What Are NFTs And How Do They Work?

What Are NFTs And How Do They Work?

By Priyobroto January 24, 2023 - 202 views

NFTs or non-fungible tokens have completely transformed the whole concept of ownership, sale, and purchase of items over the internet.

With the growing popularity of NFTs, which are basically signatures or receipts for virtual/digital assets, what does the future look like? First, a deeper understanding of NFTs is essential in this regard. 

Learning More About NFTs

To put it simply, knowing more about NFTs means uncovering their actual foundation, namely Blockchain.

What is blockchain?

This equates to computer-based protocols which are tailored to ensure the agreement of several computers for the same transactional sequence, without needing to trust each other.

Without deploying third parties for verification of transactions, Blockchains make use of cryptography and incentives for making it uber-costly and near-impossible to fake transactions, while making them easier to discover alongside. The whole idea is to enable computer-based networks to setup and maintain available databases in a more decentralized and public manner. 

The vast record-keeping abilities of Blockchains essentially let apps that are built with them as foundations, generate code snippets which may be traced to several entities and also transferred across users.

These are tokens which may become non-fungible meaning that there is no swapping of one for another. NFTs lead to shorter supply of digital items, creating a whole new type of virtual ownership. Any digital asset like a video or image may be found all across the internet, although only some rare instances would have the hallmark of an NFT. 

Here are some other core points worth mentioning in this regard: 

  • NFTs are not holding points for the asset’s data although some of them carry out this function as well. They also do not transfer copyright in many cases. 
  • In some cases, NFTs only have links to digital assets, stored in another computer network separately. 
  • NFTs have drawn huge investor interest in recent years as speculative wealth creation tools and also collectibles. For instance, Beeple sold an NFT in March 2021, for a whopping $69 million in an auction to an investment entity. Another collection called the Bored Ape Yacht Club that showcases 10,000 cartoon apes, witnessed a rise in value early last year after celebrity promotions. These are currently sold for staggering amounts. 
  • By end-2022, NFT sales had already topped $11 billion as per reports, although the market remained somewhat volatile. 

NFT Usage – Key Things To Be Addressed 

Those vouching for NFTs often state that they ensure a newer model for artists to earn revenues, helping them sell their videos, images, and other digital assets as collectibles. They may also function in the manner of tools for fundraising.

NFTs may have smart contracts which are important computer programs that may issue royalties to original artists upon the resale of NFTs. Here are some other points worth noting: 

  • NFTs can operate in the form of tickets or even credentials for membership. 
  • They can also be carbon credit records according to experts. 
  • NFTs are already used as items that can be owned by players and even in-game characters by video games based on the Blockchain, such as Axie Infinity, for instance. 
  • Artists are also using NFTs for organizing their fan bases and collectives, which are now known as DAOs or decentralized autonomous organizations. 
  • NFTs may help in safeguarding digital files against any tampering or also for monitoring the chain of custody for files. 

What Do Critics Feel About NFTs? 

Many critics feel that NFTs could be a temporary bull run, which ultimately does not have a lot to do with the foundational technology behind the same. Some also highlight concerns like these: 

  • The feasibility of an interoperable Metaverse.
  • Technical worriers of keeping digital assets online, since NFTs will only have stability akin to the network and computer storing the digital asset file. 
  • Bit rot or data degrading over time is another issue. 
  • The market has also seen unnecessary price inflation through various scams or stolen objects. Phishing and other techniques are often deployed for luring people into investing. 
  • 2022 saw $100 million+ of NFTs being stolen. 
  • Many point out the carbon footprint of NFTs, highlighting how a single estimate of Ethereum emissions surpassed 300 CO2 pounds for one average deal. However, Ethereum has since shifted to a more sustainable architectural framework, lowering its emissions by 99.9%. 

What Lies Ahead? 

NFTs are currently the topic of much debate about their future feasibility amidst a harsh time for cryptocurrency overall, with the market cooling from its earlier peak points in 2022.

With several thefts and losses, along some big-ticket crypto firms biting the dust, global regulators are now working on the taxation and classification of these assets as well.

However, NFTs have still stayed strong and could well usher in a new digital revolution in the future.

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