Obtaining the ownership of an asset has been one of the most primal traits of humankind. In the current digital age, the nature of collecting various items has evolved from merely gathering pieces of real estate, stamps, currency coins to acquiring digital assets and much more.
Crypto-Globalization among industrialized nations has led to skyrocketing the sales of various goods, which now also contains trading artworks of numerous types. Exchanges of such kind were previously primarily limited to illegal markets and backdoor deals but no more. NFT has elevated the importance of the digital world and the world of art to an echelon where it can allow the transparent yet anonymous sale of precious artworks and limited collectible assets.
Necessarily, the tradeable assets themselves need not be of the digital kind, for they can also be unique. Take, for example, the ownership deed for a tangible item or the ownership deed of a non-digital yet intangible thing.
What are NFTs?
The term ‘Non-Fungible’ serves to denote things that aren’t independently exchangeable for other items. A piece of furniture, a digital file, a machine, etc., are good examples of such things because of the uniqueness of their individual properties.
Subsequently, NFTs are Non Fungible Tokens that define or represent a person’s proprietorship over one or more unique items. In contrast, one can exchange fungible items because they have a set value that is non-reliant on their unique properties, like exchanging $7 for £4, and so on.
Collectibles, pieces of art, real estate, and so on can also be tokenized and secured via the Ethereum blockchain to allow ownership of such items to only one person at a time. Blockchain is the collective record of who owns what, whose security serves to prevent the alteration of ownership data and disallows replicating the NFT into a new item.
Types of Non Fungible Tokens (NFTs)
Since the inception of NFT is fresh, stating all the definite types of NFTs is not possible except in theory. It describes that an NFT can be any unique item that one can subject to demonstrable ownership. Currently, the known types of NFTs include the following types of things:
- A piece of unique artwork on a canvas or a digital medium.
- An accessory, apparel item, or an object belonging to a limited edition fashion collection.
- An in-game collectible item.
- A piece of writing like an article, an essay, a poem, a manuscript, or an exclusive collection of written works.
- A domain name or a digital collectible of unique nature.
- A concert ticket or an access pass or equivalent that allows entry to an event or an occasion.
- A bottle of vine or an automobile.
- A youtube video or a song file.
- And much more.
Before delving further into the inners and outers of ‘What Are NFTs’, learning about the origin of NFT is crucial to make yourself better familiar with its growth and importance. Especially in a world that’s readily accepting and denying the use of cryptocurrency, which is one of the ways by which you can purchase an NFT.
The first popular NFT sale was on 19th February 2020 of an animated GIF of the ‘Nyan Cat’, the meme from 2011 of a flying pop-tart cat. Its NFT sale generated a whopping sum of more than $500,000. However, it was not the first NFT to be minted. The ‘Coloured Coins’ are originally known to be the first NFT item by some experts.
The Coloured Coins are built from smaller denominations of Bitcoin and are uniquely identifiable outside typical bitcoin transactions. They can be as small as a single unit of bitcoin called Santoshi.
Though these coins can have use cases of multiple types like Property, Coupons, Subscriptions, Access tokens, Digital collectibles, etc., they possess a drawback. It lies in the fact that their value is tied to the least amount of their worth considered among owners. Regardless, these coins were instrumental in founding the NFTs as we know them today.
In 2014, Robert Dermody, Adam Krellenstein & Evan Wagner built Counterparty. It’s a peer-to-peer open-source distributed financial platform built upon the bitcoin blockchain allowing asset creation using a decentralized exchange model and a crypto token (XCR).
The platform collectively gained multiple projects and assets, even in 2016, due to several game creators intending to sell their assets, such as in-game items, trading cards, etc., on the blockchain.
Followed by the observed success of the sale, in the October of 2016, the platform witnessed various types of the rare Pepe meme being sold as assets. Even today, many similar assets are available on the platform alongside other NTF-like assets.
The meme trading continued to gain traction in 2017 using Ethereum, which is itself a type of bitcoin. It led to developing a new platform named Peperium that facilitated a decentralized marketplace for trading memes and a trading card game. The creations developed on to live everlastingly via Ethereum.
The moniker of the token used by Peperium was termed ‘RARE’, which also served to pay fees towards making and selling the meme assets. Similarly, the use of Ethereum for trading assets of such type birthed a project called ‘Cryptopunks,’ which was inclusive of ten thousand unique characters as assets over the bitcoin blockchain. The sale of those assets naturally occurred via the exchange of the Ethereum bitcoins between users.
Catalyst Responsible for The Global NFT Boom
Apart from the trending act of ownership of rare memes and in-game assets that pushed the tide for NFT, multiple phenomenons led to the ascend of NFT into a global spotlight. The popularly foremost causes that led to defining NFTs as a lucrative commodity in the eyes of investors and ordinary consumers were the sale of several individual Non Fungible Tokens.
Sale of NFT Items Entering Mainstream Media
NFT sales that entered mainstream media were either created or sold by prominent media personalities and artists, including musicians, renowned painters, CEOs & developers, etc. For example, Grimes, a musician, sold some of her digital artwork as an NFT for more than $6 million in March 2020. Soon after that sale, the co-founder of Twitter also auctioned his first-ever Tweet as a Non Fungible Token, the bids for which peaked at the sum of $2.5 million.
Despite its sale, the NFT or tweet will still be publicly available for viewing and responding purposes. But, the digital artwork as NFT, on the other hand, will only offer access to the content itself to the buyer and not its sole ownership. Meaning, the value of the artwork itself can still increase or decrease over time despite being an NFT asset.
Other examples of popular NFT transactions include selling one particular digital art piece as an NFT asset that Beeple made. Its auction was handled by Christie’s Inc., which succeeded in gathering a record-making sum of over $69 million in exchange for the single piece of his ‘Everydays: the First 5,000 Days’ as an NFT.
All things considered, it is further noteworthy to learn that the upsurge of Bitcoin played an equally vital role in catapulting the importance of NFTs because both are digitally exchangeable assets possessing convenient ownership tracking ability.
Join The Wagon
On the chance that you’re considering foraying into the world of NFT, likely with the desire to attain overnight monetary success, there are yet a few things you still need to know. Besides already being familiar with the surface concept of an NFT sale bringing healthy profits, learning how the NFTs work and how you can acquire them in different forms can help you make wiser decisions.
NFTs are usually live on public access blockchains such as Ethereum, Binance Smart Chain, Algorand, Flow, etc. Third-party NFT marketplaces can access these blockchains to provide the sale and purchase ability of NFTs to a registered user.
Such marketplaces, namely Rarible, OpenSea, etc., may also allow users to create Non Fungible Tokens of their own to sell or exchange them with other users. However, it generally involves paying a small commission or a fee for availing of such a facility.
Suppose a user does not want to list an NFT using these marketplaces that function similarly to e-commerce websites. In that case, they can approach or hire a developer who will use developer tools to create for them one or many Non Fungible Tokens as they may prefer.
Likewise, purchasing NFTs is possible mainly using cryptocurrencies or crypto-assets like Ether, Bitcoin, Dogecoin, etc. Yet, specific platforms do exist (E.g., Nifty Gateway) that also offer users to buy NFTs using their credit cards or debit cards.
While this addresses how NFTs are made and sold on a surface level, learning the different types of ownerships of NFTs is essential. But first, let’s understand how tokens can differ in nature.
Token Differences: How are NFTs Unique?
NFTs are commonly known to be the digitalized representation of the title of an underlying asset. They can be a certificate of title for a digital asset or an art piece, or they can be treated under the security norms of the respective nation when representing company shares.
Despite such arrangements, owning a Non Fungible Token doesn’t always denote legal ownership over the asset, digital or otherwise, unless expressly stated during its sale. Failing to have such knowledge about the specific NFT can arise legal disputes, especially over intellectual property and assets of identical nature.
Thus, in a real case scenario, both possibilities can be true: owning an artwork digitally as NFT without owning the rights to legally reproduce it and owning the NFT digital asset along with possessing the exclusive copyrights to reproduce it as per desire.
Token Standards (ERC – Ethereum Request for Comment)
Token or smart contracts made one the blockchain may differentiate from one another, so standardizing them is crucial in allowing their seamless integration between crypto-wallets and various blockchain protocols. The ERC – 20 is one such protocol standard that came into existence in 2015. It rules to define fungible tokens built on Ethereum.
The tokens or smart contracts belonging to the ERC – 20 protocol could differ in their property or composition yet can represent similar value or are equally interchangeable with other tokens built on the same ERC – 20 protocol. One can utilize these smart contracts to create investable assets or smart property.
The ERC 721 protocol, on the other hand, represents individual tokens. Such tokens are exclusive to one another and not interchangeable because their value cannot be identical. Such tokens are called NFT as they are unique digital tokens that one can only buy, sell, or trade.
Another standard protocol exists for digital token creation, namely the ERC-1155, which allows creating Semi-Fungible Tokens, Non Fungible Tokens, and Fungible Tokens.
The different standards can be better represented using the example of a game where a user earns points for playing. One can exchange the earned points against in-game items. The collected points here denote that they are fungible assets. In contrast, the items exchanged against those points are an example of Non-Fungible Assets.
Acquiring Mediums or Channels for an NFT
As previously stated, a user can visit the gateways and marketplaces mentioned above to acquire NFTs of desired types. Undoubtedly, they will be subjected to the respective kinds of norms tied to it by the seller. Additional examples of popular marketplaces that offer NFT acquiring channels are listed below:
- For Digital Art – NFTShowroom
- For Real Estate – SuperWorld, SuperRare
- For Tangible Visual Arts – Foundation, NiftyGateway
- For in-game Assets – BakerySwap, Axie Marketplace
- Popular Auction Marketplaces – Rarible, VIV3, OpenSea
Is Sharing an NFT Possible?
Though the idea of securing an NFT has been associated too often to denote securing unique rights to the respective asset, sharing an NFT is entirely possible. However, it largely depends on the ownership or licensing type of the Non Fungible Tokens, or does it not?
See, a piece of artwork or a digital asset, say, for example, the artwork sold by Beeple is partially owned in a digital medium by the buyer. Besides this, it’s possible for other people to already have digital copies of the same artwork on their own social media channels or within offline storage locations.
Such scenarios translate the act of purchasing NFTs as the mere establishment of legal contracts between buyers and sellers containing the accountability or attributes of the asset. Let’s understand this further by overseeing the act of sharing the NFT items stored online or locally.
Online Marketplaces offering the opportunity of purchasing and selling NFTs already have regulations in place that state all the legalities tied to the ownership or publishing of the respective asset or Non Fungible Token.
Typically, the buyer gets a unique identifier key upon purchasing the NFT they can use whenever they want to access their assets. The record of the transfer of the key is available on the blockchain, which is accessible to the public, long as they are familiar with the transaction details.
Such scenarios usually occur when an asset is sold to a buyer without copyright permissions. The buyer, in such cases, can access and perhaps use the asset all the same but not replicate it as per their desire or wishes.
Generally, online sharing of NFT is commonly linked to digital assets and not to physical or tangible assets. The reason being that the latter asset type is subject to geological differences and other factors which limit its wide or global sharing.
Since NFT can be tied to commodities and goods like real estate, exclusively sharing it is decided upon the rights assigned by the new owner. Unless the original seller explicitly holds a stake in the respective NFT asset even after its sale, the new owner can freely decide how to share their NFT asset.
Continue reading further to learn more about what happens to the NFT asset when the hosting server goes offline permanently or breaks down temporarily.
The Authenticity of The Non Fungible Tokens
Non Fungible Tokens have amassed massive publicity and benefitted both the sellers and buyers in their own accord in most cases after each transaction. Familiarizing yourself with the authenticity of the NFT, which is becoming a rapidly booming medium of investment or a way of asset ownership medium, is vital.
Before you delve into the marketplace for purchasing something you may fancy, here’s what you must additionally know about NFTs:
- Every minted token possesses a unique identifier sans a hash code.
- Unlike cryptocurrencies, one NFT does not hold equal value as another NFT.
- The owner information is easily accessible, so proving ownership of it is simple.
- The original owner could gain royalties on the resale of an NFT.
- The creator of NFT defines its scarcity.
- The sale of NFT is possible on any NFT marketplace regardless of a platform and needless of an intermediary entity assisting the transaction.
Use of Accessibility
Any NFT token purchase does not imply direct ownership of the asset unless explicitly stated otherwise. The cryptographic link to the NFT does not contain acquiring the location of the digital asset itself but instead leads to a portal or agreement. The agreement itself stands to define any obligations or rights over the asset between the buyer and seller.
Such purchase could very well state a contract, rights of association, meaning that numerous people or entities can share the rights to an NFT token. Unless the transfer of possession of the NFT is specifically stated during the exchange, the buyer does not have sole ownership of the asset despite wholly and solely owning the token. Let’s understand this concept better using an example.
A person owning a personal book collection could make it into an NFT without also transferring the rights to the bookshelves themselves. Also, the described books collectively hold the worth of NFT and not independently. Thus, replacing the books with a similar copy could still make the NFT retain its estimated value.
Unless the specific properties of individual books are also stated and maintained to remain constant in the collection with a non-replacement clause, the NFT is not invalidated. Thus, the permissible rights to the asset of the NFT can be multiple or singular.
Intellectual Property Issues
Digital artworks and tangible artworks can be misrepresented on online NFT marketplaces for sale by a user who is not the original creator. Several such cases have already been reported, which required the respective artists to clarify that they had no participation in creating the token. Based on this, an artist may claim copyright infringement, which may also lead them to acquire the NFT or remove it from the marketplace.
NFTs can also be created for public figures and sold, but such transactions currently hold many ambiguities in their norms. However, the person in question could claim their rights upon it based on naturally possessing the rights to regulate the commercialization of their identity.
NFTs possess the crucial attribute of being scarce and unique so that they can gain lucrative bids. When building the token, the initial owner can make it unique so that its scarcity remains at the utmost level. While doing this, it is also possible to let the NFT have similar replicas without decreasing the scarcity.
A ticket to an opera concert can be minted digitally into a token for it to be sold to multiple users without decreasing its cost or scarcity. At the same time, the total admittance capacity of the venue never increases even after multiple users possessing the same ticket.
Those tickets can still be made with slight changes to establish them as valuable collectibles. Despite all of this, each NFT will inevitably carry a unique identifier while offering essentially the same ticket or type of ownership.
The sale of NFTs is commonly possible using the Ether cryptocurrency. It is obtainable for users in their wallets via exchanging their fiat money or other cryptocurrencies in their possession.
A person may choose to turn the gold in their possession into an NFT token and do the same with a reserve of Crude Oil. Yet, the national laws inevitably bind a person from creating such NFTs, which are penalized if found to be breaching the federal regulations of possession of items.
One cannot trade Fungible items for NFT other than fiat money which is also only possible if the marketplace or individual seller allows it. Furthermore, suppose a nation disallows possession of NFT under the Securities Act or equivalent laws that do not legally permit their citizen or a company to purchase the NFT. In that case, though the entity acquires the token, they will face criminal charges and penalties for the same.
Royalties are automatically paid to the original seller of the NFT in most cases when it passes through the wallets of multiple users. Determining the sum percentage of royalties to be gained is derived from the specific norms of the NFT selling platform in tandem with what is defined by the original owner.
The same norms will continue to apply during the first and subsequent sales of the NFT as long as complete ownership is not assigned during the initial sale. In this manner, regardless of the total transactions of the NFT between multiple users, the creator of the NFT can keep earning a healthy income from their NFT if they choose to do so.
Such a facility can work effectively in favor of content creators and musicians and other people when they mint their exclusive content as an NFT.
Accurately defining how long a Non Fungible Token will last is a controversial matter. Several elements can make or break its life expectancy with or without any prior notice. A domain failure can render an NFT asset to a missing state. It is so because NFT contains practically little to no data aside from being just an encrypted identifier.
The NFT on the blockchain only contains the address, which one can use to find the data like the artist’s name, the title of the artwork, and a link to find the represented artwork, which itself is separately further stored away on a server.
IPFS – Interplanetary File System
Preventing such difficulty is possible by using an IPFS or InterPlanetary File System. It can help locate a digital piece of content as long as it is hosted on the IPFS network through multiple hosts instead of one domain owner. Placing a digital file on such a network instead of using domains helps keep the NFT alive, which is how the NFTs made by Beeple and Grimes are made available.
Alternative means to maintain the validity of NFTs is by purchasing the IPFS or file hosting domain to host the file represented in the NFT continually. The seller or the buyer can make such arrangements as per the allocation of their resources. Hence, without employing either of these mediums, it is a real possibility that you may lose your NFT in the future.
Every action related to a token on the blockchain is recorded as a transaction. Thus, creating an auto expiring NFT is not possible, even if you attempt to make such a reservation in the token code. Furthermore, suppose the unique identifier of your expired token becomes available. In that case, making it available for another token is not a practice supported on the blockchain.
Thus, although you cannot make an NFT expire automatically, it is possible to burn an NFT. Still, burning an NFT also requires a fee, similar to creating an NFT. Building an NFT costs approximately $90 when writing this article, plus the developer’s fee.
Validity of NFT in a Global Blackout?
It is not too difficult to imagine what could happen to an NFT in a Global Blackout caused by various agents such as solar flares, natural calamities, etc. NFT linked files on the IPFS will possibly retain their availability when the network is preserved using advanced technology.
Storing the digital asset linked to NFT on a public domain will make locating the asset impossible if the domain fails or is pending re-establishment.
The annual collection of NFT sales from the previous year has been estimated to be over $249 million, which is impressive, considering that the NFT market has only begun to boom. However, the total sale value of NFTs for the current year will soon surpass the previous year’s total sum. It is because a record sale of over $219 million is already made in the past few months alone.
Despite the firm skepticism NFT gets from economists about its stability and value in the future, the current market for NFT is quickly scaling up to be extremely promising. Venture Capitalists are also pouring tens of millions into NFT and its marketplaces for advancing blockchain technology, which also directly supports and strengthens the market of cryptocurrencies.
Artists of different talents and everyone else, on the other hand, are presenting mixed reactions to the NFT boom because of environmental repercussions. Blockchain currencies take enormous amounts of energy to mine. Channeling this energy leads to accelerated greenhouse effects whose damages appear to be irreparable. Yet, development is ongoing for making the NFT system consume a lower carbon footprint.
Let’s look at the different ways NFTs have been associated with the current world, beginning with how the internet has supported its growing popularity.
Today’s Internet World
Today’s connected era is equipped with the latest or at least advanced intelligence technology that functions to better support our lives. It also includes using the medium of online marketplaces to obtain items or exchange communication and do more like getting things of necessity or pure luxury.
From digital news to social media platforms, each service has reportedly shared accounts from individual users of how different types of NFT have amassed a fortune. It makes people pursue the hype of NFT all the more and put their interest in it.
With how it happens with currencies, they remain valuable as long as people believe in them. Similarly, people believe NFTs are valuable because of the public accounts, especially after the intervention of meme culture, which is still as popular as ever.
After considering how the internet has boosted the value of NFT by word of mouth and with the participation of prominent personalities, it does raise a few critical questions. Let’s see to them ahead.
NFTs Race Against Digital Currency?
In light of multiple currency options existing over the blockchain that are populating the internet, fiat money is soon slated to be benched, and for good. Digital Currencies are projected to replace fiat money to offer better convenience of transactions and other benefits over the next decade.
The race for making it a reality is already actively being advocated by few nations after initially or temporarily banning the transactions involving Bitcoin exchange. This ban, however, also invariably limits the sale of NFTs in some capacity, especially when you consider that cryptocurrencies are the primary medium for purchasing NFTs.
Cryptocurrencies cannot still be deemed to be a reliable replacement for globally established fiat currencies because of unpredictable fluctuations in rates and non-centralized control. Yet, it is possible to use NFTs to pay for a commodity of lesser or greater value. One can trade them as an asset if one may desire so.
Suspecting such trading activities and the outlandish boom of NFTs, multiple countries have banned the citizens from using NFTs for performing transactions, both locally and globally. There are numerous additional reasons why nations are banning it.
The staggering growth of a sports blockchain platform that can provide NFTs sale options grew in their valuation by an astonishing 200% in a single week. It serves as an additional marker of how many monetary resources are being pooled in the NFT market, which, if it fails, can bring about a global recession.
Thus, since NFT can become an alternative to digital currency, global measures are being taken in most countries to assign it security measures. These norms focus on treating it as a taxable asset, if not a collectible property, instead of an acceptable payment option.
Furthermore, NFTs are currently unavailable for sale using Central Bank currencies unless you obtain them from a specific marketplace offering such service specifically. Otherwise, you can land into hot legal trouble even just for possessing such tokens.
NFTs’ Taxation & Valuation Against Physical Assets?
To better understand the value of an NFT against a tangible offline asset, its uniqueness is considered with respect to treating the token as either an asset or a matter of securities (company stocks) in most countries. Based on the decision, applicable tax laws of the respective country are applied to it.
Another instance of how NFT valuation is overseen for physical assets is how Nike Inc. authenticates the tokens of its goods and evaluates their sum. It has employed experts who will verify the authenticity of the goods tied to the token to prevent misrepresentation of the company’s name and promote a transparent and reliable business practice.
NFT’s Immersion in Different Industries/ Markets
The arrival of NFTs into mainstream culture is inspiring people among different industries to bag for themselves profitable deals and worthy assets that they can singularly own.
Since Non Fungible Tokens can represent any type of asset(s) – physical or intangible (digital), no bar limits the type of token you can’t create. It simply translates into allowing people to turn any piece of object or belongings into NFT, from a recording clip, a sticker, a vehicle or real estate property, or even a typical brick, for that matter.
A few examples of the different types of NFTs are given below that are built or tied to people belonging from different professional backgrounds:
- ‘Quantum’ by Kevin Mccoy (Digital Motion Art)
- ‘Top Shot Collectibles’ by NBA (Digital Motion Art)
- ‘Charlie Bit My Finger’ by HDCYT-Youtube Channel (Digital Motion Art)
- ‘Everydays: The First 5000 Days’ by Beeple (Digital Art)
- ‘Vasanam’ by Kaber Vasuki (Demo Audio File)
- ‘Mars House’ by Krista Kim (Virtual House)
NFTs are the new portfolios or digital collectibles that a person can own for reasons unknown or to increase their overall net worth via acquiring rare items that may hold historical or titular value. Such items will usually grow in value over time, making them one of the perfect investment means. Despite this, there are also some risks attached to owning an NFT.
The new NFT market is in its early stages, and there’s plenty of room for its development and evolution. Beyond facilitating global scale transactions without needing extra conversion fees by using bitcoins or equivalent blockchain currencies to acquire tokens, the terms of its creation, availability, acceptability, and reliability in the long term are still ambiguous.
With that said, the envisioned NFT internet looks like a globally accessible and transparent virtual gallery or a trading place that can allow for purchasing and selling of tokens of various kinds. The token is also intended to serve as collateral for a loan upon properly adopting its worth for trading. Additionally, further allowing exchanging one token for another, like a barter system to put it loosely.
All in all, NFTs can become the perfect model for buyers and sellers, especially for anyone who wants to put something unique in the world and for people who like collecting unique items. Still, it will be wise not to put all of your life savings into purchasing an NFT because there’s a definite risk of losing the asset bound to your token. It is so unless you also arrange a way to keep the asset available (if digital) or possess it physically (if tangible) with you or at a safe location of your preference.