In the fast-paced and ever-evolving digital world, Non-Fungible Tokens (NFTs) and Blockchain technology have become hot topics. In 2021, the sales of NFTs surged to a staggering USD 25 billion, leading to an explosion in popularity for this crypto asset. However, there’s a camp that believes NFTs are a bubble that could potentially burst.
Demystifying Non-Fungible Tokens (NFTs)
An NFT can be any digital item – be it something as simple as drawings, photos, and videos, or more complex items such as music and in-game items. A non-physical digital asset like a selfie or even a tweet can also be converted into an NFT that can then be traded online using cryptocurrency.
What sets NFTs apart from regular digital forms is the backing of Blockchain technology. They can have only one owner at a time, thus providing exclusive ownership rights. NFT owners can digitally sign their artwork and store specific information in their NFTs metadata, which becomes visible only to the NFT buyer.
The world was introduced to NFTs with the conception of Terra Nullius in 2015 on Ethereum Blockchain. This led to the launch of CryptoPunks and CryptoCats by 2017, before NFTs began to slowly move into public awareness and found mainstream adoption in 2021.
Contrasting NFTs and Cryptocurrencies
Though they both make use of Blockchain, NFTs and cryptocurrencies are different entities. Cryptocurrencies are fungible in nature, just like traditional currencies. To illustrate, replacing one Ethereum with another does not alter its value. However, NFTs aren’t mutually interchangeable due to their non-fungible characteristic. This renders each piece of art different and unique, adding to its value.
Risks Associated with the Purchase of NFTs
As with every new technology, there are certain risks linked to NFTs. A predominant risk is fraud, with recent reports highlighting the emergence of fake marketplaces and unverified sellers impersonating real artists to sell counterfeit artworks at a discounted price.
Another significant concern is the environmental impact of crypto mining, which validates transactions by using high-powered computers operating at very high capacities. Such activity leads to environmental harm in the long run.
Understanding Blockchain Technology
Blockchain is a type of shared database that stores information differently as compared to a typical database. In a blockchain, data is stored in blocks that are chained together through cryptography. As new data comes in, it’s entered into a fresh block. Once the block is filled with data, it’s added to the previous block, thus chaining the data chronologically.
This technology has been primarily used as a ledger for transactions. In the case of Bitcoin, blockchain operates in a decentralized manner, without any one person or group retaining control – rather, all users have collective control. The nature of decentralized blockchains is immutable, meaning that data entered cannot be reversed. This ensures permanent recording and visibility of transactions to everyone.