NFTArt News

Non-fungible Tokens: Decoding NFTs for Dummies

Non-fungible Tokens (NFTs)
Written by Publishing Team

The top two cryptocurrencies – Solana and Terrra – grew by 11,000% and 12,000% last year.

By R. Chandra Mouli

If you are reading this, must be your lucky day. Not often you learn about an investment avenue that spiked 21,000% in 2021. No, it’s not a typo, nor are we talking crypto.

The top two cryptocurrencies – Solana and Terrra – grew by 11,000% and 12,000% last year. So now that I have your attention, here’s the dope on Non-fungible Tokens (NFTs) which generated a total of USD 5.4 billion in profits through sale of tokens in 2021. Just to assure you this is not a Ponzi or Pyramid scheme, the source of information on skyrocketing NFT sales is a study, developed with a BNP Paribas-owned research firm which estimates that trading in NFTs climbed to USD 17.6 billion, surging from USD 82 million in 2020.

Now sit back, silence any device that pings, beeps or interrupts, as I unravel the all-new virtual platform, a true silver lining in the cloud. First, let’s get down to earth, to auctions in the physical world.

Connoisseurs of fine art and jewellery who frequent high value auctions in the West are familiar with the term “provenance,” which denotes the ancestry or heritage of a bequeathed asset. Provenance is a lucid record of ownership, say from a certain duke to a duchess to a lord and then his daughter who may be the current owner and has perhaps handed it to Sotheby’s or Christie’s for an open auction or private sale.

In a post-pandemic phase where contactless purchase is preferred, the relevance of physical auctions is diminishing (except in instances such as the recent IPL bidding). In all other situations, bids are best conducted online, and what we look for in an auction, in terms of past and current ownership and its authenticity, is presented for viewing and verification as a non-fungible token – a unique digital identifier that cannot be copied, subdivided or substituted, since its veracity has been recorded in a blockchain.

NFTs are an all-new asset class edging past cryptocurrency. While the doubting Thomases of crypto are squirming even as the currency’s early adopters laugh all the way to the bank, this narrative, aimed at demystify NFT, is to give you enough knowledge to help you take an informed decision – whether to jump on to the bandwagon or not.

As a first step, let’s take inspiration from film stars and – trendsetters we admire artists and trust. Let’s start with Mr. Amitabh Bachchan. The Bollywood superstar, always a pioneer, be it choice of roles that go against the grain, headlining a never-before-show like KBC, or supporting social causes, had partnered last year with Guardianlink, to launch an NFT collection.

From Big B to Salman Khan, and Sonu Sood to Dulquer Salmaan in India, to world-renowned movie stars and rappers of the West, many creators have launched their own NFT collections.

Like tickets to many of Mr. Bachchan’s hit films, his digital asset too got sold out in just four days in November. The online auction on Guardinalink’s website Beyondlifeclub yielded total proceeds of Rs. 7.18 crore. The inventory included the actor’s father’s famous poem “Madhushala”, and seven autographed vintage posters of himself (from films such as Deewar and Sholay), along with his other works.

The poem recital by Mr Bachchan, which was packaged as an audio NFT, was sold for $756,000. Two sole owners now own the audio asset, one in Hindi and another in English. As for smaller pieces of art in the collection, over 300,000 fans had signed up globally.

Unlike the Initial Public Offer in the stock market which is open for a few days, an NFT collection (example a limited edition of 10,000 tokens) can get sold online in less than an hour or within one day. On International Women’s Day, when Guardianlink launched an NFT dedicated to Kalpana Chawla, the astronaut who died in the Colombia space shuttle disaster, the collection was sold out in a few minutes.

The term that comes closest to ‘Offer Opens Today’ is “NFT Drop,” the release of a non-fungible token project. The date, time and minting price are of relevance to the creator and collector.

Minting? Just like a commemorative coin, a token too has to be minted, ie. created and listed as a virtual asset. This is the NFT creator’s job, but having got into the domain, let’s get to know all aspects. The owner of a piece of art, poster or music, who wishes to digitize (tokenize), collaborates with a marketplace to create and store the asset. The service fee for the initial minting is known as “gas fee” which offsets the computing energy used by the marketplace to process the transaction on the blockchain. The marketplace also pays the creator a royalty fee every time a token is sold.

As most of us are less of creators and art collectors and more of investors and punters, let’s understand the monetisation. Remember that the ownership of the non-fungible asset, be it images, video or other collectibles, is recorded in the cloud.

The owner of the NFT can hang on to the token for ever or as with blue-chip stocks and shares, wait for demand to rise and offload for a profit. In short, the owner decides whether to remain as collector or switch to trader.

A quick aside: Those who admire a work of art or are fans of a star can actually get a copy of the token online, by just clicking Save As. That’s about all you can do… because you are not identified as the digital owner of the NFT.

For the creator, the advantage is liberation from centralized control (for example, content on a social media handle, created and curated over the years, may turn to zilch one fine day if the government bans the platform (example TikTok) or if the platform shuts down the individual’s handle (happened to a former US president).

How fast is the NFT space growing? Faster than you can say Jack Robinson or Non-Fungible Token! In 2020, the global valuation was USD 20 Million, the current figure is USD 24 Billion and the sky-high figure starting with T is not too far away.

Unlike cryptocurrency, of which there are about 3,000 in the market, and just over 100 traded actively, NFTs are highly scalable since almost any product, art form or commercial document can be adapted into an NFT. Remember, these are early days and usage and utility will evolve in the near future.

In the months to come, more auctions from online marketplaces will be announced, and not all will be from celebrities. Artists, painters and sculptors may put their work on sale, and an entire NFT movie may be put on the block. Twitter’s CEO sold his first-ever tweet for USD 2.9 million and donated the proceeds to charity, a move that signals the medium is open to every kind of message.

If there is a time to foray into NFTs, it is now. But before you opt for the investment stream, be aware of some of the pitfalls:

To bid in an NFT auction, you will need to open and fund a crypto wallet. In India, the Government is pensive and apprehensive about cryptocurrencies and has taken a view that mining of currencies by individuals should not be permitted.

The Hon’ble Finance Minister Smt. Nirmala Sitharaman has set up a working group of experts to help the government decide on banning or permitting virtual currencies.

Also remember every new opportunity to make money comes with attendant risks. Hence, do your due diligence by verifying provenance before buying an NFT, and stay away from fake drops by sticking to legitimate marketplaces.

The good news is upcoming bidding events are sure to give the evolution collector or a fledgeling dummy like me an equal chance to own tradeable tokens. It’s worth the entry and the wait. All you need is sufficient gas to take you to Cloud Nine, if not the Moon.

The writer is a communications consultant, columnist and former journalist. Views are personal

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Publishing Team