Non-fungible tokens (NFTs) – UPSC Prelims

Non-Fungible Tokens (NFTs):
  •  NFTs, or non-fungible tokens, are unique digital items stored on a blockchain, the same network that runs cryptocurrencies.
  • Anything digital – images, videos, music, online version of various articles – can be converted into an NFT and monetised.
  • How NFT Works?
    • If anyone converts its digital asset to an NFT, he/she will get proof of ownership, powered by Blockchain.
    • There is a need for a cryptocurrency wallet and an NFT marketplace where one can buy and sell NFTs. Some of the NFT marketplaces are OpenSea.io, Rarible, Foundation.
    • NFTs are different from other digital forms in that they are backed by Blockchain technology.
    • NFTs can have only one owner at a time.
    • Apart from exclusive ownership, NFT owners can also digitally sign their artwork and store specific information in their NFTs metadata.
    • This will be only viewable to the individual who bought the NFT.
  • Trading of NFTs has no legal backing yet. This lack of regulation means NFTs are prone to price manipulation.
  • Use Cases:
    • Many consumers who had put money in crypto were introduced to NFTs as a new medium of investment.
    • Some users have taken to NFTs due to speculation, as the value of a token is derived from what buyers are willing to pay for it.
    • NFTs also enable digital content creators and owners of IP (intellectual property) to monetise their work or assets without a ‘middleman’ and earn a royalty every time the NFT is resold.
    • The appreciation of crypto market capitalisation along with mainstream users adopting crypto has driven NFT popularity.
  • In 2021, NFT sales reached $25 billion compared to just $95 million in the previous year, according to Reuters.
How is an NFT different from a cryptocurrency?
  • Apart from NFTs and cryptocurrencies being built on Blockchain, both are different from each other.
  • Cryptocurrency is a currency and is fungible, meaning that it is interchangeable.
  • For instance, if one holds one crypto-token, say one Ethereum, the next Ethereum that the one holds will also be of the same value.
  • However, NFTs are non-fungible, which means the value of one NFT is not equal to another.
  • Nonfungible means NFTs aren’t mutually interchangeable.
  • Every art is different from others, making it non-fungible, and unique.
What are the risks associated with buying NFTs?
  • Fraud Risks: In the recent past, several incidents of NFT scams have been reported including the emergence of fake marketplaces, unverified sellers often impersonating real artists and selling copies of their artworks for half price.
  • Environmental Risks: In order to validate transactions, crypto mining is done, which requires high powered computers that run at a very high capacity, affecting the environment ultimately.