Non Fungible Tokens (NFTs) Explained

Simon Greenwood 14-Sep-2022 15:28:29

What is an NFT?

NFT, meaning Non-Fungible Tokens, are essentially tokens that can be used to represent ownership of unique items. “Non-fungible” means that it’s unique and cannot be replaced with something else. For example, a natural diamond is non-fungible because its cut, size, grade, and colour characteristics contribute to its uniqueness; therefore, it’s not interchangeable. Whereas “fungible” means it is interchangeable. For example, a £1 coin can be replaced with another £1 coin.

How do NFTs work?

An NFT is a digital asset representing an object. They are sold online primarily using cryptocurrency and encrypted/treated similarly to cryptocurrency on a blockchain. Check out our Consultancy pages if you want to see ways we could advise your business.

Blockchain is a system of recording information that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions duplicated and distributed across the entire network of computer systems on the blockchain. The basic idea is that blockchains are a way to store data without having to trust any one company or entity to keep things secure and accurate (Read our Blockchain Development blog to find out more).

At a very high level, most NFTs are part of the Ethereum blockchain, though other blockchains have implemented their own version of NFTs. Ethereum is a cryptocurrency-like blockchain, but blockchain also keeps track of who’s holding and trading NFTs. So basically, who owns the token. “The USP of an NFT is that it allows the buyer to own the original item but also have the built-in authentication which provides proof of ownership”.

When an NFT is created from digital objects, it can represent physical and non-physical items such as art, music, GIFs, and videos. In summary, NFTs are like actual collectors’ items but only digital.

A recent high-profile example of this is:
Damien Hirst created 10,000 dot paintings, each one was unique, and then each was linked to a corresponding NFT. They sold for $2000 per painting, and the buyers were then given the option of keeping either the NFT or the original art. The one they did not choose was destroyed. 5,149 decided to keep the physical art, and 4,851 opted for the NFTs. Personally, I would have kept the original physical art, and most of the 5,149 who did keep the physical version are probably not that bothered or aware of the ever-growing metaverse concept.

Buying an NFT essentially allows the purchaser to own the original copy of a digital file; it’s like the digital alternative to owning an original copy of a physical piece of art.

Why buy NFTs?

NFTs originated in 2014, and there has been some notoriety because of the high profile buying and selling of NFTs and the astronomical prices for items that seem ridiculous to most people. These risky investments with little or no investment certainty are very speculative, and there is no evidence yet to review investment performance.

Opportunities for NFTs

NFTs are not limited to only artwork but can allow for tokenisation and commercialisation of many assets, including e-tickets, wallet and domain names, and even property (real or virtual). For instance, when applied in the event industry, such as music festivals, NFTs can function as an e-ticket to ensure transparency and then, post-event, turn into an object of uniqueness. Event organisers could partner with artists to create unique content for these NFT e-tickets, transforming them into tradeable, collectable pieces with high market value after the event.

Another example could be real estate and property purchase transaction efficiency. One of the downsides of investing in property is the bureaucracy of transferring property ownership. It currently takes a significant amount of paperwork to buy a property. With an NFT, the transaction process is streamlined, allowing a buyer to assume ownership of a piece of property in a fraction of the time.

As we advance, NFTs could potentially revolutionise many industries through the digital transformation of the business process.

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