What are NFTs, their benefits, and how to deal with them?

The value of NFTs.

Photo courtesy Ahmnasim on Pixabay.

NFTs are digitized assets of drawings, music, or art and the passion of people for NFTs has taken everyone by surprise. NFT stands for non-fungible tokens and there is a humongous inclination among investors to own these creative assets.

A token is a piece of code that is proof of your ownership of a record on the blockchain and you have a password for it. Similar to the physical world the token can be transferred from your wallet to another wallet and the person who has the token is considered the owner.

Let us now understand what a fungible and non-fungible token is. A fungible asset is something whose units can be exchanged. An Rs. 50 bills can be exchanged for five Rs. 10 bills and the value will still be the same; which means the Rs. 50 bill is a fungible token. The same way in the fungible tokens like Bitcoin- 50 BTC has the same value as five units of 10 BTCs each.

Now if this Rs. 50 bill is signed by Bambi( a graffiti artist) whose work is being bought by Brad Pitt, Kanye West, and Rihanna its value is no longer equivalent to five Rs. 10 bills and is much more. In the same way, the non-fungible token cannot be exchanged for an identical value and its value can increase or decrease in the future like any other investment. This means that non-fungible is distinct and can’t be replaced by something else.

How do the NFTs work?

Most NFTs are created and stored on the Ethereum network and Ethereum is a cryptocurrency whose blockchain supports the NFTs. There are other blockchains also like Flow and Tezos that support NFTs. Anyone can access the blockchain and the NFT ownership can be verified.

Many of the digital goods can be tokenized like drawings, artwork, and games. The intellectual property assets like songs and videos that have related copyrights can also be sold as an NFT, but most of the present enthusiasm is to use this technology to sell digital art. As the technology advances further there could be a scope other than the art world; like the schools could issue NFT to students so that the employers could verify their educational qualifications.

Difference between NFTs and cryptocurrency

Though both NFTs and cryptocurrency rely on the same blockchain technology and the NFT can be purchased with a cryptocurrency but both the NFT and cryptocurrency are used for different purposes.

As we have detailed earlier cryptocurrencies assist us in buying goods acting as a currency and are fungible like a dollar or a rupee; the NFT is a unique token that conveys ownership and rights over digital goods.

Uses of NFT-

  • Art and luxury brands-

The crypto-art provides value through digital verification of ownership. There are many counterfeits in the marketplace and NFTs can provide validation of ownership for luxury brands and other collectibles. This can help artists to monetize their work and prevent plagiarism. The same is important in the film industry and media that are prone to plagiarism and the NFT can prevent the material to be shared without the permission of the owner. This is also applicable in gaming and the virtual world.

  • Logistics and supply chain-

The logistics and supply industry has realized the potential of NFTs. Huge volumes of goods are traded between different countries and tracing every good is a huge challenge and verifying documents is a slow process. Errors can happen but NFT can be the solution for traceability as the data of each good and transaction is stored on a blockchain and anyone can check it.

Sometimes the food and pharma companies have to recall their products but tracing them is a big challenge. In the NFTs every product has a unique ID and this makes the recalling process much easier. Other than this there is an issue of counterfeiting and there are many fake products in the market as people replace original with fake products. Once a product is minted to NFT it can’t be replaced.

  • Identification and documentation-

In personal identity management, the NFTs could be used and work is in progress. The NFTs have a code with distinctive information; they can be used to tokenize degrees, licenses, qualifications, medical records, and birth and death certificates. This can be traced to the owner helping in strict control of data. The NFTs could also help in preventing passport and driver’s license forgeries.

  • Real Estate-

NFTs can be used to establish ownership of the real estate. There could be fractional ownership and homeowners could sell part of their property to many investors by issuing tokens on the blockchain. Investors could use these tokens to receive a rental income. In this way, the world of property investing would open up to many more people. In the nearby future, NFTs could be used to check titles and ownership history.

In the virtual gaming world, the participants can purchase areas in the virtual world, and NFTS help in identifying original owners. Virtual real estate NFTs can be traded on NFT marketplaces. The ownership of virtual real estate is recorded on a decentralized ledger using NFT.

Benefits of NFTs-

  • Establishing ownership and authenticity-

The advantage of using NFT is that they help in establishing proof of ownership, and they help in relating ownership to an account as they are on the blockchain network. The ownership advantage of NFT warrants the buyers’ safety from fake NFTs and ensures that the person who has the NFT has possession overvalue. Since they are created on the blockchain there is the uniqueness of their records. There is the immutability of the blockchain on which they are stored and this ensures they can’t be replaced, modified, or removed.

  • Easy Transferability-

The NFTs can be easily traded and transferred with many trading options. Ownership transfer is easy due to the use of smart contracts and can be done after certain conditions are fulfilled between buyer and seller according to the contract.

  • Economic progress-

There are many applications of the NFTs in association with digital content. There is fragmented nature of the digital content industry and an artist publishing his content on the social networks makes money for the platform as they sell ads to the fans of the artist. This benefits the platform and the artist gets their exposure but rarely any money. In the NFT the ownership of content lies in the content itself so when a creator sells the content the funds directly go to the creator. The original creator receives royalties for each resale of the token as the NFT has the creator’s address. It is very quick and helps designers to benefit from their work with no chasing of clients for money and no editing of work to suit a client’s needs.

Due to NFTs, the content creators from many fields can come together in one system and this can lead to a huge growth of all the contributors. The creators get value for their product and the buyers gain liquidity with the help of NFTs. Due to NFTs the art collection has moved online involving many artists across the globe and linking them to buyers with no physical barriers like before.

When an artist is not well established it takes time to make a name in the marketplace. But the NFTs generate immediate income and this can be a source of income for the less privileged persons.

This has made an inclusive atmosphere where any person who wishes to create artwork can do so with the help of a computer thereby helping many persons to come up in life.

How to create and sell an NFT-

The following steps need to be followed to create and sell an NFT-

  • Create a digital wallet. This is going to store the Ethereum that you will need for paying the minting fees.
  • Add money to the wallet and that is ether.
  • Connect this wallet to the NFT platform.
  • Upload your digital file you wish to convert to NFT.
  • Setup an auction. You can set up a fixed price or allow people to bid until you find an acceptable offer. Timed auction can also be selected that takes for only a certain time.
  • Describe the NFT. You have to add a title and description of the NFT.
  • Pay the listing fee.

There is everything in an NFT for the persons concerned. If you are an artist the NFTs give you a way to sell your work for which there might not be much of a market. A buyer can support the artwork of the artists that he likes and get the rights to post the image online as well as the bragging rights that he has the art. When you are a collector; the NFT is like any other asset that you buy, in the hope that its value will go up and you will make a good profit.

Where can you buy NFTs?

The NFTs can be purchased with Ether the currency of the Ethereum network that can be easily converted to dollars on an exchange like Coinbase. Here is a list of the most popular marketplaces where you can buy and sell NFTs.

  • OpenSea.
  • Nifty Gateway.
  • Rarible.
  • SuperRare.
  • Foundation.
  • Mintable.
  • AtomicMarket.
  • Axie Infinity.
  • MakersPlace.
  • KnownOrigin.
  • Venly.
  • Decentraland.
  • The Sandbox.
  • Valuables.

The most expensive NFTs ever sold are-

  • Beeple’s  Everydays The First 5000 days for $69 million in March 2021.
  • CryptoPunk #3100 for $7.58 million.
  • CryptoPunk #7804 for $7.57 million.
  • Beeple Crossroads for $6.6 million in February 2021.
  • Beeple Oceanfront for $6 million in March 2021.
  • Edward Snowden Stay Free for $5.4 million in April 2021.
  • Mad Dog Jones for $4.1 million in April 2021.
  • The first tweet for $2.9 million.
  • Xcopy for $1.58 million.
  • Kevin Mccoy’s Quantum for $1.58 million.
  • CryptoPunk #6965 for $1.54 million.
  • Axie Infinity a virtual game for $1.5 million.
  • The switch by Pak for $1.444444 million.
  • The Pixel by Pak for $1.355555 million.
  • Gunky’s Uprising by 3Lau for $1.333333 million.

The NFTs that are used for digital arts today may have many applications in the future. The use of NFTs as a digital asset class is opening up the economic assets and helping to open up a field of investment not just for the retail investors but also for the rich investors. If a person is making an investment in an NFT he should be aware that there is no guarantee for its increase in value; some may sell for millions of dollars while others might lose much of their value in the future.

dbssethi

After working for many years in the Marine industry it was becoming clear that I was filled with an entrepreneurial spirit and wanted to pursue my own passions and dreams.
Over the years of studying and dealing with my own finances, I wanted to share my experiences with other people. Personal finance is something that excites me the most and I am very passionate about it.
Entering the stock markets during the Harshad Mehta heydays and then the collapse of the market led me to search for answers and I read a number of investment books and with time was able to identify multibagger stocks. Along with my job I was also working as an insurance and mutual fund advisor but managing both was proving difficult. As I had saved sufficient money I thought of taking early retirement and here I am to talk about my financial experiences.

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