Non-fungible tokens or NFTs are another types of assets we explain in this article. Like cryptocurrencies, NFTs operate on blockchain, but unlike cryptocurrencies, every NFT is unique and therefore not exchangeable. In the remainder of the text, we dig deeper into defining NFTs and draw occasional comparisons between them and cryptocurrencies. We also elaborate on their functionality and use as well as the involved risks and cases of scams in NFTs networks.
Table of Contents
- 1 What is an NFT?
- 2 How did NFT projects come into play?
- 3 What is the use of NFTs?
- 4 What are the risks of investing in NFTs?
- 5 NFTs are Brand New
- 6 NFTs are One of a Kind
- 7 NFT Market is Hard to Analyze
- 8 NFT Projects are not Environment Friendly
- 9 What are the Possible Cases of Fraud and Scam in NFTs?
- 10 Final Words
What is an NFT?
An NFT is a unit of data stored on the blockchain network and works like cryptographic tokens. Like cryptocurrencies, NFTs are available on digital markets for trade, and their value depends on the physical or digital asset the token is connected with. A distinct difference between cryptocurrencies and NFTs is that cryptocurrencies are fungible, meaning that their units are interchangeable and indistinguishable from each other. On the other hand, NFTs are non-fungible and one-of-kind and, therefore, have only one owner at a time. In addition, it should be stated that ownership of an NFT does not necessarily grant copyright, and other people can use copies of an NFT, while the original one and the value of its underlying asset belongs only to the owner. Another quality NFTs have is that they are extensible; this quality allows one NFT to be combined with another to form a third new NFT.
How did NFT projects come into play?
The invention of non-fungible tokens dates back to May 2014. The project used ERC-721 standard and operated on Ethereum blockchain; Ethereum was chosen to develop NFT projects because it had a built-in token creation and storage system. However, the first complete version of NFT, Etheria, was created in October 2015. The popularity of NFTs began in 2017 with a project called CryptoPunks that was used for trading unique cartoon characters on the blockchain. Later that same year, the Cryptokitties project was developed and quickly went viral. The NFT market achieved its ultimate prosperity in 2021 due to its popularity among artists, especially musicians and moviemakers. It is worth mentioning that a whopping $200 million was spent on NFTs in the first three months of 2021.
What is the use of NFTs?
Because of their distinctive nature, NFTs can be used to represent physical assets like artworks such as a painting, a photograph, a rare postcard or a sculpture, and the traceable quality of blockchain networks allows the users to be guaranteed authenticity of the token. Additionally, other fine arts have also obtained NFTs. For example, the music industry accumulated $25 million through NFTs, and the film industry used NFTs to sell movie posters. In other words, NFTs have helped the digitization of art. Later, a form of generative art was also invented. In generative art, the artists develop algorithms that generate random and unique tokens in the minting process. The second widespread use of NFTs regards the users’ profile pictures and avatars in social networks; Larva Labs, an American studio, developed a project called CryptoPunks in 2017 and minted 10,000 tokens for users.
What are the risks of investing in NFTs?
NFTs are Brand New
Decisions regarding investment in different markets revolve around the markets’ history of operation and profitability. That is, for example, you have a safer attitude towards forex than you have towards cryptocurrencies and a relatively more positive approach to cryptocurrencies than to NFTs. This is because forex and cryptocurrencies markets have proven they are here to stay, but we do not know this about NFTs yet. Moreover, the market’s recent success can be attributed to its novelty and traders’ fear of missing out on the opportunity to make a profit. It is worth reminding that NFTs operate on blockchain, a network system that has an estimate of 2000 dead coins, alongside its many successful projects. Thus, simply because NFTs are popular now, it does not mean they remain to be so in the future.
NFTs are One of a Kind
The uniqueness of an NFT connotes that unless someone else is interested in the NFT you have, you are stuck with it. This means that the market’s trends cannot be solely analyzed by technical and fundamental analysis. Instead, the value of an NFT depends more on how tastefully its associated asset is designed and how many users are fans of that design. The problem here is that very few artistic designs survive the time and ageing factor, and people grow weary of them after a while. So if you have an NFT, sell it before its fame expires; otherwise, you have to resale it for a lower price than you bought it.
NFT Market is Hard to Analyze
Cryptocurrency market fluctuations are easy to follow thanks to many technical analysis platforms and centralized and decentralized exchanges. However, NFTs are harder to analyze since their price movements are not as transparent as that of cryptocurrencies. This shortcoming of NFTs, which results in a behindhand reaction to the market movements and eventually capital loss, is known as Silent Crash.
NFT Projects are not Environment Friendly
NFTs run on Ethereum, a blockchain that uses a proof-of-work protocol (PoW) to determine the value of data units on its network. Based on PoW, one party has to prove to the other one that a certain amount of energy has been spent for the procession of a data unit. Because of the competition between miners, the energy consumption is already high, but in the case of NFTs, since we are mainly dealing with graphic and visual data, even much greater energy is needed to execute the processes. Therefore, NFT projects are subject to harsh criticism because of their energy consumption in an already crisis-stricken environment; this darkens the future of NFTs.
What are the Possible Cases of Fraud and Scam in NFTs?
On the one hand, NFTs that claim to be linked to well-known assets might be faked and traded on the market. On the other hand, NFTs can make the user believe that they are genuinely designed by reputable sources while they are actually developed by a scammer. Also, some fraudsters may run fake websites with very similar domains and UIs to the genuine NFTs exchanges, and when the victim mistakenly logs into the fake website, the available tokens in their wallet get stolen. Additionally, some scammers set up unauthorized customer service channels in social media and affiliate themselves to well-established exchanges, hoping they can access users’ information and hack into their accounts. In other fraudulent attempts, owners of NFTs may hype their tokens’ associated assets to inflate the value and seduce other users into buying their NFTs at high prices and get away with the subsequent decline in the value.
Currently, the NFTs market is not a safe place for investment because it has seen its highest highs, and it is easily possible that the value of the market plummets. However, if you have money to spare, you can still make small investments in the market, and even then, you should make sure of the authenticity of the tokens and the presenter of the tokens first. Remember that the NFTs market is hardly analyzable and is not as professional and serious as other financial markets such as forex and cryptocurrencies.