The Latest Fad Of The Blockchain World: NFTs
When a digital artwork sold at a Christie’s auction for an eye-popping $69 million, the winning bidder did not receive anything tangible—not a sculpture, no painting, not even a print. Instead, he got a unique digital token known as a non-fungible token (NFT).
The ‘non-fungible’ in NFT implies that no two tokens are interchangeable; each token is unique, unlike money, of which any two ₹100 notes are fungible and of the same value. Even common cryptocurrencies like Bitcoin and Ethereum are fungible tokens. If you send somebody a Bitcoin, and s/he returns it, it needn’t be the same token. On the contrary, each NFT has unique properties, and so it cannot be interchanged with another. NFTs are ‘one-of-a-kind’ assets in the digital world that are bought and sold like any other.
Why do we need NFTs for digital collectables, artworks, etc?
Well, because in the digital world, everything is a copy and copyable. If you forward an image to 10 people, you retain the original while 10 new copies get created. Blockchain technology doesn’t allow you to duplicate a crypto and spend the same coin twice, but is still fungible.
Why the hype around NFTs?
As human screen time increases, much of our life has gone digital. For decades, we have had unique in-game tokens, swords and other collectables. Uniquely tagged, these turn into NFTs. This concept has been around for many years, but the crypto boom and news of high-value sales of digital art via NFTs has led to an explosion in interest, lately. High-profile investors like Mark Cuban have been talking about them; the US National Basketball Association uses NFTs for its Top Shot site. This February, a one-of-a-kind digital rendition of the famed Nyan Cat meme was sold for 300 Ethereum (or about $590,000). Twitter co-founder Jack Dorsey has promoted an NFT of the first-ever tweet, with bids reaching as high as $2.5 million. Any unique digital ‘asset’ may get an NFT tag and often an instantly large valuation. Such assets may range from Kings of Leon albums to cartoons of cats (in the name of digital art), and much else in between.
Are NFTs any good?
They solve some of the problems that exist on the internet today. As everything becomes more digital, there’s a need to replicate the properties of physical items, like scarcity, uniqueness and proof of ownership. In the Netflix sci-fi series Black Mirror, even human consciousness is eventually uploaded online. NFTs serve relatively modest goals of unique digitisation.
Every NFT has an owner, which is on the public record and easy for anyone to verify. Artists and other creators can not only access a global market; they can retain ownership rights over their work and claim resale royalties directly. There could be other benefits. Maybe in the future, you could use an NFT as collateral for a decentralised loan.
NFT valuations go through classic hype and bubble cycles. This was even admitted by Mike Winklemann, the digital artist ‘Beeple’ whose art was sold for $69 million, in a BBC interview. A Brooklyn-based film director mocked and made money off the NFT craze by selling an audio recording of his flatulence.
An NFT is just a unique tag for an asset, and its value should not go up just because it has a tag. Courier services have unique barcodes for all packages, but that makes no difference to their value. In essence, NFTs are no different; they are like barcodes, but decentralised and blockchain-based.
There is also a dark side to the NFT hype. There’s a lot of money to be made in the NFT market, with influencers, including Dorsey and Elon Musk, pushing such fads. But it’s in sync with our excitement over new internet concepts. Consider this chronology. In 2016 and 2017, we had a bumper harvest of ‘initial coin offerings’. In 2018-19, we saw a boom in securitised token offerings. In 2019-20, decentralized finance was the buzzword. And now we have NFTs.
One of the big charges against NFTs is that they’ve formed a market with artificial scarcity, as there’s no limit to how many NFTs you can create.
Unlike NFTs, real-world art is not zero cost. However, once zero-cost NFTs eventually flood the market, as more and more creators try to cash in on this craze, supply will overwhelm demand, and NFT prices may subsequently crash.
Also, while the true value of an NFT is its certificate of authenticity, nothing at the moment stops people from creating an NFT of an asset that they did not create. If its original owner never created a tag, there is no online way of verifying who owns it.
Crypto and NFT transactions are unsustainable from an energy-use perspective. A Bitcoin transaction can consume as much energy as 700,000 credit card swipes. Ethereum gas transactions are slow and expensive. Gas is the term for the amount of ether (ETH), the native cryptocurrency of Ethereum, required for a user to interact with the network. NFTs are allegedly worse. A single NFT involves multiple digital processes, from creation and buying to selling and reselling. These all require energy. The average NFT is said to take up around 340 kWh, which implies a carbon footprint of 211 kg.
Another uncertainty around the value of NFTs is that they can, in practice, be separated from the digital goods they tag, undermining their worth. A creator can change an image even after its sale, and all ‘unique NFTs’ can still have copies at virtually no cost.
If you’re still thinking of buying NFTs, consider all of the above. Unless you’re a creator, NFTs don’t provide any cash flow and are not real assets by that definition. The only way you make money is by finding other buyers, which means bragging rights might be all that you have until the bubble bursts.