NFT: what is it? how does it work?

Gallery of MArs House NFT

What is all this craze behind NFT?

The craziest crypto innovation sweeping the digital currency can be summed in three letters: NFT. In the early march of 2021, Mike Winkelmann – the digital artist known as Beeple – sold an NFT for a whopping $69 million. Yes, you heard it right. Until the last October, the most Beeple had ever sold a print for was $100. The NFT sale of “Everydays – The First 5000 Days” at Christie’s made him one of the most valuable living artists. The same month, Twitter CEO Jack Dorsey’s first tweet was sold at auction for $2.9 million. Grimes sold, god knows what, for $6 million. Clips of NBA superstar LeBron James dunking are sold for $220 Thousand.

What the heck is NFT?

A non-fungible token (NFT) is a new type of digital asset, whose ownership is stored in the blockchain – a digital ledger. These digital assets include items varying from art, audio, videos, real estate, trading cards, GIFs, characters in video games, etc. As the name suggests, these assets have a certain unique value. Unlike other virtual & fiat currencies, these NFTs cannot be replaced with anything else.

Can’t anyone just copy it?

The answer to this can be both “yes” and “no.” Every NFT is unique and acts as a digital collectable, whose ownership is stored on the blockchain network. One way of looking at them is: anyone can own a copy of the Mona Lisa painting, but the real value lies in the 1503 Da Vinci painting of Mona Lisa. Therefore, anyone can access and use digital art. But the real value of such art lies with an individual (or group of individuals) whose claim of ownership has been stored on an Ethereum blockchain network.

EverydayBeeple, EVERYDAYS: THE FIRST 5000 DAYS, 2021. Sold for $69,346,250 in a single lot sale at Christie’s

How did it begin for NFTs?

NFTs have been around for a while now. In early 2012, the idea of issuing the assets onto the blockchain was first conceptualized by Yoni Assia. But, the wave of NFTs began only in 2017 with the release of CryptoPunks on the Ethereum blockchain, with the purpose of trading unique cartoon characters. Another project, CryptoKitties, where players adopt and trade virtual cats gained popularity. To date, these colourful cats on the web have generated revenue of over $40 million. In 2021, interest in the NFT market has spiked to its all-time high.

What are NFTs used for?

One of the biggest use of NFTs today is that content creators can now take the profits from their digital content. When the creators sell their content, funds are directly transferred to them. If the new owner of then wishes to sell the NFT, the original creator is still paid a certain royalty. In the age of Copy/Paste, these NFTs provide the value of ownership to the holders of digital content. Game developers can earn a royalty on every item sold and resold.

How much is the NFT market worth?

According to the 2020 year-end report on NFTs by NonFungible.com, the leading data provider for the NFT market, the NFT market tripled in size overall last year, and its value rose to more than $250 million. The report further revealed that the total number of active wallets grew by 97% in the previous year. 2020 has seen a significant boom in the interest for non-fungible tokens. However, the crypto boom in 2021 has proved to be crazy for NFT lovers. To put it in perspective, the first three months of 2021 alone account for more than $200 million spent on NFTs. It has forecasted that the NFT market will reach $710 million in 2021.

How will NFTs change the way we look at digital content?

At face value, the whole NFT innuendo seems absurd: crazy rich crypto whales buying wholly worthless digital art for millions of dollars. Many have dismissed the NFT craze as the latest get-rich-quick scheme for crypto space. What is at the heart of NFT is the “idea of ownership.”

Over the years, the Big-Tech (popularly known as FAANG) have exploited artists of all kinds – authors, musicians, video creators, photographers, painters – into creating content that generates visits and engagement and getting almost nothing in return. These artists can, for the first time, transfer their ownership over digital content to an enthusiast and earn good money.

You can now be the owner of your content and reap its benefits. When you transfer an NFT to a buyer, you are certifying that the copy of the digital file is original. If you buy an NFT, your private crypto key will hold the proof of ownership of the original. Even when the digital content is all accessible by anyone with the internet, the sole ownership over the digital content remains yours.

NFTs, aside from all the visual pleasure, offers a certain social contract. In a world of NFTs, the buyer and the seller agree on the idea that what one is buying from the other is unique. And the artist transfers the right to ownership of the token to the buyer. No one else can own the same – at least, explicitly.

What is the ecological effect of NFT?

Aside from all the hype about NFTs, there is serious concern about their ecological implications. Several climate activists have pointed out that NFTs are not eco-friendly, because they are built on blockchain technology that consumes lots of energy. Blockchain is intrinsically designed to solve complex mathematical puzzles, that act as proof-of-work. The miner who solves the mathematical problem first is rewarded with some crypto coins. This process requires lots of computational power, which drives electricity consumption. Some estimate, a single Ethereum transaction consumes 48.14 kWh. That is over half a month of energy consumption within an Indian household.

So, how do you make sense of NFTs?

 


Picture: “Mars House” designed in May 2020 by Artist Krista Kim, has become the first sold digital NFT homes in the world.

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