BY SAMYAK GARG
You may have seen the sudden increase in the usage of the acronym NFT. You may have heard crazy things about it, like the fact that the first tweet ever tweeted in the history of twitter was just purchased for $2,915,835.47 (this amounts to a staggering 21.6 Cr Rupees).
The news got even more interesting and bizarre when on march 11, 2021, Beeple’s “Everydays: the First 5000 Days,” was sold at a Christie's auction (a famous auction house) for $69 million!
Mike Winkelmann, the creator of the artwork, started this journey in 2007 when he uploaded his first digital artwork on social media (just for fun). Since then he uploaded a new art every day, and this year he compiled all of his 5000 ‘everyday’ artworks into a collage and minted it into an NFT.
Christie’s auction house, which has never before sold a purely digital work, partnered with Mike for the auction of the encrypted Jpeg file. The online auction lasted for 2 weeks and the bidding started at $100. In the starting, the price rose slowly but soon it gained momentum and accelerated fast, before reaching sky high in the final minutes, where it was increasing in increments of over $1 million. The winning bid was $60 million, which, after all the extra charges were added, left the purchaser with a bill of $69 million.
So you may be thinking that NFT basically means a digital version of an art that people are buying for a lot of money. Well, it's not that simple…
NFT Stands for Non-fungible Token. let’s break it down:
Fungible means something that is ‘replaceable with another Identical item’, like money or food or clothes. It means something which is commonly found and is not unique. Therefore, Non-fungible item is something which cannot be replaced and is unique. You cannot find an identical pair for a Non-fungible item. ‘Mona Lisa’ or ‘The Crown of the Queen of England’ or the ‘Kohinoor’ are examples of non-fungible items.
Naturally Non-fungible items are exorbitantly priced due to high demand (and low supply) and due to its association with prestige and status in the society.
To understand what a Non-fungible token is, first we have to understand the crypto world of blockchain.
What is blockchain?
Generally, whenever we indulge in a normal transaction, our Bank/ or any other authority, validates the transaction as valid or invalid.
Suppose, we indulge in a transaction where I give you a cheque for 100 rupees in exchange for a book. The time you deposit the cheque, my bank will privately check my bank balance and verify if I have the said amount. If I have a balance of 100 rupees then it will transfer the money to your bank account or else the above transaction will be rejected and termed as invalid.
The blockchain does the same thing a bank does, but instead of my bank privately checking my balance. On the blockchain, every transaction is recorded and tracked publicly on the internet. This means that everything that happens is noted publicly and documented for everyone to see.
Now, if in the above example we were on the blockchain, and you charged me 10 crypto coins for your book. This transaction will go on the public record where a group of people around the world are keeping track of every single transaction happening simultaneously at all times. They have past and present records which enables them to tally everything. So, if I don’t have the 10 crypto coins, these people would notice that there is a discrepancy in the data and my transaction will be rejected. But if I have a balance of 10 coins then the transaction will be approved and will be recorded on the blockchain permanently. It will show a reduction in my account and an increase in yours.
The important thing to note here is that a group of people verifies the legitimacy of every transaction with the help of computers which have access to anything and everything. And because of this they can ensure that everything adds up and is tallied perfectly.
The transactions recorded are highly encrypted and recorded chronologically one after another forming a ‘chain’, which is hard to break.
Now, talking about NFTs –
What if I purchased a tweet from Jack for 21Cr rupees. If this transaction is approved, then it will be unalterably recorded on the blockchain that ‘I possess ownership of that specific tweet’ and everyone can see it as it is public. No one can deny me that title.
The blockchain doesn’t care about whether the tweet is a physical item capable of being purchased or not, it just cares about whether the person has the said balance in its account. If they have that amount then it will be put on the chain.
An NFT is a digital token which can be traded on the blockchain, this specific token cannot be replicated or reproduced and is unique to a specific item/thing. Technically, an NFT is a digital asset that is created, or ‘minted’ from digital objects that represent both tangible and intangible items, including:
Art
Music
Videos and Gifs
In-game items
Collectibles
Essentially, NFTs are like physical collector’s items, only digital. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead. But there are some major differences between the two.
Unlike the oil painting which cannot be replicated exactly and whose possession by an individual enables him to prevent others from accessing it. Digital objects can be accessed by anyone and can also be replicated in the exact form.
Possession of an NFT is only a proof of ownership that is separate from copyright, ie. NFT only certifies ownership and in no way restricts access or use of any copy of the original file. Any person can access the file or even create copies of it.
Now, the next question that arises is that, if anyone can view these objects then why are people spending millions of dollars on these things?
In reality, NFTs do not have any intrinsic or inherent value, but it has extraordinary value when we think about it in terms of how the human Psyche works. Homo Sapiens is a social species, for generations we have lived in societies and civilisations and we thrive on human connections. We as humans, inherently have a need to gain respect and have a good social standing, we need affirmations from friends, family, etc.
This is the concept of NFT. We humans will associate immense value to an if
An entire group validates and agrees
That something is real
And there is only one of it present in the world
It doesn't really matter if the thing in question has any materialistic utility or not, it just has to have value in our minds.
Moreover, different people have different motives to trade NFTs:
People may purchase these digital assets for the sole purpose of speculative transactions, as the value of NFTs are increasing, everyone is trying to profit from the situation.
A person may pay for an NFT because besides allowing the buyer to own the original item, it also contains built-in authentication, which serves as proof of ownership. Collectors value those ‘Digital bragging rights’ almost more than the item itself.
The potential for NFTs is yet to be fully realised, we have just scratched the surface yet, the uses and applications for the same are manyfold.
Generally, when an artwork is sold, the artist only gets the amount for the first sale, but with NFTs Artists can charge royalty from every subsequent sale of their artwork this will enable them to get some security (in terms of money) and permit them to benefit from every resale of their artwork.
But not everything about NFT is good and bright, there are some downsides and apprehension for this new and upcoming thing:
As mentioned before NFTs are stored on the blockchain, mostly on Ethereum. For a blockchain to work, there has to be several thousand computers and supercomputers running 24/7 crunching numbers as fast as they can, and this produces a lot of carbon footprint and exhausts a lot of electricity. Ethereum alone takes about 33TWH (Terawatt hours) of electricity (same as the whole country of Denmark).
Besides security and encryption there isn’t much higher purpose for these computers, wasting a huge amount of electricity when it could be put to many better uses (like production or logistics, etc) raises the question, whether blockchains are really worth the adverse effect they have on our environment.
Conclusion
Although it has been in use for some years, NFT is a new concept and people are still figuring out new ways to use and implement it. NFT has and will bring about a drastic change in the industry, be it the financial or the art industry or any other. Despite its negative effects, it can be utilised in various venues, it can be used to purchase virtual land, it can expand the scope for paperless transactions, gaming companies are also taking advantage of this technology.
All in all, NFTs are the future and their potential is infinite, the only restriction is our imagination!
ABOUT THE AUTHOR
Samyak is currently a second year student pursuing B.Com. Hons. at Kirori Mal College. Economics and human psychology fascinates him. Moreover, He is passionate about reading novels (mostly fiction) and is an occasional writer. He also likes to play sports and enjoys watching movies and tv shows a lot.
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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