Cryptocurrency has been making headlines from the time of their emergence. Be it legality, taxation, price fluctuations-all issues surrounding cryptocurrencies, almost everyday we hear something about them. Similarly you must also have come across the word NFTs(Non-Fungible Tokens) or may already know a lot about them. NFTs work on a methodology that makes them distinctive.
A non interchangeable unit of data stored on a blockchain is known as an NFT. NFTs are unique digital assets that have proof of ownership and verification of authenticity held in the blockchain.
Notably they are not the same as cryptocurrencies like Bitcoin, and each token is uniquely identifiable. NFTs may be associated with digital files such as photos, videos, audios, any digital art form, website domains, real estate, collectibles, event tickets and even tweets.
NFTs are used as a speculative asset. They are individual tokens with valuable information stored in them. The distinctive feature of NFTs is that they are verifiable because of the kind of data they store confirming their ownership. That makes it easy to transfer them between owners. NFTs’ value is determined by their demand in the market. They can be purchased or sold just like physical types of art.
In this article we shall try to explain what NFTs are, why they are so popular, how they work and the future of NFTs-whether they will sustain or fall eventually?
There are a few reasons behind their popularity-
- NFTs emerged around 2015. As cryptocurrencies are in trend and are supported by the blockchain frameworks, people are getting attracted to this new form of digital content,namely Non-Fungible Tokens, backed by technology on similar lines. They like to possess them just like any other asset or an investment.
- The Internet makes everything possible. Almost anything and everything is available online. When an individual buys an NFT, he/she owns the content. Despite the ongoing popularity of the content, the internet allows it to gain some more. This helps in building more value and ultimately the owner gets the maximum benefit out of it. The creator’s share and the platform putting it online get a very small amount of share as compared to the owner. The same digital asset can be bought and sold a number of times and be a tool to revenue generation.
- They remain verifiable through their unique identification due to the use of blockchain. There is no question of fake items being traded as it can be traced back to the issuer or owner. As they all are unique unlike coins, they are not interchangeable. No two NFT are the same. NFTs cannot be replaced.
- NFTs have emerged as a new market to create wealth with high growth potential. NFTs have the ability to diversify your portfolio if your risk tolerance is high. NFTs offer real world perks like access to high-end events, groups etc depending upon the creator. They are efficient enough to generate smart contracts by process streamlining and elimination of intermediaries.
- Artists can sell directly to collectors through this market and earn royalties for the sold artwork.
As celebrities have started involving themselves into NFTs, there is no doubt that they are going to be in trend. There is more to NFTs and that has been discussed in the following paragraphs.
Emergence of NFTs
The Ethereum blockchain was developed as a network of smart contracts, a platform on which developers can create assets of value through a verified, interconnected ledger of communication and ownership. Two digital artists Matt Hall and John Watkinson developed Crypto Punks. They were made available publicly in 2017. Some of the largest NFT transactions so far have been the following-
- The First Tweet was auctioned by the Twitter co-founder Jack Dorsey and a collector paid $2.9 million to own that tweet.
- Lebron James, an NFT basketball card fetched a valuation of $200,000.
- Dragon has a price tag of more than $1.2 million. It is nothing but a Cryptocat from CryptoKitties.
How do NFTs work?
NFTs are part of the Ethereum blockchain as Ethereum’s blockchain supports NFTs. The extra information that it stores makes it work like a different coin, i.e Ethereum coin. One of the first uses was a game called CryptoKitties. It allowed users to trade and sell virtual kittens.
The most exciting thing about them is the use of technology to sell digital art. However they are designed and made in such a way which cannot be copied. Owner retains the copyright, reproduction rights etc. The same thing can be sold as many times as one wants to but only one person owns the original piece.
A 50 second video by Grimes was paid $ 3,90,000. A video by Beeple was paid $ 6.6. Million. Again, it all depends upon whether you are an artist or a buyer. A buyer hopes that the value of the NFT will go up and it will be sold for a profit. Every NFT is a unique token on the blockchain. It could be a rare artwork by an artist or a trading card with several copies of the same artwork.
Logan Paul, a popular youtuber sold some NFTs video clips for watching a video on YouTube anytime one wants for up to $20,000!! He sold NFTs of a Logan Paul Poke’mom card. Big brands and celebrities have shown their interest in NFTs such as Marvel and Wayne Gretzky. Anything digital is saleable as an NFT. Even animated stickers or articles can be successful as NFTs. And perhaps that’s the reason why GenZ is excessively drawn towards NFTs.
Why do people like to buy it? This is where the whole concept becomes complicated. Some people treat them like a collection of fine art, Pokemon cards etc. And the desire to hold them is driven by the fact that both the normal people as well as the rich want to be mega-rich in future by holding them.
Then there are communities based on the things owned by people. Pudgy penguins and the Bored Ape Yacht Club are making quite a buzz. Those who are part of these communities use their possessions to share memes on Discord or to compliment on Twitter. Artistes find this entire concept very interesting as they are able to sell the art work which otherwise would not have reached the market.
An idea of your own can make you rich!! It is as simple as that. A percentage of it is received every time the owner sells it or the NFT changes hands. From a buyer’s perspective, you can buy some art work to support an artist financially and get some usage rights in turn. You can brag or flex for your own art collection. And if that art goes viral, gets popular..it will make the artist super popular as well.
There are marketplaces dealing with NFTs. Prominent among them are Nifty gateway, Grime’s choice, OpenSea, Rarible, Decentraland,Cryptopunks, CryptoKitties, NBA Top Shot and many others. Majority of market places accept Ethereum,though there is no such condition. Anyone can sell an NFT, and in exchange they can get whatever currency they want.
Why is there a need to invest in NFTs with caution?
The new asset class has its own set of disadvantages.
- One of the biggest drawbacks of NFTs is that they are not good for the environment. Creating environmental art is in conflict with saving the environment itself. The artists who are aware of this fact are moving away from it. Some alt-coins are using ‘proof of stake’ as an alternative. Great amount of energy expenditure and carbon emissions become inevitable to record the Ethereum blockchain.
- NFTs are speculative assets and are illiquid. It is a new class of asset and not much is done yet in this direction. It is difficult to find ways out of it if one faces any kind of trouble. Further, it is not a regulated market, there is no formal or legal support to solve the issues pertaining to it.
- Cryptocurrencies also face issues like tampering and stealing of data. NFTs are also prone to such frauds and scams. NFTs are vulnerable to hacking and stealing.
- The behaviour of the NFT market is not very certain as it depends on what someone is willing to pay for a digital or physical art. The value is relative and highly volatile.
- To own physical art and to own digital art are not the same. Digitization of physical art cannot replace the uniqueness of any art object.
- Buying non fungibles does not give you the copyright to own the art. You may buy a token for an NFT while people get copies of the same on the Internet. These files can be found on social media to show off, without paying a single rupee for that. If you end up paying piles of money for the same, it’s your misfortune. Plus, the value attached to it cannot be ascertained precisely. You can just say that you own a token behind the original asset. A digital record may be worth millions for the sake of bragging.
Are NFTs going to sustain in future or they are already seeing a downfall?
If your portfolio consists of NFTs, then you should be able handle this highly volatile, speculative asset. The craze or fanism surrounding NFTs might not stay longer as it may fade sooner or later. It is difficult for any art work to get popularity, sometimes the artists themselves die and it takes longer than that to make their work popular. If something is worth millions of dollars or rupees, we cannot say that it will be worth the same or more or less a century from now. Nobody can answer this question, but it is highly likely that NFTs will fetch nothing.
The work of great artists are meant to be precious for those who collect it. All collectors of NFTs should feel the same about their collections in order to keep them trending. Once the charm fades, the collectors might ask themselves as to why there was any need at all to invest in such items which actually do not exist. They do not get full rights to the image or artwork they represent. Owning a digital token doesn’t give you anything as it is an intangible asset. There is no long-term value attached to it.
The probability is that it might fail leading to massive losses on the part of those who hold them or may succeed and maintain their value. NFTs are fun things but if you are planning to have them as an investment? NO. They are extremely risky assets. Own low cost NFTs for the sake of enjoying your involvement in it but if you think that you will be rich because of them then that could be a myth.
Facts that further prove that NFTs are already in trouble-
One in three NFT collections have expired due to little or no trading activity. One third are trading below the cost of minting them. There are about 8,400 collections worth 19.3 million individual NFTs on Ethereum blockchain. After making an impressive entry, several NFT projects have been shelved. Cryptocurrencies too had a real hard time after making a lot of buzz around 2018. With no regulators around and a shaken future like unregistered securities, NFTs too might see a major fall. Everything is going at a great speed but with the least amount of direction. Investors themselves are ignorant and are not paying attention to what tomorrow holds for them.
Recent NFT sales figures are not pretty good. The 30 day sales volume is down by 40% compared to the previous month. Another market, OpenSea, is down by 67% in the last 30 days. According to experts, the reason for this fall is perhaps that only those who are meant to stay will come forward to play in the market. It is kind of a good sign that the bubble bursting stage can be avoided if the frenzied demand cools down.
There are many examples to prove that there is no trading activity for NFTs despite the artist following the main trend like mimicking images from popular video games and films. The new projects outperform and the old ones get shattered. Digital images or PFPs (profile pictures) are facing price drops to a larger extent.
NFT prices are dropping and sales are slowing down. The market capitalization is also cut in half. The bubble is about to burst. It already was unsustainable. Not only is their average price of NFT down but the cumulative daily sales are also dropping. Secondary market sales also show a disappointing figure. On March 15 there were about 92,000 secondary sales and 22,000 sales of newly minted NFTs. The numbers nearly peaked in early February. Last month ‘A Bored Ape Yacht Club’ NFT had a big dollar transaction amounting to $224,028 but that was at a loss of $67,800 on the seller’s part who bought it towards the end of January. The ratio of repeat buyers to new entrants is seven-to-one. NFT buyers are on a rise compared to a year ago.
The overall fall could be due to a number of other factors as well. It might have resulted from inflation to the war in Ukraine to increased regulatory scrutiny of NFTs by the Securities Exchange Commission in the US. The average selling price has dropped by about 30% since February 24 when Russia attacked Ukraine. OpenSea, the biggest NFT marketplace, recorded its best month ever in January 20222, but after that the prices have started retreating steadily. Those who are fond of collecting digital art warn that there will be a cataclysmic market crash due to oversaturation as people find NFTs easily accessible and versatile. Sales of the most popular brands are falling rapidly.
Why are NFTs harmful?
NFT sales are based on Ethereum and its price is linked to how much demand/supply there is. Increase in demand leads to increase in transactions. To complete each transaction, physical energy is needed. The ‘Proof of Work’ shows when any transaction with Ethereum is done. An average Ethereum transaction takes up 35 kWh of energy, which is equal to almost six days of household power consumption in India. And it just goes higher and higher with more and more transactions involving Ethereum.
The more artists mint NFTs, there shall be more transactions. All kinds of bids, purchase, sell, cancellations add to the total number of transactions. From start to finish there can be hundreds of transactions. They consume more energy compared to a crypto transaction. 82kWh with 48kg of CO2 is emitted. It is 2.3 times higher than a normal transaction. An average NFT takes up 340 kWh of energy and emits 211 kg of CO2. This is equivalent to driving for 620 miles or flying for two hours!! Imagine if a popular artist is able to sell around 1500 editions. He is going to use 263,583 kWh and emit 163 tons of CO2. This is unbelievable high enough to the total energy consumption of a European citizen for 77 years and flying for 1500 hours. It is highly unlikely that NFTs will ever be sold again if they fail to appeal in the first place. Artists lose money and the planet gets adversely affected.
We just talked about a popular artist. What about a single platform using the energy to carry out all the transactions? Roughly before March 2021, all the nine most popular NFT platforms have closed 1606,435 transactions in total, emitting 115,811 tons! It is insane to fly for 146 years non stop to emit that much amount of energy.
Is there a way out?
Ethereum 2.0 has been under development for the past seven years. This is entirely not linked to energy but to the amount of currency already present. It will take a few more years before ETH 2.0 is released. There is one more solution better than this greener option ETH 2.0, known as Efinity. It is a cleaner option for the environment and cheaper for creators and faster for end users.. It does not depend on blockchain wallet. This will make it more sustainable and accessible for all users. It is in the developing stage and can provide a good option to the existing ones.
Enjin, the company developing Efinity, claims that the Polkadot network used by them will make NFTs available for everyone. It will be a fun-filled, simple and accessible experience for all participants.
Conclusion:Despite everything said and done, it is not over yet. The collections that weren’t successful are long forgotten and the rest will be history. The whole concept of NFTs is somewhat weird. At the same time their popularity makes it clear that their fanclub is not going to stay away from them in near future. It is quite evident that until the better version of ETH or other sustainable options become available, NFT transactions must be discouraged. Looking at the harm that NFTs cause to the environment, the modern day creators have started to rethink before using them as a means of livelihood.
As an investor if you want to have them, do it with caution and allocate only a part of your investible funds in NFTs. NFTs are highly volatile and there is no system yet to make the entire process methodical, forget the legal and regulatory aspects. Artists using various platforms to sell their art work should not be blamed. It is not them, but the technology that has led to serious consequences. Only time will tell whether NFTs are going to make it or not. They will attract only those who find them fun. Mainstream investors will stay away from them. A lot needs to be done in the direction of regulating the operations of both cryptocurrencies and NFTs. Until then people will continue to bear the fruits of this gamble, whether good or bad.
Bhoi Smrutirekha Dharanidhar