Understanding the concept behind NFTs (Non -Fungible Tokens) and their relation to cryptocurrency

If you are remotely interested in the world of art, technology, blockchain, or just an everyday spectator who might have stumbled upon the term (NFT) Non-fungible tokens, you must be wondering what in the world are these…err…art? Money? Crypto? And why do some of the NFTs have astronomical values? Well, I was in the same boat and did a little digging. So, buckle up for the (supposed) digital answer to art collectibles.

1. What is meant by Fungibility (Fungible vs Non-Fungible) of a commodity?

To first understand NFTs (Non-fungible tokens), you have to first be aware of the concept of fungibility. In essence, when we say something is fungible, it means that you can simply replace it with something similar or equivalent. Let me illustrate this with an example, say you have a 10 dollar note and your friend replaced that with another 10 dollar note, you wouldn’t mind it a bit now would you. Why? Because it spends the same. This means that the dollar note (or any other one for that matter) is fungible. Similarly, one share of Reliance stock is worth the same as any other share of Reliance stock. Only the value of stock or currency matters to you. So to be fungible the two items should be functionally identical in the market.

However, let’s say you have an old coin from 1935 which your great grandfather (or a time traveler!) gave you. This means that coin is unique to you like a collectible and if lost it can’t be replaced. This makes that coin a Non-fungible item. Something like The Starry Night of Vincent van Gogh, irreplaceable.

Having a unique copy or limited edition collectible of a commodity makes it a big selling point in physical media and has been for decades. Collectors of the said commodity are willing to pay a fortune for these limited edition copies or Non-fungible items. Now, how does this apply to digital media such as digital art, gifs, and video clips? Well, let’s explore.

2. How does NFT work concerning digital media?

Similar to “one-of-a-kind” physical collectible NFTs are assets in the digital world that are in a limited supply but have no tangibility of their own. But how would that even work? After all, the whole point of digital media is that it can be shared or copied infinitely (paid or unpaid). The copy of the e-book that I buy would be the same as any others. There is no limited edition or signed copy of an e-book. Why? Because Ctrl+V, remember.

This is where the dope new (well not that new) blockchain technology comes in. Yes, the same one which helps run cryptocurrencies like bitcoin and ethereum. The whole point is to record transactions of the digital currencies and who owns them (peer-to-peer network). In a similar vein, blockchain is used to create (or “mint”) and store NFTs (your ‘limited edition’ collectible). Now, to make it unique or irreplaceable, the blockchain creates a set of records of cryptographic hash (list of transaction bundles that are connected and ensure its authentication in the node). Various blockchains have created standard tokens which use the proof of stake model to operate and support NFTs.

Now, just like physical media, you have your set of limited edition collections of digital media which you can use for bragging rights. Hurray!

3. What makes the NFTs original and irreproducible?

Even now you might be like…um…I also have a gif of Nyan cat or Lebron’s dunking clip in my WhatsApp shared folder and I didn’t pay millions for them. So, how was the Nyan cat gif that sold for almost $600,000 or Lebron’s dunking clip which sold for $208000 different from mine? Well, yours is not crypto original, meaning it does not have the authentic digital watermark of the original producer who created or minted it on the blockchain for a limited amount.

Now, how do artists or producers of the said digital media make sure they are irreproducible and retain their uniqueness. For this, they will put out an art piece, say 100 limited edition football cards into a particular node of a blockchain (say ethereum). This particular blockchain carrying the said art piece now has its set of characters which make it unique. Blockchain records all the transactions of the art piece when it’s sold from one owner to another, thus creating a chain of cryptographic transactions which in turn can be used as proof of ownership. Note that proof of ownership is different from copyright. (Proof of ownership validates that you owned the said digital media at some point and do not necessarily have copyright privileges. This allows the original owner to create more pieces if they choose).

Also to prove a fake NFT from a real one, blockchain technology uses a piece of software (called full node) that checks everything on the blockchain for fakes. When the software finds a fake NFT it rejects it. This process is similar to that of the bitcoin network and for precisely this reason you also cannot create a fake bitcoin. Bit fuzzy right?

4. Why are NFTs worth so much?

Traditional items of value like unique works of art derive their worth from the fact that they are one of a kind. Digital media can be replicated easily and endlessly and hence not worth much. But with NFTs artwork can be tokenized and made unique with very few in circulation.

So, whenever something is perceived to be in short or limited supply we as humans tend to exaggerate its value. For some folks, it’s about the bragging right of owning something unique (like our beloved pokemon cards!), for some it’s about appreciating their favorite artists or performers.

With the growing frenzy around cryptocurrency, the value of NFTs can potentially grow in the future. Artists can program NFTs such that they get a cut every time a transaction is made. Clever isn’t it! Also recently eBay has announced that they will allow the sale of NFTs on their platform. I mean you can’t deny the mania.

5. What is the difference between NFT and cryptocurrency?

Although, NFTs are generally built using the same kind of blockchain technology as cryptocurrencies like bitcoin, dogecoin (yeah!), and litecoin, there are a few differences. The major difference stems from our discussion regarding the fungibility of assets. Cryptocurrencies like bitcoin are fungible i.e. they are equivalent and interchangeable. NFTs are non-fungible (non-interchangeable) because of the special digital signature attached to them.

Another difference is how their market value is perceived. Cryptocurrencies have a fluctuating value like stocks in the share markets, whereas NFTs value depends on their asset (artist, origin, or prominence). But as with cryptocurrencies, there are concerns about the environmental impact of running the blockchain.

6. Can you create, buy or sell NFTs?

Whew, a keen bunch aren’t you! Well, you have come this far, so let me tell you how to buy/ sell NFTs or better create them.

First of all, to buy them you’ll need to get a digital wallet (coinbase, binance, etc.) which allows for the storage of NFTs and cryptocurrencies. Next, you will have to purchase or mine some cryptocurrencies depending on what the NFT provider is accepting. Also, keep in the mind the charges or fees associated with the transaction. You can find that out by doing a bit of research (Note: please do research everything in advance before engaging in any of this).

After this head over to one of the marketplaces for NFTs trading or shopping. Some of the prominent ones are:

• Opensea.io — Described as the largest marketplace for NFTs, it offers a wide range of digital media. They also feature over 800 different projects including cards, collectible arts, and such.
• Rarible — It’s a community-run marketplace for the initiated. Rarible awards RARI tokens and distributes over 75000 RARI tokens to its users per week. This platform is recognized more for its focus on artworks.
• Nifty Gateway — A centralized, USD-based marketplace for buying and selling NFTs. famous artists like Beeple, Grimes, and others have sold their arts through this platform.

Some other NFT marketplaces are

• SuperRare
• NFT Showroom
• Foundation
• Atomic Market

Also if you are a gamer (like me), NFTs are included for in-game items like special skins, swords, or guns.

Being the cool new toys, NFTs are bringing in new players into this market every single day driving their potential even further.

As for creating NFTs, technically anyone can make an NFT related digital artform and sell them (maybe even for hefty prices). I mean just like real art pieces you can create digital media, make it into an NFT by adding it to the blockchain (minting) and sell it via the above-mentioned marketplaces. Though you have to go through a few complications. First, the prices or fees charged by the marketplaces are a bit on the higher side (owing to the high energy for the transaction), second, you have to account for market fluctuations and conversion charges.

In closing, I would like to say that NFTs are shedding new light on the world of digital art and people are making money off of it. So if you have money to spare do partake ( if you can handle it!). I will reiterate, kindly do your research beforehand.

7. What are the concerns with NFTs?

Every new technology comes with its own set of problems and criticisms. For NFTs some glaring ones need to be addressed for sustainability.

First, the massive energy usage associated with the process of minting and blockchain transactions results in greenhouse emissions. Coupled with the fact that the proof-of-work aspect of NFTs requires huge electricity usage, means the whole process is an environmental nemesis. Some recent NFT technologies do try to reduce the carbon footprints of NFT transactions, but the results have yet to be seen.

Second, the problem associated with everything digital is bit rot and link rot which means over a period of time the image quality drops, hyperlinks become glitchy and websites cease to exist.

But the more nuanced bit of worry is that in this world of capitalism and consumerism everything is about money. We have to make sure that real art and artists don’t get lost in this feeding frenzy.

Closing thoughts

Hey, I am a fellow pedestrian just like you, watching this craze unfold. But what I have gathered from all of this is, though NFTs do have potential like bitcoin, especially for creators and artists, it suffers from the same caveats that bitcoins do. They are unregulated, highly volatile and the whole concept is entirely nascent. Experts are skeptical about its future and have warned against large unhinged investments into NFTs.