Background
From $69 million .jpeg files to NBA highlights and tweets, non-fungible tokens or NFTs have become one of the most intriguing yet unknown topics in the fintech sector. In 2021 the market capitalization (m-cap) for NFTs was augmented to a staggering $20 billion, and it will only go upwards. Here, we seek to dispel common misconceptions about NFTs and explain why downloadable memes are worth millions of dollars and how they could lead to the end of the planet.
What sets them apart?
To comprehend NFTs one needs to understand what is meant by ‘fungibility’. Fungibility is the ability of an asset to be exchanged or substituted with similar assets of the same value, for instance, a coin worth ₹10 can be substituted by a note worth ₹10. This shows that currency is fungible, NFTs on the other hand are the literal opposite. Each NFT is unique and non-substitutable, for instance, The Last Supper is an original piece of art, it cannot be substituted by a printout of The Last Supper, because it does not have the same value. The principle of NFTs is that the proprietor of an NFT has an authentic digital signature, one which they can own and take pride in.
NFTs are cryptocurrencies but unlike fungible cryptos like Bitcoin, they are wholly unique. They exist as a network of numbers and alphabets stored on a blockchain ledger; this data has the history of a particular digital asset. Blockchain is like a decentralized bank that has all the records of all the transactions, but it is operated by a group of people on the internet, rather than a central entity. This data is also encrypted assuring the NFT’s authenticity and scarcity. This acts as a beneficial platform for digital artists due to the scarcity, which in turn, increases the value.
The T in NFTs, tokens, can be anything. A token is a thing that exists on the internet, which is created by a person and sold to another person, on the internet. National Basketball Association (NBA) recently started its NFT production entity - Top Shot. Top Shot sells trading cards that are NFTs of match highlights. They sell for hundreds of thousands of dollars! An NFT of Jack Dorsey (Twitter’s co-founder)’s first-ever Tweet sold for nearly $3 million. Christie’s, one of the world’s largest auction companies, conducted its first-ever digital art auction, earlier this year, which sold for $69 million.
Why are NFTs so expensive?
This question has been very popular amongst the masses, why is a thing that one can just download for free costing up to millions? The answer tells us a lot about human luxury and psychology. One needs to understand that the price or the value of a product depends a lot on the consumers of that product. The difference between an NBA highlight on Instagram Reels and an NBA highlight on Top Shot’s NFT is that it's official.
Yes, in essence, it is the same thing but the brand, the hype and the flair attached to an overpriced product are unmatched. Why are shades of white on a canvas valued so much? Why are Gucci jackets so expensive? The answer to all these questions is subtle- the human mind tends to value things that other people cannot afford. Rich folks have the resources to buy whatever they wish. An NFT is used to higher the social status of the ultra-privileged.
The impact of NFTs and their future
We’ve seen how companies are stepping into the digital realm with NFTs, and artists aren’t far behind. What comes next, are NFTs the future?
As they open a new marketplace for artists & creators, buyers & collectors, NFTs are futuristic because they have increased transparency. They have dissolved plagiarism which is a massive benefit for the original creator. They can eliminate the dependency on middlemen, allowing creators to be better compensated & more innovative. However, NFTs also have a darker side.
Most operations of NFTs are based on the Blockchain of Ethereum. The fact is Blockchain is entirely based on computers that consume fatal amounts of electricity. As of April 2021, the Ethereum blockchain has consumed over 49 terawatt-hours of electricity, which is higher than several countries combined (as cited by Digiconomist). Electricity is usually generated by powers plants that burn fossil fuels, that release big amounts of carbon, which as we all know is perhaps the biggest global problem in recent times. The rise of NFTs is directly proportionate to the rise of electricity consumed by Ethereum Blockchain, both have seen an immense rise. The irony is that all of this is happening not to build roads, schools or develop the infrastructure in developing nations, but to satisfy the desires of the ultra-rich.
One cannot rightly predict what will happen to NFTs as of now. Experts’ opinions vary but what all of them do assert is that the rise of NFT is solely based on hype, and this hype always slows down. Mittens, fidget-spinners are examples. But even though the meteoric rise of NFTs is mortal, they have revolutionized digital art for the good. They have given a platform to graphic designers and artists to showcase talent, but at what cost? Climate change is the biggest threat to the future of mankind, and NFTs are just worsening the situation.
~ Lorik Yadav
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