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- Aarushi R, Gahana P N (Senior Columnists)
Did you hear that Twitter’s CEO Jack Dorsey’s tweet ‘just setting my twttr’ was sold for $2.9 million or that GIFs and memes like the 2011- Nyan Cat are being sold for a whopping $587,000? Well, this is not fake news. As of 2021, right from digital paintings to GIFs, online games, tweets, YouTube videos, memes, songs and even digital kittens (like the crypto kitties) can be sold by their original creators. These various forms of digital art are being sold in the form of a type of cryptocurrency called NFT.
NFT stands for non-fungible token. It is a class of cryptocurrency under the Ethereum blockchain that enables ownership of digital assets. NFTs cannot necessarily be used as exchange currencies because each NFT token is completely unique and entirely different from the other. To grasp this better, we should keep in mind the concept of fungibility. Fungibility is the ability of an asset to be exchanged or substituted with similar assets of the same value. Currencies like rupees, dollars or even gold and bitcoin can be exchanged for other assets of the same value. Hence, they are called fungible. Whereas, NFT, as its name suggests is not ‘fungible’. For example, one can exchange five notes ₹20 for one currency note worth ₹100 because they are of the same value. But one cannot exchange the original Mona Lisa painting for a mere poster replica of the original painting. Fungible assets are like the rupee notes that can be exchanged whereas, NFTs are like the original Mona Lisa painting. Each one of them has a unique digital signature and can be substituted easily.
NFTs grew massively popular in 2020 with their market cap growing from $41 million in 2018 to $338 million in 2020. So, when exactly did this NFT craze begin? The origins of NFT can be traced back to 2013 when Colored Coins were issued as an attempt to bring assets (like properties, coupons and digital collectables) onto the blockchain. But the first time NFT received its due attention was with the introduction of ‘CryptoKitties’ in 2017. CryptoKitties is a virtual game, wherein a player can adopt, breed, raise and trade virtual cats. In this blockchain-based game, each such Kitten/ Cat is a unique NFT that is bought and sold. When the players of this game started becoming millionaires, many began to acknowledge the immense potential of NFTs.
NFTs serve as digital certificates of authenticity. Similar to the ownership of intellectual property rights, they enable the owner to claim ownership rights over various forms of digital art. The primary reason for the rise in usage of NFT is its popularity among digital art and content creators. Digital art form creators did not get the true worth for their creation but NFT helped to tackle this by creating scarcity and limitation. Since, every NFT is unique and cannot be exchanged it helped to create scarcity and hence, pushed up the prices of various pieces of digital art. NFTs, like other cryptocurrencies, are stored in the form of encrypted data on blockchains. To understand NFTs and cryptocurrency in general, it is important to understand the basics of blockchain.
Blockchain is a term that has been popularly used in recent years. But what is it, what problems can it solve, and how can it be used? Well, as the name itself indicates, a blockchain is a chain of blocks containing information. Also known as Distributed Ledger Technology or DLT, its idea originated in 1991 with the intention of preventing the backdating or tampering of digital documents. However, it wasn’t until 2009 that this mind-blowing technology came under the spotlight, with the introduction of Bitcoin (a form of virtual currency or cryptocurrency, as it is commonly called, which facilitates payments for various transactions). Blockchain technically acts as a decentralized platform for recording transactions, which means that it doesn’t have a centralized organization overseeing and recording the transactions happening. Let’s say you make a payment with a credit card. This transaction is approved and recorded by your bank or your credit card company. In such a case, your bank acts as a centralised organisation that has all records of your transactions and transactions of similar customers. Whereas, in a blockchain, anyone who is a part of the network has access to hundreds or thousands of transaction records, thus making the entire technology very decentralized.
When we look at banks or other centralised structures, it is the companies who maintain the databases of the many million customers and their transaction records. This involves spending billions of dollars just to protect such information. Despite this, we find that this big data gets hacked into, and our security gets disrupted. This isn’t the case in Blockchain technology. Every transaction is recorded in a block and then these blocks are chained together to make a big old list known as the blockchain. However, each of these records needs to be verified by multiple computers. So, a simple hacker with one system cannot just jump in and invalidate the chain, and this makes blockchain something secure and accessible to only those who are part of the transaction (also known as miners).
NFTs are also using this blockchain technology. To be precise, they are part of the Ethereum Blockchain. Now, just like Bitcoin, the Ethereum technology lets one transact in cryptocurrency for a small fee. Ethereum further builds on Bitcoin’s innovation by letting you build other applications like games, social media apps etc. on top of its blockchain network It acts as a marketplace for games, financial services and art too. It protects your data and doesn’t censor you. So, essentially, what you are actually buying when you buy an NFT is a really long digital receipt that contains your transaction along with literally every other transaction that has ever happened on that chain.
Now, where does one buy an NFT? Does it have a marketplace? Yes, we can buy NFTs in not just one, but many marketplaces, each having different types of arts or collectibles. Well, this is because other blockchains have started to facilitate NFTs as well. Since each blockchain is different, we can’t really expect to buy and sell all types of NFTs in the same marketplace. Some of the popular ones include Opensea, SuperRare, Nifty Gateway, NBA Top Shot and Sorare. Each of these platforms operates slightly different from the others. For example, Opensea hosts a variety of collectibles while Sorare offers to only trade in limited edition soccer NFT cards.
To put it out straight, the main purpose behind NFTs is to create artificial scarcity. This isn’t just so that those with too much money can make more, but it also acts as a platform for artists to showcase their talents and make a living in the digital age. But one cannot ignore the concerns that have been raised regarding the use of NFTs. Many experts claim that once the hype around NFT dies down, prices will plunge and lead to huge losses for the owners. Moreover, digital content can be easily viewed, copied, downloaded irrespective of who the owner is. For instance, Jack Dorsey’s tweet may now be owned by a Malaysian businessman but it does not inhibit me from viewing the tweet. This puts NFT based digital assets at a disadvantage to the physical form of art and assets because free accessibility may not be possible in the case of the latter. Moreover, NFT is a crypto that is an entity of the digital world yet, cryptos have been stolen before. So, there is a huge element of risk involved and people use pseudo identities on the internet.
Besides, there are environmental concerns surrounding cryptocurrencies in general because of the large carbon footprints it creates.
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