W*# Are Non-Fungible Tokens (NFTs) And Why Are People Paying Millions For Them?

Would you pay US$6 million for what is essentially lines of code?

These people did.

On 28 Feb 2021, artist and musician Grimes (wife of Tesla CEO Elon Musk) sold about US$6 million (S$8 million) worth of digital artworks in the form of Non Fungible Tokens (NFTs) on NFT marketplace Nifty Gateway.

This is only one of many NFT transactions that are happening as according to a report from NonFungible.com and L’Atelier BNP Paribas; the total value of transactions in the NFT market grew a whopping 300% from US$62.8 million in 2019 to US$250.8 million in 2020.

Intrigued?

Here is all you need to know about NFTs!

TL;DR: All You Need to Know About Non-Fungible Tokens (NFTs)

Here are some of the biggest NFT transactions that have occurred recently.

NFT Meaning: What Does NFT Stand For?

NFT stands for Non-fungible token.

What Are NFTs?

Well, I’m glad you asked.

Like the name suggests NFTs are non-fungible. This means that an NFT is a unique digital asset, that cannot be replicated and cannot be traded for something of equal value.

As such, each token represents a unique value.

NFTs are the opposite of fungible assets like fiat money, Bitcoin or Gold which are mutually interchangeable and can be exchanged for something of equal value.

For example, you can trade a $100 note for 10 $10 notes or one bar of gold for a gold necklace of equal weight and grade.

How NFTs Work

Here’s how they work.

NFTs are actually cryptographic tokens with unique identification codes and metadata that make them unique.

These tokens are created on a smart contract platform like the Ethereum network and cannot be replicated.

To put it simply, you are buying lines of code on a blockchain when buying an NFT.

But in terms of utility, NFTs are used to represent proof of ownership and authenticity of digital art, digital collectables and online gaming items. They are proof that this version of something is uniquely and authentically yours.

They can also be used to represent ownership of real-life physical items like physical art pieces, rights to property, and more.

Are NFTs a Scam? Why Would Anyone Buy NFTs?

On the surface, buying an NFT seems like a scam.

After all, there is no visual difference between an NFT original and a copied version.

Take for example this unique digital recreation of the iconic 2011 Nyan Cat meme.

This NFT sold for 300 ETH (~S$742,000) on the Crypto art platform Foundation on 19 Feb 2021.

Similar to other collectables like fine art, Pokémon cards, and luxury branded watches, having the authentic original or limited edition version is everything.

You might have hundreds and thousands of Nyan Cat memes saved on your computer, but none of them are the ‘real’ Nyan Cat NFT worth 300 ETH (~S$742,000).

The blockchain, which is a type of decentralized record-keeping on a public ledger of blocks. Even if the blockchain network gets hacks is it almost impossible to remove traces of the NFT from the internet.

As an NFT’s uniqueness and ownership can be easily verified, they can be efficiently traded on the secondary market as well as having the potential to be utilised across different applications.

Risks of Buying NFTs?

In my opinion, you are not investing when buying NFTs. Rather you are buying a speculative asset in hopes that its value will appreciate so you can sell it for some gains.

Benjamin Graham, often touted as the father of value investing, once defined speculation as:

“Speculative operations are all concerned with changes in price. In some cases the emphasis is on price changes alone, and in other cases the emphasis is on changes in value which are expected to give rise to changes in price. I think that is a rather important classification of speculative operations.”

The monetary value assigned to NFTs is almost entirely dependent on the ability to sell it to another person at a higher price in the future, ala the Greater Fool Theory.

The theory states that investors can profit from buying an asset without worry about its fundamentals as someone else will come along and buy it for a higher price.

Granted, there is a way to properly value NFTs. But, it is not based on anything more concrete.

In contrast, when you invest in stocks, you are buying a piece of a business. As such you can value the company by looking at its earnings or dividends and determine whether it makes sense to pay for the company’s share price.

There’s always the danger that the NFT frenzy may just be flash in the pan or adding fuel to a speculative bubble.

If you throw in quite a big sum on buying NFTs and the interest levels and value of the NFT suddenly crashes, you could face huge losses and be left holding the bag.

However, supporters of NFTs argue that the scarcity of NFTs which is by design will keep prices up as long as interest in NFTs remains.

Also, you need to be aware of NFT fakes.

There’s the case of this artist who sold ‘inspired’ NFTs that look like works of the mysterious artist Banksy for about 493 ETH (S$1.2 million).

But in my opinion. NFTs are mainly a playground for the mega-rich to speculate on.

Criticism of NFTs

However, there are still some issues with the NFT market that need to be resolved.

High Transaction Fees (Ethereum Gas Price)

One of the issues is the high transactions fees incurred when transferring the property title of an NFT.

As most NFTs are on the Ethereum blockchain platform, each transaction requires the payment of Gas: the fee charged for processing a transaction or contract on the Ethereum blockchain network.

This fee is denominated in gwei: a small fraction of ETH.

At the time of writing, the average ETH Gas price charged for each transaction is 126 gwei ($6.40).

Not to mention the fees that NFT marketplaces like OpenSea, Decentralland, Super Rare, Rarible and Enjin Marketplace charge.

Environmental Impact

In addition, as NFTs are mainly on the Ethereum Blockchain platform, they leave behind a huge carbon footprint as Ethereum still operates on the Proof of Work architecture that requires mining.

According to Digiconomist, Ethereum mining consumes a huge amount of electricity and leaves behind a large carbon footprint. 

To put this into context, the amount of electrical energy that the Ethereum network consumes rival that of countries like Ecuador with a population of about 17.4 million.

But on balance, this is set to improve as Ethereum is transitioning to a more eco-friendly Proof of Stake architecture by the start of 2022.

How to Buy NFTs And Sell NFTs?

You can buy NFTs on NFT marketplaces like OpenSea, Nifty Gateway, Decentralland, Super Rare, Rarible and Enjin Marketplace.

Currently, OpenSea claims to be the first and biggest NFT marketplace with over 200 categories and 4 million items.

The platform allows users to buy and sell NFTs like digital art, game items collectables, virtual stuff and even domain names.

NFT Marketplace

Personally, I am excited about what NFTs can do for artists who mainly create digital art as they might finally get paid for their work.

For the longest time, these artists have been struggling to find a way to effectively monetise their work due to the nature of digital art which is infinitely replicable by design.

But with NFTs, you can more effectively support artists directly without having to go through middlemen.

This adoption of NFTs is even going mainstream as Grammy-winning American rock band Kings of Leon, Grimes, and YouTube star Logan Paul have released NFTs.

Rolling Stone has reported that the band released NFTs of their latest album When You See Yourself, and generated about US$2 million (S$2.7 million) in sales.

Source: Kings of Leon | Bandwagon Asia

What Are Your Thoughts on NFTs?

Do you have any questions about this new phenomena? You can always ask the savvy community members over on Seedly for help!

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