An NFT (non-fungible token) is a type of digital asset that represents unique ownership of a specific object or content. The term ‘non-fungible’ means that each token is unique and cannot be exchanged for another token of equivalent value. Unlike cryptocurrencies like Bitcoin or Ethereum, which are fungible and identical to each other, NFTs are different and distinct.
Examples of content that NFTs can represent include:
- Digital art: images, illustrations, animations;
- Collectibles: Digital cards, rare game items;
- Music and video: Albums, music videos, recorded sports moments;
- Virtual real estate: Digital real estate in metaverses such as Decentraland.
How an NFT works
NFTs use blockchain technology to verify authenticity and ownership. Most NFTs are created and traded on the Ethereum blockchain, although other blockchains, such as Binance Smart Chain, have also started to become popular.
3 simple steps on how it works:
- Creation (minting): cre ators turn digital content into NFT through a process calledminting. It registers the token on the blockchain.
- Trading: NFTs can be bought, sold or exchanged on digital marketplaces like OpenSea, Rarible or Foundation.
- Verification: the blockchain keeps a public ledger that attests to authentication and ownership history, providing maximum transparency.
Why are NFTs so special?
NFTs combine uniqueness, transparency and digital ownership. Here are the main benefits:
- Uniqueness and authenticity: every NFT is different, and registering on the blockchain guarantees its authenticity.
- Owner control: The owner can keep, sell or transfer the NFT.
- Creative Possibilities: Artists and creators can sell directly to consumers without intermediaries, keeping a larger share of the revenue.
- Exclusive rewards: Owners of NFTs often receive access to private events, additional goods or special benefits.
How are NFTs used in different industries?
NFTs have varied applications that make them relevant in many sectors:
1. Arts
Digital artists can make money from their creations in a transparent way. A notable example is Beeple’s work, which sold for 69 million dollars.
2. Gaming
Players can buy and sell unique in-game items such as skins for characters or weapons. These assets become transferable between platforms.
3. Events and music
Musicians release exclusive albums as NFTs and fans receive digital artifacts or VIP access.
4. Digital real estate
In metaverses, people buy land and buildings as NFTs to build virtual spaces.
Criticisms and risks associated with NFTs
As exciting as it sounds, NFTs are not without controversy:
1. Extreme volatility and speculative nature
The NFT market is known for its extreme volatility. Prices can rise exponentially in a short time, only to fall just as quickly. This volatility is often fueled by hype, celebrity influence or passing trends, rather than by clearly defined intrinsic value. Many critics liken investing in NFTs to gambling or a speculative bubble, where the potential for big gains comes with an equally high risk of total loss of investment. It has been observed that a significant percentage of NFT collections have zero trading volume and a short lifespan.
2. Security risks, fraud and scams
Even if blockchain technology is by its nature secure, the platforms and wallets used to store and trade NFTs are not immune to attacks. There is a risk of:
- Hacking: digital wallets can be compromised.
- Phishing: Attempts to steal private keys or access data.
- Rug Pulls: The creators of an NFT project disappear with investors’ funds.
- Fake NFTs: Selling works or collections that are not authentic or for which the seller does not own the rights.
- Money laundering: Lack of strict regulation can allow NFTs to be used for illegal activities.
3. Legal uncertainty and intellectual property issues
The legal framework for NFT is still under development, which creates legal uncertainty. Many jurisdictions do not yet have clear regulations. There is also often major confusion about intellectual property rights:
- What are you actually buying? Purchasing an NFT does not necessarily mean that you own the copyright, reproduction or commercial use rights to the digital work. Most of the time, you are only buying a “certificate” of digital ownership of a token, while the original creator may retain all other rights.
- Counterfeiting and piracy: It is relatively easy to copy a digital image or file, even if the original NFT is unique.
4. Environmental impact (for PoW)
A major criticism, especially for NFTs created and traded on blockchains using the Proof of Work (PoW) mechanism ( as Ethereum was before “The Merge”), is the massive energy consumption. The process of “mining” and validating transactions in PoW requires considerable computing power and, by extension, a large amount of electricity, generating a significant carbon footprint. Although Ethereum’s migration to Proof of Stake (PoS) has substantially reduced this impact, many other NFT blockchains still use PoW.
5. Lack of liquidity
Unlike traditional assets (stocks, bonds) or even major cryptocurrencies (Bitcoin, Ethereum), the NFT market can suffer from a lack of liquidity. There isn’t always an immediate market or a large number of buyers to sell a particular NFT, especially if it is a less popular collection. This can make it difficult to turn your investment into cash when you need it.
6. Value subjectivity and investment analysis
The value of an NFT is largely subjective and depends on collective perception, rarity, the reputation of the creator and the community surrounding the project. There are no clear traditional financial metrics to value a NFT, which makes investment analysis more complex and risky.
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