A non fungible token (NFT) is a digital data stored in a blockchain. The digital data records its description and owner. The ownership can be transferred. Therefore it can be sold and traded. It can be created by anybody and require minimum computer coding skill.
There is always a underlying asset to a NFT, which is a digital file or physical assets. It could be image, videos, audio, intellectual property, games or sports highlight. Since underlying assets is non-homogeneous, it is not interchangeable. Therefore it is called non-fungible.
It was originally conceived in 2014. However, its market rapidly grew in 2020. Its market value in 2021 was around USD 15.70 billion. It is expected to reach USD 122.43 Billion by 2028, with a CAGR of 34.10 % during the forecast period of 2022 – 2028
How it works?
It is created with same coding language as in Cryptocurrency However, it records details of underlying asset and digital signature that tracks ownership. When any transaction happens buy or sell, it creates transaction blocks and connects each block to create a blockchain. Thereby give details of where the associated asset is stored.
It stands as a proof of ownership of a digital asset but does not imply ownership to the underlying asset. Ownership of an it is often associated with a license to use such a linked digital asset, but generally does not confer copyright to the buyer. Some grants only a license for personal, non-commercial use, while other licenses also allow commercial use of the underlying digital asset.
Why people buy?
It is demanded to take possession of underlying assets. Though it does not ensure actual possession, atleast digitally one can flaunt its possession. Especially for item which are not accessible at large. Example – famous artwork, music piece by popular singer, cloths worn by celebrities, rare video clips etc.
How NFT different from cryptocurrency?
In case of cryptocurrnecy unit value is homogeneous. A bitcoin will value same everywhere depending upon market demand. Therefore a bitcoin can be interchanged with another bitcoin or cryptocurrency with same value. In case NFT its value is derived from underlying assets as well as market demand. Therefore it is heterogeneous. A NFT cant be interchanged with another.
Technically Cryptocurrency is more sound and solid. NFT is not.
Where is it used?
Currently it is used for followings
Digital art
Its use for digital art has got considerable public attention. A NFT is linked to a digital art and sold to buyers giving digital possession. Some NFT use generative arts, which assembles collection of simple pictures. Popular example are BoredApes, EtherRocks, and CryptoPunks.
Games
Different games developer using in-game NFT to make it more popular. CryptoKitties was an early successful blockchain online game in which players adopt and trade virtual cats
Music
Now a days artist also selling artwork and music as NFT. American rapper Lil Pump, Grimes, Eminem, Ed Sheeran, Maroon 5 are few artist who have used NFT to release their songs.
Film
In May 2018, 20th Century Fox partnered with Atom Tickets and released limited-edition Deadpool 2 digital posters to promote the film. In March 2021 Adam Benzine’s 2015 documentary Claude Lanzmann: Spectres of the Shoah became the first motion picture and documentary film to be auctioned as an NFT. Since then many others have followed.
What are the issues and drawbacks?
No copyright
It does not guarantee copyright to underlying asset. Therefore anybody can down load the underlying asset. The only difference between NFT or downloaded possession is the ‘status symbol’ to show off that you can afford it.
Off-chain storage
The blockchain for NFT does not store the associated artwork file in the encryption. It is just a certificate of ownership pointing to the piece of art in question. This however makes the art itself vulnerable.
Environmental concerns
The concept of blockchain requires high energy consumption is its network of computer. Therefore its purchases and sales are enabled by the high energy usage and consequent greenhouse gas emissions, associated with blockchain transactions.
Artist and buyer fees
Sales platforms charge artists and buyers fees for minting, listing, claiming, and secondary sales. On occasions the artist end up paying more than actual sales
Plagiarism and fraud
There have been cases of artists and creators having their work sold by others as an NFT without permission. The anonymity associated with it and the ease with which they can be forged make it difficult to pursue legal action against its plagiarists.
The NFT marketplace OpenSea has rules against plagiarism. Some marketplaces responded to cases of plagiarism by creating “takedown teams” to respond to artist complaints.
• A process known as “sleepminting” allows a fraudster to mint an NFT in an artist’s wallet and transfer it back to their own account without the artist becoming aware
• The price paid for specific NFTs and the sales volume of a particular NFT author may be artificially inflated by wash trading, which is prevalent due to a lack of government regulation.
Pyramid/Ponzi scheme claims
Critics compare its structure to a pyramid or Ponzi scheme, in which early adopters profit at the expense of those buying in later.
“Rug pull” exit scams
A “rug pull” is a scam, similar to an exit scam or a pump and dump scheme, in which the developers of an NFT or other blockchain project hype the value of a project to pump up the price and then suddenly sell all their tokens to lock in massive profits or otherwise abandon the project while removing liquidity, permanently destroying the value of the project.
Rug pulls have become an increasingly common hazard when buying NFTs, with the proceeds of some rug pulls being valued at hundreds of thousands or even millions of dollars.