Is NFT Worth the Hype?
NFT stands for Non Fungible Tokens. Fungible refers to something that can be exchanged with something else of the same value. A 500-rupee note has the same value as another, so it doesn't matter which one you have. This is because the currency is fungible.
Conversely, non-fungible is something that is unique and cannot be interchanged; like art pieces, land titles, and birth certificates. Before we dive deep into NFT, let us listen to this NFT song. This is not an AR Rahman song, but rather, Elon Musk’s, who had tweeted about selling his self-made animated audio song.
Although Elon Musk calls this an NFT, there is much more to NFTs than this video song clip. NFTs are unique digital assets registered on a blockchain, that act as proof of ownership or certificate of authenticity. Blockchains, like Ethereum, store the transaction information in form of a ledger. These ledgers are immutable (in theory).
Owning an NFT does not give you the exclusive use of the work. Instead, you only have the right to sell that asset. And for art collectors, it’s a way to directly support artists in a manner not available before NFTs.
Application of NFTs
NFTs have radically altered virtual experiences and opened the door to a plethora of potential applications. Here are some use cases of Non-Fungible Tokens:
Gaming: NFTs have sparked a lot of interest, particularly among game creators all around the world. In general, there is a high demand for tradable, one-of-a-kind things in gaming. Also, in-game purchases have spawned a multibillion-dollar business. For example, gamers frequently make in-game purchases to get advantages such as skipping a few levels to advance. However, if the gamer decides not to play the game any longer, all of the money invested will be wasted. With the NFT model, the gamer can sell his or her NFT in-game purchases after exiting the game. Axie Infinity and Battle Pets are two popular NFT-based games.
Did you know?
In late 2018, one player was so desperate to move to a “better location” in the virtual game Decentraland that they were ready to say goodbye to 2,800,000 MANA in order to purchase a land piece in-game. At the time of the deal, that was equivalent to over $215,200.
Media: NFTs make it possible for Intellectual Property holders to sell unique and programmable digital goods on the internet. For example, BCCI can create NFTs for every Sachin Tendulkar straight drive and auction it to his fans. Similarly, Marvel can use famous movie scenes to create NFTs and sell it to their fans.
Real-World Assets: NFTs have the potential to alter the way ownership is established. Real estate, like lands and homes, can be tokenized. Similarly, in the case of jewelry, an NFT can demonstrate legal possession when reselling. NFTs may be used to tokenize and issue physical items like vehicles and homes, and these NFTs can reflect ownership information. As the internet of things (IoT) progresses, we may expect to see further breakthroughs in NFTs that represent real-world items. Recently, IPwe has revealed its plans to represent patents as non-fungible tokens (NFTs) or digital assets.
NFT Ownership and DeFi: Currently, in DeFi, the vast majority of DeFi lending protocols are collateralized. What if you could use NFTs as collateral? This means that now you’d be able to accord an NFT representing a piece of art, digital land, or even a tokenized real estate, as collateral and borrow money against it.
However, it's not as simple as it sounds. When it comes to NFTs, the markets for particular tokens are very often illiquid which makes the price discovery process tricky.
To understand this problem better, imagine that someone buys a rare NBA slamdunk shot for 10 ETH. This NFT is later used as collateral and the borrower draws 2,000 DAI, assuming that 10 ETH is worth $2,000 and this particular NFT has 50% LTV (loan-to-value). After this, if no one else is willing to buy this particular Slamdunk shot, we can say that the market for this NFT is illiquid or even non-existent. The only thing we can assume is that the NFT is still worth the same amount as it was last sold for. This is of course not a safe assumption as the value of NFTs can change quite dramatically.
Now to overcome this, some peer-to-peer lending projects allow borrowers to offer different NFTs they own and the lenders can choose which NFT they are willing to accept as collateral. The NFT which is held as collateral is kept in an escrow account. If the borrower defaults then the NFT would get transferred to the lender.
Do NFTs Make Sense?
The potential of NFTs could be much wider with possible application to copyright and intellectual property rights, ticketing, and the sale and trading of video games.
A common critique of NFTs is that they are just digital files without any intrinsic value. However, given the underlying properties and the sense of being a part of a cult, we believe NFTs will have tremendous scope in the future.
Think about it this way, historically humans have been natural collectors. One only needs to look at the traditional collectibles like stamps and trading cards to understand that people collect different things for various reasons.
Ownership is a way to join a community. So, as the popularity of a sports team or a movie franchise grows, owning a piece of it would also become a way to join those communities or maybe you could just earn social status. So, the more the popularity of these communities, the more would be the value of the NFTs.
NFTs make it possible for true ownership to exist for digital items. Moreover, they can not only be used as vanity items but also as utilities inside applications (e.g. avatar skins in games). So, as the popularity of the community and underlying properties grow, they will continue to accrue value.
Btw, we did try listing my own NFT!
I (Shubham) initially found NFTs to be a cool way to make some quick flips. So, one of my late-night musings left me listing my own NFT. Converting your digital art to an NFT is no rocket science. In my case, the digital art was a photograph.
So, that night, I experimented with different NFT marketplaces like Opensea, Rarible, NiftyGateaway, and Mintable to name a few. These are platforms that allow you to create, sell and buy NFTs.
Being new to this world, I was flabbergasted at looking at the number of NFTs listed and being traded on these platforms. So, a few hours later, I hopped into the bandwagon by listing my ‘art’ on Mintable after a failed attempt at Opensea (credits to the Gas Fees about which we talked in our last blog).
It was a pretty easy process to convert my digital art to an NFT and then list it. Here’s how:
- Created my crypto wallet on Metamask
- Created an account on Mintable and connected it with Metamask wallet
- Uploaded my art piece to create a new NFT, added description, listing amount, and the quantities to be available
- And Voila, my first NFT was listed on the platform.
Now, fingers crossed, I am hoping to get rich soon! :)
The Real Cost of NFTs
Though NFTs have a unique value proposition, they come with a disastrous cost to the environment. The dark side of blockchain is its carbon footprint. The blockchain is made strong and reliable by all the computers around the globe mining for digital tokens. This process uses a LOT of energy, with Bitcoin mining alone generating around 37 million tonnes of CO₂ every year. This is on par with that of entire countries.
On the other side, Ethereum, the platform for most of the NFTs, is planning to switch to a proof of stake model from proof of work. This is expected to make things more environmentally friendly. However, it’s taking a forever long time, and the actual changeover may not happen for years.
Here’s an excerpt from a Verge article:
Proof of work acts as a sort of security system for cryptocurrencies like Ethereum and bitcoin since there’s no third party, like a bank, that oversees transactions. To keep financial records secure, the system forces people to solve complex puzzles using energy-guzzling machines.
Solving the puzzles lets users, or “miners,” add a new “block” of verified transactions to a decentralized ledger called the blockchain. The miner then gets new tokens or transaction fees as a reward.
The process is incredibly energy inefficient on purpose. The idea is that using up inordinate amounts of electricity — and probably paying a lot for it — makes it less profitable for someone to muck up the ledger. As a result, Ethereum uses about as much electricity as the entire country of Libya.
Concluding…
We have seen that there are several potential applications of NFTs for the real world. Some of the hype is fueled by sociological reasons, while others are changing consumer habits led by external market forces. One of the main drivers behind the recent explosive growth appears to be driven by social commentary.
Now, does that mean that there is a bubble waiting to explode? Maybe not. It would be unfair to characterize the entire industry as a bubble, especially when most ‘hype’ is concentrated around the art segment. If we open up NFTs to the broader potential, then many interesting business use-cases could evolve.
Yes, the industry is largely speculative, where an NFT worth $1 today might be worth $100 tomorrow. There are no fundamentals to it! The real question is whether the current demand is led by genuine collectors/ users or if it is led by NFT traders who are artificially inflating the prices. If it is the latter, then there will come a correction because the industry would be mainly supported by the players wanting to make some quick bucks.
Now, there are pieces of evidence in favor of and against the NFT bubble. Also, rather than a bubble, the NFT industry appears to be in active price discovery mode. Retail users are being introduced to new forms of use cases that have never been seen before. Well, you may find some aspects ‘bubbly’, but there is still too little data to back that up.
