The cryptocurrency community has been using the decentralised finance system of digital currencies to shake the foundation of the centralised monetary system over the past few years. But non-fungible tokens (NFTs), another application of the blockchain, are not taking a backseat.
NFTs are gradually becoming more and more popular. There has been a substantial increase in the use and trading of NFTs thanks to their dynamic and broad use cases across platforms, as well as their ability to support digital scarcity and proven ownership of unique, one-of-a-kind assets.
So, what is a non-fungible token (NFT)?
NFTs can be used to signify ownership of certain goods. We can use them to tokenize items such as works of art, valuables, and even real estate. They are protected by a blockchain and can only have one official owner at a time; so no one is allowed to change the ownership record or create a new NFT by copying and pasting an existing one. In terms of economics, objects such as your furniture, a song file, or your computer are considered non-fungible. Due to their distinctive characteristics, some goods cannot be substituted with other items (read more analysis here).
This does not mean that NFTs cannot be exchanged; rather, it simply means that because of their distinctive qualities, the exchange price fluctuates. Therefore, it’s possible that trading in an art NFT or purchasing numerous NFTs with 1ETH won’t be possible. Simply think of NFTs as commodities with a certain ascribed value based on their properties that can be exchanged for an equivalent amount of crypto currency or fiat money.
Characteristics and specification of NFTs
NFTs comes with a lot of specifications making them very secure, thus giving them the status of an asset. According to ‘Non-Fungible Tokens: A Brief Introduction and History’ (November 2020, crypto.com), some prominent features of NFTs are:
- Uniqueness: NFTs provide data in the form of codes that explain the properties of that particular token. Because these NFTs are examples of blockchain use cases, the information contained in each token can be tracked but cannot be altered. This distinguishes them from other NFTs. For instance, even if the GIF image of another NFT is identical, the coded information in the individual pixels of a collectible limited edition GIF image can be used to identify the difference between those two similar-appearing NFTs. This feature enables NFTs to improve their worth based on their rarity rather than merely selling them for more money.
- Traceability: As stated earlier, NFTs being a use case of blockchain are recorded on a block for every transaction or exchange that has happened since the NFT was created. This means each token can be verifiably authentic, and not a counterfeit – obviously a very important thing for owners and prospective buyers.
- Indivisibility: Unlike a fungible token or a crypto currency, which can be transacted even in terms of a decimal fraction of one whole token, NFTs cannot be transacted in fractions. Just as one cannot buy one, the same goes for the NFT: it can only be transacted as a whole and indivisibly.
- Programmability: NFTs used to be transacted in very small numbers because they could not be used across platforms. For instance, if one bought an NFT version of Limited Edition Nike shoes and it could only be saved in a phone photo gallery then why would anyone buy it? But due to the feature of being programmable, NFTs are programmed to execute across different software platforms. Now if someone buys an NFT pair of shoes then they can take augmented reality (AR) photos where they can be seen wearing those NFT shoes, which can be used with their game avatar in any online multi player game. This feature of NFTs has given rise to their popularity.
In other words, NFTs combine non-fungible assets with the finest features of decentralised blockchain technology. You can really own and control your own NFTs, in contrast to traditional digital assets that are issued and governed by centralised corporations and that may be taken away from you at any time.
How widely can NFTs be used?
NFTs can be extremely powerful since they can represent any asset – digital or real. This feature of NFTs has been used to boost the crypto and NFT communities. Some of its notable use cases are:
- Gaming: NFTs may be utilised across different software systems because of the programmability feature, as already mentioned. To improve their profile statistics, player avatars in games can trade NFTs for tradeable in-game products and more.
- Art: The most contentious use case so far has been this one. Artists may profit from their work while maintaining their copyright with NFTs. NFTs also give artists the chance to get paid royalties each time one of their works is sold. However, an issue arises when works of art whose owners are deceased are turned into NFTs and made profitable, leading to an increase in copyright conflicts throughout the world.
- Virtual assets: Rare collectable NFTs exchanged on NFT Marketplaces serve as virtual assets since they have a value ascribed to them, and that value rises over time depending on their rarity and uniqueness, much like any other item, such as gold or real estate in the real world.
- Real-world assets: One of the original imagined purposes for NFTs was to tokenize real-world assets that can then be traded. Nike some years back patented a system to tokenize shoes. Real estate has been tokenized and transacted as well.
- Identity: Users’ ability to safeguard and manage their personal information, such as medical records, birth certificates, and other details, will be improved with NFTs. By incorporating this into our identity protection systems, the government can stop ID theft, identity tracing, and many other things.
The NFT market is dynamic and fascinating, but it also raises several legal concerns that call for a multidisciplinary approach. As stated above, not all use cases are utilised well, and this misuse in the absence of legal advice has resulted in a variety of legal problems, including contract disputes, fraud, money laundering, intellectual property infringement, and other types of legal violations.
The NFT market has shown encouraging indications of life, but there is still a long way to go before this unique use of blockchain technology is widely tested and adopted.
Photo: Ilya Pazniak | Dreamstime.com