The global hope and hype around non-fungible tokens

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The global hope and hype around non-fungible tokens

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• Millions for a virtual token: In 2021, a digital artwork was auctioned for $69 million, and the winning bid got no painting, no sculpture, no print but just a unique digital token called NFT (Non Fungible Token). A new era was born.
• What is non-fungible: No two token are interchangeable, but remain unique. 

1. Money and currency are fungible; two notes of Rs.100 are of exactly the same value
2. Bitcoin and Etherium are also fungible; if we give a Bitcoin to someone and he returns it, it can be a different token (but equal in value)
3. NFTs cannot be treated like this, and they are "one of a kind" assets

• Birth of NFT: Since digital artworks can be copied easily, the idea of non-fungible tokens was born, so that an artwork can be uniquely identified and valued. Do not confuse with blockchain: that technology doesn't allow duplication of crypto but still they remain fungible.
• Tagging digital assets uniquely: So take any digital asset of value, tag it uniquely as a NFT, and sell it at high value. Some examples include: the first-ever tweet by Jack Dorsey (Twitter co-founder), Nyan Cat meme's digital rendition, etc. Basically any digital asset can be given an NFT tag.
• Physical onto digital: Since humans are becoming more and more digital now, the need is felt to bring some of the physical world's properties into the digital. These are scarcity, uniqueness and proof of ownership. NFTs serve that need.

1. Each NFT has an owner, known publicly
2. Artists can retain ownership over their creations and claim royalties
3. Future years may see NFTs as collaterals for seeking loans

• Is it a scam: Consider courier services. They put a barcode on all packages, but does that change the packages' value? No. Similarly, NFTs are actually digital barcodes, just decentralised and blockchained. They should not impact the real value of the underlying. 
• Series of hyped products: In 2016 and 17, there was a bumper harvest of initial coin offerings (ICOs). Then in 2018-19 came a boom in securitised token offerings. In 2019-20, DeFi (decentralised finance) was the buzzword. In 2021, it's NFTs.
• The future: As more and more NFTs will crowd the market, with creators trying to encash this craze, supply will overwhelm demand and market will crash. (Remember that real world art is not zero cost)
• Frauds: If the original creator of an artwork does not create a tag, but someone else does, there's no way of knowing who the real owner is.
• Unsustainable energy use: Bitcoins are energy-intensive, and each transaction consumes huge energy. Same for Ethereum. For NFTs, it's said to be worse.
• Summary: Other than for creators, NFTs do not create any cashflows. Only way to make money will be to find other buyers, which means bragging rights till the bubble bursts.

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