What are NFTs and are they just another digital fad?

What are NFTs and are they just another digital fad?
While you may not have heard the term ‘non-fungible tokens’ (NFTs) before, this digital concept has exploded in the art, music and gaming sectors of late.

To this end, a number of high-profile NFTs have been sold globally during Q1 2021, with one fascinating project seeing a digital token representing a burnt piece of Banksy artwork sell for $380,000 back in February (the original artwork has been procured for just $95,000).

But what are NFTs, and do they represent just another fad in the volatile and fast-moving cryptocurrency space?

What is an NFT and How do They Work?

An NFT is essentially a digital asset which can represent virtually any piece of physical or digital content, by providing an online ledger of ownership on a blockchain.

Each NFT is completely unique and non-interchangeable, which means that a particular token cannot be exchanged with a like-for-like entity on any network. This sets NFTs apart from traditional cryptocurrencies such as Bitcoin, but we’ll have a little more on this later.

In terms of functionality, non-fungible tokens provide transparent and immutable proof of ownership for digital artwork and music. These content types are ‘minted’ into NFTs online, with this process completing a unique representative file that’s recorded in real-time on the blockchain ledger.

Each NFT is also maintained transparently through the blockchain over time, while this decentralised ledger will also detail a token’s individual transaction history.

Smart contracts are used to create each NFT’s unique ID and metadata, while also creating greater programming capacity (such as the ability to link a non-fungible token to an alternative digital asset) on advanced blockchains like Ethereum and Polkadot.

Interestingly, NFTs not only retain the scarcity and value of original artwork and content, but they enable creators to charge a premium for their work while leveraging a unique and increasingly hyped sales medium.

How do NFTs Impact the Internet of Things?

NFTs are reinforcing the steps already taken by cryptocurrency to decentralise databases and transaction ledgers. The blockchain system allows no single entity to control the massive amounts of data generated by digital networks, with each connected device acting as a authenticator.

This could easily be translated to IoT networks and devices, with the potential for faster processing and coordination increasing as the number of connected devices grows. NFTs further signal the rise of the Machine to Machine (M2M) economy, with IoT devices increasing efficiency and decreasing the need for human interaction in transactions.

Will NFTs Just be Another Cryptocurrency?

While NFTs are similar to cryptocurrencies thanks to their broader categorisation as digital assets, they should be considered separate to currencies like Bitcoin and Tether.

This is because they’re non-interchangeable, and therefore cannot be traded in the same way as cryptocurrencies or forex, although they can obviously be bought and sold directly through alternative blockchains.

However, they remain a potential source of profit for investors, with Wall Street becoming increasingly interested in small and large-cap ventures that are looking to position themselves in the burgeoning NFT markets.

Certainly, non-fungible tokens are creating a new age of asset ownership in the fields of art and music, with their potential impact in these industries making them far more than mere fads. Not only this, but the scarcity of NFTs and hype that surrounds their deployment arguably adds value to already coveted content, which will drive sustained interest amongst artists and investors in the near-term.

The only real concern here is the extent to which asset prices are being increased in the form of NFTs, with this type of disproportionate value increase usually indicative of an emerging bubble.

This makes it an even more interesting space to watch in the future, particularly as a growing number of artists and markets look to leverage NFTs to their advantage.

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