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What Are NFTs And Why Are They Here To Stay?

If you’re wondering what all the talk of NFTs is all about, you’re not the only one. Non-fungible tokens, or NFTs, have been all over the media lately since big money is starting to change hands. Back in March, one NFT even sold for $69 million at a Christie’s auction.

An NFT is a blockchain-based digital asset, often artwork, that’s not unlike your regular JPEG file. The difference is it’s cryptographically authenticated, meaning the author or creator is verified within an immutable and unchangeable digital record. For some, it’s the future of artwork. For others, it’s a passing fad. 

So, what is it? Is NFTs a legit investments and if they have staying power in the collectibles and alternative investments industry.

NFTs 101: Where’d They Come From?

Questions often arise on how digital art can hold value if, in theory, it can be replicated with a simple copy-and-paste function. The answer is that NFTs derive value not from the artwork (or document) itself but rather from the fact that the buyer becomes the only verifiable owner of the original artwork minted by the work’s creator. 

When an artist mints an NFT, it renders all other copies of the artwork, well, copies. Therefore, the economic value of the NFT is attached to the blockchain that verifies the authenticity of the work, rather than the work itself. Much like bitcoin or ether, NFTs hold instrumental but not intrinsic value.

Although they’ve caught media attention recently, NFTs have been around for several years, with an early example including CryptoPunks. Early NFTs were basic digital artworks and memes that were tethered to the Ethereum blockchain. It was only this year, however, that major auction houses started selling NFTs for fiat dollars.

NFTs: What Are They Good For?

As mentioned earlier, NFTs can be utilized as artworks whose authenticity can be verified without a centralized authority. That alone is a novel innovation that I think lends the asset class real legitimacy. But that’s not all they’re good for. They can also be used for the following:

• Unique personal documentation: With NFTs, government- or private-issued documents could be turned into unique personalized tokens. In theory, there’s little stopping people from one day owning digital documentation wallets containing driver’s licenses, immunization records and even birth certificates minted by sovereign states.

The same goes for private vendors, such as event promoters. In the future, people could see concert tickets minted as NFTs, which could eradicate illegal scalping or illicit secondary market activity.

• Virtual reality items: Virtual reality (VR) technologies are becoming increasingly popular, and the rise of decentralized VR worlds could necessitate the use of NFTs for buying and selling authentic digital creations. We’re already seeing decentralized VR environments running on blockchain technologies in Somnium Space and Decentraland.

• In-game purchases: Much like VR environments, NFTs lend themselves well to online video games. NFTs can allow players to purchase and retain ownership of unique digital items such as skins, armor or weapons. Unlike centralized in-game purchases and microtransactions, NFTs could be created and sold by the players themselves.

• Collectible investments: Rather than art alone, NFTs are well suited for a host of collectible items, such as first editions or pre-print books, trading cards or even stamps. As a decentralized technology, NFTs remove the burden of having to hire third-party authenticators to verify whether a collectible is truly genuine.

NFT Scams To Watch Out For

As with any nascent asset class, you’re going to have to be vigilant when it comes to NFTs. Since they aren’t well-understood by the investing public, there’s bound to be scammers and frauds out there willing to capitalize on ignorance or misunderstanding. Such NFT scams could include:

• Buying NFTs that the seller doesn’t actually own themselves.

• Buying NFTs that transfer “ownership” without accompanying legal documentation or an agreement in writing stating such.

• Buying NFTs from an online auction site that goes under or orchestrates an exit scam.

• Buying NFTs with high royalty fees that funnel proceeds back to the seller.

• Buying NFTs with non-exclusive ownership rights, which grants the seller the right to continue minting replica copies to other buyers.

Putting It All Together

There’s massive potential in issuing digital assets on blockchains. It just so happens that NFTs are one of the first such applications. The future of NFTs could go in either direction, but the use cases for NFTs go beyond merely art ownership. I think NFTs are here to stay and aren’t going to die out anytime soon. 

However, there’s one thing that’s certain. In the future, the NFT market won’t look much like it does today. Creating non-fungible tokens on blockchains has real and unique benefits across a variety of industries such as live events, online gaming, virtual reality and real-world documentation, and this is where the asset class going.

Whether we’re going to keep seeing headline-grabbing million dollar auction sales, well, that depends on whether consumers keep demanding them.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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