NFTs for newbies: An intro to non-fungible tokens

Anything from a tweet to viral memes is now being sold as NFTs for jaw-dropping prices. But what are NFTs, and is it worth it to get on the bandwagon?

It was when the viral Charlie Bit My Finger YouTube video sold as an NFT that people began to truly question the nature of reality and technology. If you’re a millennial, you know which video we’re talking about, and chances are you’re confused about the sudden hue and cry about NFTs, too.

But this 56-second viral video with over 900 million views was almost taken off the internet after being sold as an NFT for $760,999.

How is this possible? We’ll break it down for you.

NFTs, or Non-Fungible Tokens, are digitised assets encoded on blockchain platforms that have unique identification codes. Each of these tokens is ‘non-fungible’, meaning that they cannot be replaced with another item of the same value. If you exchange an AED 10 note with another, it does not affect the utility of the currency, and you can get a shawarma with both.

But each NFT is uniquely encrypted with token-specific data and cannot be replaced. This could be an artwork, a video clip, a song, an in-game avatar, a jacket or even a tweet — as emphasized by Jack Dorsey’s first tweet that is now an infamous NFT!

Now, how would this work against selling a physical art piece? Selling an asset as an NFT would entail “minting” it. Like cryptocurrency, the digital artwork would be minted or encrypted on the blockchain platform through individuals solving complex mathematical equations and building the blocks on blockchains, making it more secure and harder to transgress. Selling a physical piece would mean signing the commercial rights over to the buyer. They then have hard possession of the piece, and can sell it to whomever they deem fit.

But buying an asset as an NFT does not give one commercial or trading rights over the piece. While you may resell the token itself, you will not be trading the actual object. Instead, all you get is “technical ownership” of the virtual asset or a certificate of ownership. That, and bragging rights on the internet, of course.

And yet, NFTs have emerged as a burgeoning industry of their own, with global NFT spending reaching over $40 billion. Why do people do it? You won't be the first to ask.

Advantages of NFTs

Non-replaceability

One of the biggest specialities of NFT trading is the non-fungible aspect of it. Each of these tokens hold unique cryptographic proofs, and not one is like the other. This non-replaceable nature of NFTs makes owning them that much more special; purchasing them ensures that you own an asset that nobody on earth has, and will ever be in possession of.

It amps up exclusivity in digital ownership, which can rightfully be dubbed as the single biggest appeal factor when it comes to NFTs. Unsurprisingly, “authenticity” is the buzzword of the season.

Evolution of investment opportunities

Apart from owning a piece of art or music, another avenue that NFTs explore is that of investments. While plenty of high players are tapping into NFTs to expand and diversify their investment portfolios, the unpredictability associated with NFT trading is a dangerous glint that attracts players into the game.

Unlike traditional bonds or stocks, the rise and fall of which can be mapped or forecasted, the value of NFTs is highly volatile, and nearly impossible to detect or predict. Everything from 2009 internet memes to pictures of animated apes and stylised pyramids are selling for millions of dollars. Nobody — not even the most trained, intuitive stockbroker — can survey an asset and determine what its value will be next week, or even tomorrow.

Supporting new creators

Traditionally, artists and creators must dedicate a portion of their income to record labels or social media platforms in exchange for visibility and publicity. Through NFTs, however, they can partner with gateways and mint their artwork to trade it directly to the public through auctions.

This opens a whole new world of opportunities for up-and-coming creators who are not backed by high-flying labels or connections, as well as those that are already established and have a level of hype and reputation to back them up. Several old and new artists such as Euphoria, Uzair Merchant, Callous Minds, Snoop Dogg, etc are making use of NFTs to create and pitch their craft directly to their fans. Here, it orbits for several hours or days while the fans collectively decide their value, literally and figuratively, and pay them their appraised worth.

That’s revolutionary.

Foolproof authentication

Another underrated benefit of NFTs is that you attain foolproof authentication of a particular asset. While half the globe is concerned about the fact that buying NFTs is basically like buying a screenshot of the art, the rules remain the same as they do with physical art. A screenshot of the Mona Lisa or a perfect forge of Lady Gaga’s autograph might look and feel like the original, but you still don’t have the creator’s consent or partnership in owning it. A fake is, ultimately, a fake.

Once you purchase it, an NFT is a certificate of ownership that has the buyer's details directly encoded in it. Not only is this extremely difficult to manipulate, but you could also keep track of an automatically updated supply chain. These tokens create an authentic, centralised repertoire of data, past owners, history, and the value of everything from digital artwork to a plot of land.

No paperwork, no bureaucratic red tapes, no long queues. At least, that’s what they promise.

Inclusive growth and economic opportunity

You probably already know that currently, the most expensive NFT art is by Beeple (Everydays: The First 5000 Days), and was sold for a whopping $69 million.

But did you know that the buyer, Vignesh Sundaresan, is a 33-year-old investor of Indian descent who came from a family that had once struggled to make ends meet? Now, this rags-to-riches story might be too fluffy and perfect for some of you — and you may be right. But it doesn’t change the fact that NFT trading did make it possible for someone from an erstwhile lower class to not only amass millions, but also make headway in art-collectorship: a world that was previously populated by just the crème de la crème of society.

When asked about the flimsy nature of ownership that NFTs propound, Vignesh aka Metakovan, stated that he would love if people downloaded for free the art he had paid millions for. He, like thousands of others, believes that NFTs are the future of inclusive and equalised growth — opening the doors of art creation and collectorship to races, classes, and genders that were previously sidelined due to systemic inequalities, and the art world’s open partiality to heteronormative white men and their art.

Artists like Juno Cooper, Aida Sancho, Iris Nevins, etc have all come to the forefront to shed light on their art and identities in immensely creative ways.

Challenges faced by NFTs

Proclivity to illegal activity

Laundering massive sums of money under the guise of art collection is hardly a novel concept. As with physical art, NFTs are also assets that are valued at random and have immensely volatile prices based on speculation and perceived value. This makes them perfect for those minting money illegally to protect their sources while pushing their black money into the “noble cause” of owning priceless art.

NFTs and their tendency to balloon in rates overnight become a seamless excuse for launderers to transfer their illegal savings into crypto-currency wallets — even more easily than physical art ownership, as this is entirely devoid of paperwork and other formalities. Studies have proven that the NFT explosion has led to a directly proportionate rise in related fraud and money laundering schemes, too.

The absence of a KYC (Know Your Customer) or AML (Anti-Money Laundering) mechanism only increases its proneness to all kinds of illegal activities, including but not restricted to copyright fraud, plagiarism, forgeries, and pyramid schemes.

Quick money scheme

That brings us to the next point.