The curious case of Non-fungible tokens
The advent of internet technologies has evolved to an unprecedented level, where it has created a digital-first ecosystem that aims to give the common people the highest control. One example of such an ecosystem that is entirely based on the internet is Cryptocurrencies. Cryptocurrencies are the digital version of money that is created and held as virtual coins or tokens. Similar to digital payments using the Indian rupee, you can use cryptocurrencies to buy and sell items. There are hundreds of cryptocurrencies available in the market, such as Bitcoin or Ethereum, where the investor can buy and use them to either trade or buy and sell items.
However, the internet-based ecosystem that created Cryptocurrencies is Blockchain. Being the core technology, it has revolutionized the digital ecosystem by offering to store information that is unique to the buyer or the seller. Its evolution has created a new offering called Non-fungible token, which is making people rich every day. But what are blockchain and non-fungible tokens? How do they work?
This blog will shed some light on blockchain technology, the curious case of non-fungible tokens, and their relationship with cryptocurrencies.
What is Blockchain?
The Blockchain is like a digital ledger. Every transaction is authorized and authenticated by the owner. The digital ledger works similar to that of an excel sheet or a Google spreadsheet, where transactional records are stored after each purchase. However, the blockchain is highly secured, and every transaction is matched with the buyer and the seller before the payment is debited or credited.
Every time a new transaction is executed by a buyer or a seller for a specific cryptocurrency, a new transaction record is added to the blockchain. This process continues till the block is full. The completed block then gets added to the longest chain and distributed to all the ledger holders. This ledger is publicly available to anyone who wants to use it, making it immensely transparent as it is virtually impossible to manipulate. If someone decides to manipulate any transaction on the blockchain, it will certainly be identified by others who hold and cross-check the ledger after every transaction.
What are Non-fungible Tokens?
Non-fungible tokens are unique digital assets that are not interchangeable, meaning that there can only be one NFT with the same features. For example, a Rs 500 note is fungible as you can give your note to someone else and get one in return, which will have all the same features and value. However, non-fungible tokens are made to be unique, without any other copy available to anyone else but the buyer.
Non-fungible tokens can be anything, a painting, a sculpture, a video, etc., as long as it is digital and has not been sold before today to anyone else. Once a non-fungible token is sold, it ceases to exist in the outer world, with its limit to the buyer. It is up to the buyer to either hold the non-fungible token or sell it to a different buyer. One of the distinguishing features of a non-fungible token is that it uses blockchain technology to record the information of buyers and sellers to avoid the ‘double-spending’ problem and ensure the non-fungible token remains unique.
Understanding Non-fungible Tokens
Non-fungible tokens have become the new exotic digital assets, with people bidding to buy them in millions. Recently, a digital artist called Beeple sold digital art as a non-fungible token for $69 million, making the piece the most expensive digital art ever to be sold.
Essentially, a non-fungible token works on the principle of blockchain technology, especially the Ethereum blockchain. Unlike other cryptocurrencies such as Bitcoin or Dogecoin, the Ethereum blockchain supports non-fungible tokens. The process uses the blockchain to record and manage every transaction regarding a sale of a non-fungible token.
The main idea behind the non-fungible tokens is their uniqueness, that a single non-fungible token exists as one universal copy, without any other copies. To ensure they are unique, and no other copy is made, they leverage the blockchain’s digital ledger to cross-check the transactions. It allows avoiding the manipulation of the non-fungible tokens and selling their copies to other buyers.
A non-fungible token acts as proof of ownership over a digital asset or digital content that is stored in a safe place by the buyer. Only the buyer or the owner can access the non-fungible token and sell it to other interest buyers. If a non-fungible token is sold, the transaction is recorded on the blockchain, and the ownership is transferred to the new buyer.
Popular NFT Marketplaces
When compared to other countries such as the US, non-fungible tokens are still relatively new in India. However, the non-fungible token industry has recently seen a rise in demand as Indians are looking to buy non-fungible tokens from celebrities and other famous artists. If you are looking to buy non-fungible tokens, you can look towards the following popular NFT marketplaces:
WazirX: WazirX is one of the biggest crypto trading platforms in India that also offers buying and selling of non-fungible tokens. WazirX has created a separate NFT platform called WRX Crypto, where you can sign up, convert your INR into WRX Crypto and invest in a specific NFT of your choice.
Variable: Raible is known for its open and democratic features that allow creators and sellers to create, issue and sell their NFTs. However, before buying any non-fungible token, you will have to convert your INR into RARI tokens.
Foundation: Foundation is an exclusive NFT platform that requires the creators or sellers to get ‘upvotes’ or an exclusive invitation from other Foundation creators before posting and selling their NFTs on the platform. Foundation is known for the buying and selling of high-cost NFTs.
OpenSea.io: Opensea.io is a peer-to-peer NFT platform that allows anyone to post and sell their NFTs. It aims at the buying and selling of ‘rare digital items and collectibles’. Before you can access the platform, you will have to create an account.
Challenges of Non-fungible Tokens
Here are some of the challenges related to non-fungible tokens:
No Regulations: Similar to the cryptocurrency market, the non-fungible token industry does not have any regulatory body in India, making it prone to scams or financial frauds. With no particular law to protect NFT buyers or sellers, the non-fungible token industry comes with high financial risk.
Complex Agreements: The non-fungible token market is considered to be creator-centric, meaning that even though they sell their NFT to an interested buyer, they may hold the control as per the rigid sale agreement. For example, the agreement may restrict the buyer from selling the non-fungible token for a specific period.
High Valuations: Investors are buying NFTs by spending huge amounts as they are in high demand. However, it is highly unlikely that this demand will continue forever. In such a case and with no regulations, investors can lose their capital in the future or incur huge losses.
Speculative: Unlike equities, where you have numerous factors such as technical analysis and fundamental analysis, there is no method to evaluate and analyze NFTs and predict their future price. It makes them highly speculative\, which can turn negative and result in high losses for investors if they do not find any buyers who are ready to pay a high amount in the future.
India is witnessing an increased interest in the non-fungible token industry. Recently, Amitabh Bachchan sold an NFT collection for over Rs 7 crores. Although NFTs are the talk of the town at present, analysts believe that a financial bubble may be brewing which may force NFT investors to incur losses in the future. Hence, it is advised that you invest in NFTs only after reviewing and analyzing them along with being cautious when transacting.
Frequently Asked Questions Expand All
NFTs are special as they are not mutually interchangeable. It means that if you have bought an NFT, there can only be one like you have, making them unique.
As NFTs are high in demand and are going for crores, analysts believe that it is unlikely that this demand will continue in future. It can force current investors to incur losses in the future.