Non-Fungible Tokens: “Explain Like I Am Five”

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Non-fungible tokens (NFTs) appear to suddenly have erupted out of the realm. From music and art to tortillas and bog roll, digital assets are trading like 17th-century exquisite Dutch tulips, fetching huge amounts of money in certain cases.

However, are NFTs worth the moolah—or plainly hyped? Some analysts believe they are a bubble that will burst, similar to the dot-com mania or the Beanie Babies obsession. Others feel that NFTs are here to stay and will forever be revolutionizing investments.

Defining Non-fungible Tokens

Non-fungible tokens are a virtual asset that symbolizes material world things such as artwork, music, games, and video clips. They are purchased and traded online, frequently using cryptocurrency, and are typically encrypted with the same underlying program as many of the digital currencies. 

Quick Timeline On NFTs

2014, NFTs are gaining popularity as a desirable means to purchase and sell-off digital artwork. Since November 2017, a whopping USD 174 million has been spent on NFTs.

Non-fungible tokens are also typically one-of-a-kind, or at the very least one of a very limited release, with unique identification codes. “Primarily, NFTs generate digital scarcity,” explains Arry Yu, head of the Cascadia Blockchain Council of the Washington Technology Industry Association and MD of Yellow Umbrella Ventures.

This is in sharp disparity to the vast majority of digital inventions, which are virtually invariably endless in quantity. Limiting off supply should theoretically increase the value of a particular asset if it is in demand.

However, many NFTs, at least in the beginning, were digital works that already existed in some form elsewhere, such as memorable video clips from NBA games or securitized copies of digital art that were already circulating around on IG.

Standalone images—or perhaps the full collage of pictures can be viewed online for free by anybody. So, why are people willing to expend millions of dollars on something that they can easily capture or download?

Primarily because an NFT permits the buyer to retain ownership of the original item. Furthermore, it includes built-in validation, which acts as proof of ownership. Collectors appreciate “digital bragging rights” nearly as much as the thing itself.

How does an NFT and Cryptocurrency differ?

NFT is an abbreviation for non-fungible tokens. It’s constructed using the same coding as the rest of the popular cryptos, such as Bitcoin, but that’s where the similarities end.

Real-world currency and cryptos are both “fungible,” which implies they may be traded for one another. They’re also worth the same value—one dollar is always equal to another, and one Bitcoin is always equal to another of its type. The fungibility of virtual currency gives it a reliable means of executing blockchain transactions.

NFTs, on the flip side, are distinct. Each one has a digital signature that prevents NFTs from being swapped for or equal to one another (hence, non-fungible).

Inner Workers Of Non-Fungible Tokens

Non-fungible tokens stay on a blockchain- a distributed public ledger that keeps track of all transactions. They are commonly held on the Ethereum blockchain, though they can also be harbored on other blockchain systems.

Non-fungible tokens are fundamentally digital collector’s items- similar to actual collectors’ prized possessions. Instead of receiving a real oil painting to hang on the wall, the client gets its digital version.

They will also have sole ownership rights. That’s correct: An NFT can have a solitary owner at a time.

That said, treat non-fungible tokens in the same way you would any other investment: do your homework, recognize the dangers (including the possibility of losing all of your investment money), and continue with prudence if you choose to take the leap.

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