Since they were spun off from cryptocurrencies in 2014, non-fungible tokens (NFTs) have moved far away from their origins as alternative investments. Today, these digital assets are at the cusp of being mainstream themselves. It’s now almost impossible to read any tech-oriented news site, social media page, or forum and not encounter the term.
Perhaps due to both ignorance and extreme exuberance, NFTs are often misunderstood. This is understandable, as NFTs are a new type of asset. However, they are often confused with cryptocurrencies, which are related but quite different in practice.
Below, we’ll look into what NFTs are and why they are different from more established cryptocurrencies. The best way to learn more about these digital assets is to start trading them in small amounts. For a safer way to trade, download an XMR wallet to start exchanging Monero, a private cryptocurrency that keeps your finances secure.
What Are Blockchains?To understand NFTs, it’s necessary to understand blockchains. A blockchain is a type of database where users can add entries (blocks) but can’t edit them. Each time a new block is created, it is time-stamped and rendered practically unalterable. The data block could then be referenced by any other user on the network through a public register.
Adding entries requires solving cryptography challenges to ensure secure links to other blocks in the chain. This all makes blockchains a good solution for creating trustworthy and auditable datasets that are also easily accessible.
Blockchains can be used in a wide variety of applications that require secure but readily-accessed databases. Population records, logistics movements, insurance contracts, and currency are just some of the applications of blockchain technology.
What Exactly are NFTsNon-fungible tokens or NFTs are a type of digital asset that is secured through blockchain technology. Like cryptocurrencies, NFTs are secured by systems that employ blockchain principles. The word “non-fungible” refers to the fact that NFTs cannot be substituted or subdivided, something that could be done with cryptocurrencies, where units have to be exchangeable with each other by definition. Non-fungibility makes every single NFT unique and prevents them from being freely exchanged with each other.
The non-fungibility of NFTs makes them well-suited for a variety of purposes, particularly as secure representations of other items or even abstract ideas. The most popular application for NFTs is their use as secure ownership certificates. Because they cannot be forged or duplicated, they are uniquely suited for this application. Some of the assets NFTs have been used to secure include real estate, game items, artifacts, intellectual property, and much more.
A controversial and misunderstood use of NFTs is to secure ownership of digital artworks. People who do not understand NFTs often confuse digital artworks with NFTs. However, in this application, most NFTs are merely tokens or certificates that reference the artworks and are not normally considered to be the artworks themselves.
What Are The Downsides of NFTsNFTs have limits and downsides to their use. Financial experts often point to the following drawbacks:
-Environmental Impact. Maintaining a blockchain database requires an immense amount of energy. It is expected that in a few years, the extra carbon emissions necessitated for maintaining cryptocurrency and NFT blockchains will exceed that of the city of London. However, there are counterarguments that as NFTs streamline global business, there will be a reduction in carbon emissions from fewer people traveling and using office spaces.
-Instability. Because of the newness of NFTs as an asset class, there is still plenty of uncertainty about whether they will catch on. Even individuals and firms that are confident in the cryptocurrency market are divided on how to view NFTs. As a result, the prices for NFTs can be quite volatile, even by blockchain asset standards.
-Difficult to Exchange. Unlike cash or even cryptocurrencies, NFTs are difficult to exchange because each one is a unique item with different underlying qualities. This makes them exceedingly difficult to trade, especially during general market downturns. The ignorance of the general population on the utility of NFTs also restricts the potential pool of buyers.
-Limited Income Generation. As with baseball cards or rare antiques, the value of NFTs is purely based on how the market and individual buyers value them. This makes them more limited than stocks, real estate, or bonds in terms of income generation.
-They Could Be Used for Criminal Activity. Malicious actors have long been making NFTs that purport to certify or represent objects that they do not own the rights to. One common scam is to make and sell NFTs that refer to artworks without the artist’s knowledge or consent. These activities present a serious challenge to the wider adoption of NFTs as an asset.
Should I Buy NFTsAs with any other new investment vehicle, it is difficult to make a blanket recommendation. NFTs are proving themselves useful in a variety of applications, but only time will tell if they hold up to their promise as a truly viable asset.
If you want to learn more about blockchain assets, one good way to get started is by trading small amounts of a secure cryptocurrency. And because cryptocurrencies are fungible, they are much easier to exchange or offload during market downturns. Once you’re more knowledgeable and confident, you can make a better-informed decision about trading NFTs.