockchain as it gives users complete ownership of a digital asset. For instance, if you’re a sketch artist, and if you convert your digital asset to an NFT, what you get is proof of ownership, powered by Blockchain.

Why are people willing to spend millions on something they could easily screenshot or download?

• In simple words, when you list your NFT on a marketplace, you pay something called a gas fee (transaction fee) for using the Blockchain, following which your digital art is then recorded on Blockchain, mentioning that you (your address) own the particular NFT. This gives you full ownership—which cannot be edited or modified by anyone, including the marketplace owner.
• An NFT is thus created, or as crypto enthusiasts say it is “minted”, to get exclusive ownership rights. NFTs can have only one owner at a time. Apart from exclusive ownership, NFT owners can also digitally sign their artwork and store specific information in their NFTs metadata. This will be only viewable to the individual who bought the NFT.

How is an NFT different from cryptocurrency?

• NFTs and cryptocurrencies are very different from each other. While both are built on Blockchain, that is where the similarity ends.
• Cryptocurrency is a currency and is fungible, meaning that it is interchangeable. For instance, if you hold one crypto token, say one Ethereum, the next Ethereum that you hold will also be of the same value. But NFTs are non-fungible, that means the value of one NFT is not equal to another. Every art is different from other, making it non fungible, and unique.

Who can buy NFTs?

• Anyone who holds a cryptocurrency wallet can buy an NFT. That is the only prerequisite to purchase an NFT. All one needs is a cryptocurrency wallet powered by Metamask, and an NFT marketplace where they can buy and sell NFTs.

Some of the largest NFT marketplaces are:

• OpenSea.io: Touted as the largest NFT marketplace, one can find digital art, there are collectibles including game items, domain names, even digital representations of physical assets at OpenSea. Essentially, the platform is like an eBay for NFTs with millions of digital assets organised into hundreds of categories.
• Rarible: Quite similar to OpenSea, Rarible is also one of the largest NFT marketplace that enables artists and creators to issue and sell NFTs.

What are the risks associated with buying NFTs?

• NFTs, like any other entity, have a dark side to it too. In the recent past, several incidents of NFT scams have been reported including: emergence of fake marketplaces, unverified sellers often impersonating real artists and selling copies of their artworks for half prices.
• Another risk associated with NFTs is the negative impact on the environment. In order to validate transactions, crypto mining is done, which requires high powered computers that run at a very high capacity, affecting the environment ultimately.

Reference:

1. https://indianexpress.com/article/explained/what-are-non-fungible-tokens-nft-7783662/