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 2020, the market capitalization (m-cap) for NFTs augmented to a staggering $338 million, and it will only go upwards (1). This article aims to eliminate various doubts one may have about NFTs and explains why downloadable memes are valued in millions and how they may cause the end of the world.

Fungibility

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 example, The Last Supper is an original piece of art, it cannot be substituted by a printout of The Last Supper because it won’t have the same value.

The principle of NFTs is that their proprietors have an exclusive digital signature which they can own and take pride in, like a trophy or an award.

NFTs are cryptocurrencies but unlike fungible cryptos like Bitcoin, they are wholly unique. They exist as a network of numbers and alphabets stored on blockchain, a digital ledger; which contains the history of a particular digital asset (NFT). 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 like the government. 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 its value.

The T in NFTs, ‘tokens’, can be anything. A token is something that exists on the internet. It is created by one person and sold to another 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 Twitter’s co-founder, Jack Dorsey’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 accumulated over $69 million in sales.

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 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 can be used to higher the social status of the ultra-privileged.

The impact and future of NFTs

‍Most operations of NFTs are based on Ethereum, a blockchain platform. 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 (2). Electricity is usually generated by power plants that burn fossil fuels and release big amounts of carbon, which, as we all know, is perhaps the biggest global issue in recent times. The rise of NFTs is directly proportional 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. Artists now have a medium that they can directly utilize to attract potential (extremely-high-paying) buyers, while at their homes. This is especially helpful in times such as these. 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.

Citations

1. ‍NFTs Explained by The Wall Street Journal
2. ‍Ethereum Energy Consumption Index by Digiconomist