Are NFTs the new future of ownership?
Wouldn’t you be taken aback if someone told you that they had earned millions just by selling something as trivial as a tweet on the internet? Well, something like this happened in March 2021, when the former Twitter CEO, Jack Dorsey, sold his first tweet for 2.9 million dollars (i.e. ₹21,09,75,800).
Now, that begs the question: why would someone pay such a high price for just a tweet? The answer lies in the fact that the tweet was sold as an NFT.
Jack Dorsey’s Tweet which was sold as an NFT
So, what is an NFT?
NFT, often known as modern-day collectibles, is an amalgamation of two words: Non- fungible and tokens. To gain a better understanding, one should start by analyzing these two words separately. Anything that cannot be replaced and has a unique identity is known as a non-fungible object. Let’s suppose you own a limited edition merchandise signed by your favourite band. That merchandise is irreplaceable to you because it has the signatures of your preferred artists and therefore, the merchandise is a non-fungible object. On the other hand, a token is a term that is widely used in the context of cryptocurrencies. It is used to describe crypto assets that run on top of another cryptocurrency’s blockchain.
NFT works on the lines of blockchain i.e. NFTs are stored by means of blockchain technology which makes it effectively decentralized. Defi tokens are an example of this. The practicality of defi relies on the fact that one can keep a record of transactions without referring to a centralized source. Hence, non-fungible tokens are those decentralized digital assets that can neither be interchanged nor exchanged due to their unique properties. They could include a digital collectible, a game, an essay, or even a pair of sneakers online!
Owing to the “phenomenal increase in transactions in virtual digital assets”, as described by the Finance Minister, Mrs. Nirmala Sitharaman, the Government of India has put a tax of 30% on any income from the transfer of digital assets which includes NFTs.
Moving on to the next aspect: where do we find NFTs?
NFTs are usually found on online marketplaces, the top three of them being, Rarible, OpenSea, and Foundation. To purchase an NFT from any of these marketplaces, one has to own a digital wallet, which would enable them to hold cryptocurrencies and NFTs. After creating a wallet, one can purchase any cryptocurrency. It has to be kept in mind that the cryptocurrency purchased should be accepted by the NFT provider. The most widely accepted cryptocurrency for buying and selling NFT is Ether. Platforms like Coinbase, Kraken, and Paypal deal in cryptocurrencies. Most exchanges charge at least a percentage of your transaction as fees when you buy crypto.
After these steps are undertaken, the person can buy NFTs from the above-mentioned online marketplaces. It is also important to search for the desired NFT on an appropriate site. While marketplaces like OpenSea and Foundation deal in almost all types of NFTs, they have their specialties too. For example, OpenSea is the biggest online marketplace for NFTs that specializes in rare digital items and collectibles. Rarible, on the other hand, allows artists to issue and sell NFTs and enables holders to weigh in on features like community rules and fees.
NFTs are definitely in vogue. Let’s understand what the craze is all about.
Well, there are plenty of uses of NFTs, the most common being in the field of digital content. This is because the industry is currently in a state of chaos. Platforms are exploiting independent content creators in several ways.
An artist who posts work on a social media site generates revenue for the platform, which sells advertisements to the artist’s fans. In exchange, they gain exposure, but that exposure does not translate into money. NFTs create a new creative economy in which creators retain control of their work rather than handing it over to the platforms that promote it.
Ownership is ingrained in its substance. When they sell their work, the money goes straight to them. If the NFT is sold by the new owner, the original creator may be entitled to royalties since the creator’s address is part of the token’s metadata, which can’t be changed.
However, there’s no denying that NFTs are intriguing. There are significant disadvantages of investing in them. Firstly, they are not under the control of any authority. Instead, they are a part of an unregulated market which allows creators to acquire ownership and control over the distribution and monetization of work, making the introduction of any uniform regulation on NFTs extremely difficult. For example, an artist’s work could be sold as an NFT without their knowledge or consent. If the NFT is sold for a profit, the earnings would go to the NFT miner but not the original creator of the piece. This can happen since there are no regulations around NFT auctions. Moreover, the value of an NFT is not constant and keeps fluctuating. So, no one knows exactly how ‘valuable’ they are. If the enthusiasm fades for whatever reason, investors could lose a lot of money. Also, for many buyers, the technical processes involved in trading the tokens might be daunting and complicated.
The following graphic describes how one can make their own NFT.
The entire NFT ecosystem works because Ethereum is decentralized and secure.
Decentralisation means that an individual and everyone else can verify that the individual owns something, without trusting or granting custody to a third party who can impose their own rules at will. It also implies that one’s NFT is portable across many different products and markets. Additionally, security means no one can copy/paste your NFT or steal it.
Every NFT is unique in itself and must have an owner. Ownership is a matter of public record and therefore, is easily verifiable. This makes the system more simple and decentralised, since ownership related disputes are much less likely to arise. Transferring rights is made easy, given that a proper procedure is in place. What is fascinating is that these items can be used in unique ways. For example, one can use digital artwork as collateral in a decentralized loan.
NFTs originally appeared in 2014, but they didn’t attract much notice until lately.
Back in days, there was no solid chain that ensured proper transaction procedure of digital assets. However, things have changed for the better now. There has been authentic storage of every transaction that takes place with regard to any NFT. In addition, creating and spreading counterfeit collectibles has also become impossible since each item can be traced back to its original maker or issuer. They can’t be directly exchanged with one another, unlike crypto money, because no two are alike, benefiting both the artists and the owner.
NFTs can feature smart contracts, which are programmed bits that can autonomously perform activities under certain situations. The goal is to develop a set of automatic, self-enforcing rules that cannot be disregarded or bypassed. Since the technology is still in its initial phases, it is anticipated that many blockchain smart features will be applied in asset evaluations in the near future.
Another fascinating aspect of NFTs is that they are capable of transforming society, such that people would be able to achieve whatever they wish for, simply by anticipating it. However, NFTs have yet to reach their full potential and evolve as a technology, and it will take time for other industries to embrace and trust them.
Overall, one thing that is almost certain is that NFTs are set to take the world of ownership by storm.
Curated By: Chirag Ladha and Nishtha Bhatnagar
(Chirag Ladha is a 1st year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)
(Nishtha Bhatnagar is a 1st year student pursuing B.Sc Economics(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)