NON FUNGIBLE TOKENS (NFT)
- Non-fungible tokens (NFTs) are a type of digital asset that represent ownership or proof of authenticity of a unique item or piece of content using blockchain technology. Unlike cryptocurrencies such as Bitcoin or Ethereum, which are fungible and can be exchanged on a one-to-one basis (1 BTC is always equal to 1 BTC), NFTs are non-fungible, meaning each NFT has distinct, irreplaceable properties that make it one-of-a-kind
- For the uninitiated, Blockchain is a distributed ledger where all transactions are recorded. It is like your bank passbook, except all your transactions are transparent and can be seen by anyone and cannot be changed or modified once recorded.
- NFTs are gaining massive popularity now because they are becoming an increasingly popular way to showcase and sell your digital artwork.
- Billions of dollars have been spent on NFTs since its inception—which date backs to 2015, and Terra Nulius was the first NFT on Ethereum Blockchain, although this project was merely an idea which only allowed to customise a short message which was then recorded on blockchain.
Non-Fungible Tokens (NFTs) work by leveraging blockchain technology to create and manage unique, digital assets. Here's a step-by-step explanation of how NFTs function:
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Blockchain Technology: NFTs are typically built on blockchain platforms, with Ethereum being one of the most popular choices. A blockchain is a distributed ledger that records transactions in a secure and immutable manner.
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Tokenization: To create an NFT, a digital or physical asset is tokenized. This process involves converting the unique asset, such as digital art, music, or a collectible, into a digital token. This token is coded to be non-fungible, meaning it has unique characteristics that distinguish it from other tokens.
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Smart Contracts: NFTs often use smart contracts, which are self-executing contracts with the terms and conditions of the NFT written into code. Smart contracts automate various functions, such as the transfer of ownership, royalties, and other rules associated with the NFT.
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Minting: The creation of an NFT is called "minting." This is typically done through NFT marketplaces or platforms that support NFT creation. When an artist or creator wants to mint an NFT, they upload the digital file, provide details about the NFT, and often set parameters like royalties to be received on future sales.
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Ownership and Provenance: Once minted, the NFT is assigned to a specific blockchain address, and ownership is recorded on the blockchain. The blockchain provides transparency and a history of the NFT, showing who the original creator is and any subsequent transfers or sales. Provenance and authenticity are major benefits of NFTs.
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Transfer and Transactions: NFTs can be bought, sold, and traded on NFT marketplaces. When a transaction occurs, the blockchain updates the ownership records. These transfers can happen instantly, and ownership changes are recorded on the blockchain.
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Interoperability: NFTs are not confined to a single platform or ecosystem. They can be bought and sold on different NFT marketplaces, making them highly interoperable.
- Wallets: To interact with NFTs, individuals need cryptocurrency wallets that are compatible with the blockchain supporting the NFT. These wallets store the private keys necessary to access and manage NFTs.
| Subject | Non Fungible Tokesn (NFT) | Cryptocurrency |
| Fungibility | NFTs are non-fungible, which means each NFT is unique and cannot be exchanged on a one-to-one basis with other NFTs. They represent ownership or proof of authenticity of a specific, one-of-a-kind item or piece of content. | Cryptocurrencies like Bitcoin and Ethereum are fungible, meaning each unit is interchangeable with any other unit of the same denomination. For example, one Bitcoin is always equal in value and utility to another Bitcoin |
| Ownership and Value | NFTs represent ownership of unique digital or physical assets, such as digital art, music, collectibles, or even real estate. They derive their value from the uniqueness and scarcity of the assets they represent | Cryptocurrencies are primarily used as digital money and store of value. They have a quantifiable value and are used for transactions, investments, and as a medium of exchange. |
| Interchangeability | NFTs are not interchangeable. Each NFT represents a distinct and irreplaceable item, and they are typically not used for everyday transactions like buying coffee or groceries | Cryptocurrencies are interchangeable and are often used for everyday transactions. You can send or receive fractions of a cryptocurrency with the same denomination. |
| Blockchain Technology | NFTs can be built on various blockchain platforms, with Ethereum being a popular choice. NFTs rely on blockchain technology to record and verify ownership and provenance | Cryptocurrencies are typically built on blockchain networks optimized for financial transactions. Bitcoin, for example, operates on a blockchain focused on secure, peer-to-peer payments |
| Value Determination | The value of NFTs is often influenced by factors like the rarity of the asset they represent, the reputation of the creator, and the demand from collectors and investors | The value of cryptocurrencies is determined by supply and demand dynamics in the open market, and their prices can be highly volatile |
Some of the largest NFT marketplaces are:
OpenSea.io: Touted as the largest NFT marketplace, you can find digital art, there are collectibles including game items, domain names, even digital representations of physical assets at OpenSea. Essentially, the platform is like an eBay for NFTs with millions of digital assets organised into hundreds of categories.
Rarible: Quite similar to OpenSea, Rarible is also one of the largest NFT marketplace that enables artists and creators to issue and sell NFTs.
Foundation: This is a unique NFT marketplace where artists must receive “upvotes” from fellow creators to post their art. Artists list NFTs for auction at a reserve price, and once the first bid is placed, a 24-hour auction countdown begins. If a bid is placed within the last 15 minutes, the auction extends for another 15 minutes.
6.What are the risks associated with buying NFTs?
Buying Non-Fungible Tokens (NFTs) can be an exciting and potentially lucrative endeavor, but it also carries certain risks. It's important for anyone considering NFT investments to be aware of these risks and take precautions
Here are some of the main risks associated with buying NFTs:
- NFT prices can be highly volatile. Just like cryptocurrencies, the value of NFTs can fluctuate significantly in a short period. Buying an NFT at a high price could result in substantial losses if the market value declines
- While NFTs can be bought and sold, the market for certain NFTs may lack liquidity, making it challenging to sell them quickly or at a fair price, especially for lesser-known or niche assets.
- The NFT space has attracted scammers who create fake or plagiarized NFTs, as well as fraudulent NFT marketplaces.
- Buyers should exercise caution and verify the authenticity of the NFT and the reputation of the seller.
- NFTs are often associated with digital art, music, and other creative works. There can be legal challenges and copyright disputes related to the ownership and sale of these assets. Buyers should ensure they have the rights to use and resell the NFT.
7. Way forward
NFTs work by creating unique digital tokens on a blockchain that represent ownership and authenticity of digital or physical assets. They are bought, sold, and traded in a transparent and secure manner, and their smart contracts often allow for automated processes like royalties. The NFT space is continually evolving, offering new opportunities and challenges for creators, collectors, and investors
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Previous Year Questions 1. With reference to Non-Fungible Tokens (NFTs), consider the following statements: (UPSC CSE 2022) 1. They enable the digital representation of physical assets. 2. They are unique cryptographic tokens that exist on a blockchain. 3. They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions. Which of the statements given above is/are correct? A.1 and 2 only B.2 and 3 only C.1 and 3 only D.1, 2 and 3 Answer (A) |
Source: indianexpress
