Making Sense of NFTs

Bored Ape #8585 NFT got sold on OpenSea for USD 2.7 M. This is not the most expensive NFT among the Bored Ape Yacht Club, most expensive is #8817 at USD 3.4 M, but I like #8585 better hence the picture. BAYC is a collection of 10,000 Bored Apes NFTs.

In March 2021, Everydays: the First 5000 Days digital artwork created by Beeple got sold for USD 69 M as an NFT. This is the most expensive NFT sold and also one of the most expensive artworks by a living artist.

So, what are NFTs, and why everyone is either buying or minting one?

Tokens are of 2 types — Fungible and Non-fungible. Fungible means replaceable by identical item. An INR 10 note is fungible, so is a cryptocurrency like Bitcoin. You can replace a currency with same denomination as another currency.

But, something which has a unique value attached to you, that is Non-fungible. Example being — The car you own or the house you live in is non-fungible. You cannot replace non-fungible asset with another identical asset, it would be a different thing.

Although the concept of fungibility is not absolute. It is relative to the person. You can debate what constitutes fungible for someone but non-fungible for others.

For physical assets, we have established methods to create and prove the ownership of something. But for digital assets, imagine a photograph, how do you prove unique ownership in digital world? What if someone can just download that image? If you really own it, can you transfer it to someone? Hence, unique ownership aspect was not completely figured out for digital assets till now.

Here comes NFTs. NFT stands for Non-fungible tokens. NFT is a unique representation of ownership of any asset, it can be digital data like image, video, music; or it can be a right or privilege to be part of something; or claim on physical goods. Day by day we are figuring out new things that can be minted as NFT.

But, you can also own something in digital world without NFTs, right? You can, but not the way you own something in physical world. Let’s say you own a pair of shoes in an online game; now the ownership lies only till the universe of that game. You can not hold that shoes across the digital world and you can not transfer them to anyone outside.

With NFTs, ownership becomes available across the digital world. NFTs can be transferred, they can be programmed too. This is ensured by blockchain. There are standards like ERC 721 and ERC 1155 which make NFTs possible.

ERC 721 was the first standard related to NFT. ERC 1155 has added functionality of allowing unique ID to show classes of assets and not just one asset. These Ethereum standards essentially ensure who has ownership and transfer of the same.

A creator can put the digital art on blockchain, this process is called ‘Minting’. Once it is minted, NFT can be sold through marketplaces like Opensea through auction. Creator can also choose to get paid portion of revenues every time NFT is transferred further.

That is fine, but I can still download the image and save it, right? Yes, you can, but downloading an image does not equate to ownership. NFTs ensure that the ownership of digital asset is verifiable on-chain.

“You can’t right-click and save a community.” — Sanchan S. Saxena

Some of the most successful NFT projects have a thriving community around them, like Bored Ape Yacht Club, Cryptopunks, NBA Top Shots.

“If the community around an NFT is dying, the NFT is likely bleeding value. If the community is surging, the NFT is likely gaining value.” — Naval Ravikant

“Ultimately, NFTs will authenticate the world.” — Cameron Winkelovss

If you are not following NFT space, you are missing out on history being written on-chain.

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Prerak Desai

Prerak Desai

Writes about Startups, Tech, VC | MBA @ MDI Gurgaon | Chartered Accountant | Reads Non-Fiction | Can be Found Drinking Black Coffee | Open Micer