Money & Banking

Explainer: What are NFTs, and why the sudden frenzy about them?

| Updated on: Nov 09, 2021
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Non-fungible token means something unique that cannot be substituted with another

NFT stands for Non-Fungible Token. Ok, let’s explain. Non-fungible means unique and something that cannot be substituted with another. For example, while a ₹2,000 note can be substituted by another note of the same denomination, or a ten-gram gold coin with another gold coin of equal weight, that is one is fungible (inter-changeable, non-unique to the other).

MS Dhoni’s bat, which he used in the 2011 World Cup final to help India win the title, is unique, and has no substitute.

Similarly, think of an original handwritten letter by Mahatma Gandhi or a particular painting by MF Hussain. These are unique and non-fungible – there is no substitute to the original.

The currency note, gold coin, cricket bat, letter and painting examples used above are all real physical things. If you extrapolate that to the digital world with the help of blockchain, you would have an NFT. It is like a digital world collectible, a digital asset, which is available to be bought and sold online, with digital proof of ownership through blockchain. But then, what is blockchain?

What is blockchain?

Unless you have been living under a rock or are a sworn technophobe, you would have at least heard of ‘blockchain’ being mentioned in the news and daily conversations. Blockchain is a decentralised ledger, where data is stored in the form of blocks, and comes together as chains (thus blockchain). As the name suggests, it is ‘decentralised’ – it is distributed.

Since there are multiple copies of the shared database, no single user can tamper or change any data, thus ensuring trust and large-scale acceptance. The innovation with blockchain is that it guarantees the trustworthiness and security of a record of data without the need for a trusted third party. Think of blockchain as a ledger whose records of transactions cannot be altered, deleted or destroyed. Each new block is added to a chain, but the old ones cannot be altered or manipulated.

While the blockchain technology has been around for nearly three decades – it was first proposed in 1991 – it become mainstream over the last decade, mainly due to the popularity of cryptocurrencies such as Bitcoin, which use the blockchain technology. This is the technology which underpins everything from cryptocurrencies, decentrailised finance (DeFi) applications, NFT’s and Smart Contracts.

How do NFTs work?

Most NFTs are part of Ethereum blockchain. Ehtereum is a cryptocurrency like Bitcoin, Shiba Inu or a Dogecoin. Other cryptocurrencies, too, can and indeed, are offering NFTs, but the most popular one right now is the Ethereum blockchain and transactions happen using ETH coins. NFT, is thus, any digital asset such as a piece of music, image, photograph, painting, GIF, meme an audio or video file or game that can exist in a digital format.

Just like in the real, physical world where we assert ownership and usage rights, as we move to an increasingly digital world, there, too, if you own something digital, you can assert your ownership and how the asset could be used. That creates value. For instance, Twitter CEO jack Dorsey sold the NFT to his first tweet for about $2.9 million, the proceeds of which Dorsey had said would be given to a charity. Are you asking yourself what the buyer got for the purchase of Dorsey’s NFT? The tweet itself continues to be live on Twitter, but the winning bidder would own the NFT, which is signed and verified by the creator, similar to a virtual autograph. By now you would be wondering why one cannot can’t just save the tweet and what is so unique about it.

Think of what you get when you buy, say, a painting by your favourite artist. You feel happy and proud about owning something. NFTs are similar to it. What is the value of your painting? Whatever the market is ready to pay. That is the case even in NFTs. This is also a new alternative investment asset class, which is hugely speculative. For instance, this article could be sold as an NFT if there is a buyer who wants to purchase it.

NFTs in India

Recently, Amitabh Bachchan sold a number of NFTs, including his recital of his father’s famous poem Madhushala, apart from various other NFT offerings from his movie career, for $1 million. Similarly, actress Sunny Leone sold her NFTs in a private sale. Others, too, including Salman Khan, singer Mika Singh, poet Priya Malik and numerous others, have offered NFTs or are in the process of doing so.

In India NFTs can be brought on various trading places such as crypto exchange WazirX, NFTically, Wall.app, Zebpay and a number of other platforms. These platforms act as digital middlemen. Sellers can set a price for their NFTs or opt for an auction. While we are still in the early days of NFTs, the type, range and price available is likely to go up.

Published on November 12, 2021

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