NFTs: THE NEW FAD

-Penned by Jeevan Joseph & Sakshi Sharm

DEFINITION

A non-fungible token (NFT) is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable. NFTs can be used to represent items such as photos, videos, audio, and other types of digital files.

In simple words, NFTs give a person proof of ownership of the digital asset bought. However, since the internet is so porous, owning an NFT does not necessarily mean that a person has exclusive rights since anything digital can be duplicated endlessly.

At this point, though, it is important to understand the difference between an NFT and other cryptocurrencies like Bitcoin, DodgeCoin, Ethereum, etc. The cryptocurrencies mentioned are fungible, i.e., all have the same value. This means that you can trade one for another bitcoin, and you will have the same thing. NFTs, however, are non-fungible as each NFT may represent a different underlying asset and thus have a different value associated with it.

NFTs, being digital tokens, are logged on a blockchain ledger and traded across the network. Most NFTs are part of the Ethereum blockchain and are traded using Ethereum Support. Other cryptocurrencies are also trying to implement their own versions of NFTs like TRON introducing standard TRC-721. Free NFT marketplaces also exist. Examples include Axie Infinity, OpeanSea, CryptoPunks, NBA Top Shot, Rarible, Foundation, and Sorare.

HISTORY

The concept of NFTs first came up in December 2012 with the inception of “Colored Coins” — interestingly, a project Vitalik Buterin, the creator of Ethereum, had a hand in building on the Bitcoin blockchain. It was conceived from the idea of issuing real-world assets like real estate on a blockchain. The limitations of Bitcoin’s scripting language were, however, inadequate to sustain the application. However, the concept of Colored Coins opened possibilities for experimentation and laid the groundwork for successful NFTs in the Future.

A few years later, in 2014, Counterparty, a peer-to-peer financial platform/open-source online protocol built on the Bitcoin blockchain, was created. It included several projects with its own assets, including card/meme trading. In 2015, the Spells of Genesis game creators became the first to issue in-game assets on a blockchain via Counterparty. By October 2016, memes issued as collectibles were issued with the recognizable green frog “Rare Pepes” on Counterparty.

CryptoPunks launched the world’s first marketplace for rare digital art in Oct of 2017 on the Ethereum blockchain. Creators of the project showed 10,000 different cartoon characters for anyone with an Ethereum wallet to claim freely. All were quickly claimed, inspiring a robust secondary marketplace where collectors would trade them for increasing prices. The Cryptopunk NFTs were creatively issued on a hybrid of the ERC20 and ERC721 Ethereum tokens since the ERC721 had not yet been developed.

CryptoKitties in 2017 marked the NFT mainstream moment, going viral and raising $12.5 million in investment. The CryptoKitty virtual cats are breedable. They have a unique number and 256-bit distinct genome with DNA and different traits (pattern, mouth shape, fur, eye shape, base color, accent color, and more) — which are passed onto their digital feline offspring. At the height of CryptoKitty buying/breeding/trading, the cartoon collectibles had reached almost 5,000 ETH in volume. Founder Cat #18 sold for 253 ETH ($110,000 at the time of sale). This sale was later beat by the 600 ETH sale of “Dragon” for $170,000 in September 2018.

IMPORTANT STAKEHOLDERS

There are three major stakeholders in the NFT market, I.e., the artist, the buyer, and the collector. The artist uses NFTs to sell art. With each change of ownership, the artist is paid a percentage of the transaction. Buyers use NFTs to support their favorite artists and share their work online, while collectors may use NFTs as speculative assets by buying and selling, depending on how the value varies.

PROS & CONS

EXAMPLES

Some of the most talked about NFTs:

• Beeple’s “Everydays: The First 5000 Days”: This work is an important milestone for visual artists around the world—it is the first purely NFT digital artwork that has been auctioned at a major auction house (at an eye-watering $69 million).
• Grimes releases WarNymph: Popular artist Grimes made $5.8 million in a matter of minutes selling her NFTs in late February this year. A collection of 10, the digital assets were titled “WarNymph,” which were the product of collaboration with her brother
• Jack Dorsey’s first-ever tweet: Jack Dorsey, Twitter’s CEO, sold the very first tweet on the platform (made on March 21, 2006) for $3 million as an NFT.
• Sports Collectibles: NBA shots: Top Shot is an NFT marketplace where basketball fans can buy, sell, and trade NBA moments. So far, the most expensive collectible traded is LeBron James dunking against the Houston Rockets, which was sold for over $387,000.
• Andrés Reisinger’s Virtual Design Objects: The Argentinian designer Andrés Reisinger found an exclusive niche for his creative output—he sells furniture NFTs. His most expensive piece was sold for little under $70,000. While this is furniture you cannot use physically, these objects can be placed in open worlds like the above-mentioned Decentraland or Minecraft. 
• RTFKT’s digital sneakers: RTFKT is making big waves in fashion. Even though the people that buy his NFT sneakers will not ever be able to wear them, they are still willing to pay upwards of $10,000 for a pair. In the March of 2021, RTFKT has sold a series of sneakers that he made with another artist called Fewocious—they managed to collect $3,1 million in sales in a matter of minutes.
• Taco Bell’s charitable NFTs: Taco Bell has recently embarked on exploring the NFT craze by commissioning a series of GIFs and images based on dishes from their menu. Their tokens were sold out within about minutes from the launch. Their NFTs were modestly priced—$1 per piece. While they have not generated substantial revenue, they have certainly created a lot of buzz on social media. More importantly, all the proceedings were donated to the Taco Bell Foundation, which is the chain’s charity organization.

INDIAN LANDSCAPE

Celebrities

Amitabh Bachan announced his plans to unveil NFTs on September 2nd. The digital collectibles are expected to include recitations of his father, Harivansh Rai Bachan’s works, recollections of Big B’s most iconic moments on the silver screen and posters of his movies. The NFTs will be launched by BeyondLife.club. Interestingly, the company has asked for more suggestions from prospective buyers about the kind of NFTs they expect to see in the future. Diginoor is another company that focuses on NFTs, which plans to release Rajanikanth’s iconic Shivaji The Boss tokens for interested collectors. Actress Sunny Leone has also unveiled plans to enter the realm of NFTs with unique tokens. On the other side, younger icons like Ritviz and Vishal Malhotra have already sold their NFTs on WazirX.

Photographers and Artists

Digital Art creators have gained access to a whole new stream of recognition and revenue thanks to the interest shown by new-age collectors towards NFTs. The artists can put up their pieces for sale on platforms that primarily pay them in crypto currency. Photographers have also tried their hands at minting their photographs in order to convert them into NFTs. Many have had reasonable success on NFT marketplaces like Zora and Foundation.  However, some artists claim that it is increasingly becoming difficult for new artists to establish themselves in the NFT space. The marketplace itself does not promote artists. All marketing efforts have to be taken by the artists themselves.

Companies

We discussed quite a few examples of foreign firms entering the NFT space and capitalising on the craze surrounding it. However, corporates in India have not shown the same zeal and enthusiasm in adopting NFTs. One of the reasons could be a smaller and niche collector base in India. Another could be that cryptocurrencies are still unregulated in India. Given that most NFTs are bought and sold using cryptocurrencies like Ethereum, companies many not want to risk it until they know the legality of the space they are entering into. 

IMPACT ON THE ECONOMY

Just as cryptocurrencies are seen as tools that will eventually decentralise currency, NFTs are seen as the medium that will do the same thing to artistic goods. The rising popularity of NFTs are sure to bring blockchain technology to the forefront of future investment decisions as well, with creators and collectors depending on blockchain to establish the authenticity of a piece.

The government of India is planning to introduce a 2% equalisation in addition to the normal GST on the sale of NFTs. This leads to a situation known as double taxation and could possibly lead to much slower adoption of NFTs by the Indian public. Increasing investments in volatile and speculative instruments like NFTs is also a new challenge faced by the government. Since it has no precedent, the formulation of regulatory policy measures is a slow process. For now, the Reserve Bank has merely assured individuals that investments in crypto and NFTs are not illegal.

According to some investment advisors, NFTs are highly risky and retail investors should stay from these for the time being. On the flip side, some rich retail investors see NFTs as the next big thing and use them to diversify their portfolio.