What are non-fungible tokens (NFTs), and are they worth buying? We explain what you want to know about a trend some call a fad and others see as the future of ownership.
What is an NFT?
To answer that question, we should first look at what it isn't. “Fungible” means something that can be exchanged for the same thing – in other words, it's not unique. For example, if you go to buy a 500g bag of sugar in a particular size, you don’t look for one specific bag of sugar; you select one from several on the shelf because they’re all the same. Money is another example of a fungible object: you can exchange your R10 note for money of the same value, and it makes no difference.
Non-fungible means something is unique. The Mona Lisa is unique – there’s only one. You can't take your Mona Lisa and exchange it for mine. So the Mona Lisa is non-fungible.
Okay, but what is an NFT?
An NFT, or non-fungible token, is a digital marker that proves uniqueness. Using blockchain, the same technology that supports cryptocurrencies such as Bitcoin, you can prove an NFT – and whatever it represents – is unique.
You can attach an NFT to a digital object, such as an image, text, sound, video, etc., which will prove it’s the original. Even if someone copies that object, they can't claim it’s the original unless they also own the related NFT. An NFT can also reflect the value paid for the object and even help send some royalties to the original creators.
NFTs can be attached to physical objects as well. But currently, the focus is on digital assets such as images, videos, music and such. Recently, someone paid nearly $3 million for the first Tweet written by Twitter's CEO.
How do NFTs work?
As mentioned NFTs use blockchain, the same technology that powers cryptocurrencies. It would take some time to explain how blockchain works, so let's keep it simple: blockchains are a great way to maintain an accurate yet decentralised register of information and avoid fraudulent entries. The technology makes it very hard to forge an NFT (almost impossible). So if you buy something that has an NFT, a blockchain network will confirm if that NFT is legitimate.
You mentioned NFTs could be used for physical objects too?
Yes. NFTs can reinforce the uniqueness and value of a physical object. Many collectables, such as paintings, statues, cars, trading cards, etc., come with a certificate of authenticity – an NFT can play that same role. Additionally, NFTs can be used to make unique invitations and access passes, such as exclusive meetings or concerts – concert tickets currently use holograms to help prevent forgeries. One day, you might attach an NFT to valuable possessions such as your house.
Are NFTs a good investment?
That's the million-dollar question! But let's take a step back: the value is not in the NFT. It’s in whatever the NFT authenticates. Just as with anything you sell, what you get depends on the buyer. The NFT only confirms you are the legitimate owner. If you bought an animated picture of a flying cat and can find someone who will pay extra to get it from you, then an NFT was a good investment.
The one exception to this view is that NFTs currently sell via cryptocurrencies, and that can make the NFT’s value slave to the volatility of the currency.
Currently, the NFT market is still young, and there’s a lot of fad buying. Some think it’s a bubble, expecting most NFTs will not hold their value.
Are NFTs safe?
The elephant in the room is that NFTs, and many blockchain markets, aren’t regulated. If things go wrong, there's not much recourse. For example, if the blockchain that supports your NFT disappears, so can the value of your NFT. As NFT markets mature, that could change. But it’s still risky.
NFTs can also lead to unethical activities. For example, an artist could sell an NFT for one of their works, then copy that work and make another NFT for the copy. Some collectors even ruin work to make more money: one group made a digital copy of a Banksy artwork and then destroyed the original. There is also a problem of people stealing work and selling it as their own. Since there’s NFTs are unregulated, it’s up to individual marketplaces to police such issues.
If you plan to buy an NFT, check with the marketplace you use on how your ownership rights will be protected.
I hear NFTs are bad for the environment.
They might be. NFTs transact through cryptocurrencies, which in require large amounts of energy to create. This is because they’re updated and controlled by a global network of computers. So while NFTs themselves are not a huge issue, they encourage practices that are environmentally unsound. Many people are trying to solve this problem, while others don’t think it’s possible. Suffice to say, it’s not just a problem for NFTs, but also cryptocurrencies.
Where can I get NFTs?
There are lots of NFT marketplaces. Locally, you create, sell and buy NFTs on the marketplace MoMint.so, which will soon host a major NFT auction of both digital and physical goods. OpenSea claims to be the largest NFT market globally, and established auction houses such as Sotheby's have created places to buy and sell NFTs. Local galleries, such as the World Art gallery in Cape Town, offer NFTs for local artworks.
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- Header image by A M Hasan Nasim from Pixabay
