By Akhil Gunasekaran
Pull out a one-dollar bill from your wallet, and analyze it closely. What if you could see every past owner of this one-dollar bill, even down to the origin of its chemical composition? Now, what if the value of this one-dollar bill changed depending on its trade volume and faith? What you have just discovered is the blockchain: the underlying cryptography (security system) behind cryptocurrency and its derivatives — including the recently popularized Non-Fungible Tokens, or NFTs.
With sales of NFTs reaching into the tens of millions of dollars, this technology may have piqued your interest. From artwork to memes, and even Ponzi schemes, NFTs have revolutionized the digital marketplace. However, discussions about NFTs tend to come with a large amount of confusing jargon, so general audiences may be wondering: what exactly is an NFT?
What makes NFTs different from most cryptocurrencies is their non-fungible nature. In economics, a “fungible” item is one that is interchangeable with another similar item. For instance, if I were to hand you a one-dollar bill, and you handed me a one-dollar bill, we would have just executed an equal exchange. This is due to the fact that the underlying value of the cotton in our hands, one dollar, is the same. However, NFTs differ, in that each individual NFT has a unique embedding, which prevents duplicates from being created.
For certain professions, such as artists, the non-fungible nature of NFTs provide an advantage. Primarily, it prevents artists from being victims of piracy and digital theft. The owner of the artwork embeds their art as an NFT, and that unique coded embedding would be the proof of ownership. The artist could then sell their artwork on a marketplace in exchange for cryptocurrencies, such as Ethereum or Bitcoin, which could finally be converted to US Dollars.
However, the variable nature of NFTs’ value makes some investors prone to scams and fraud. According to an article by CBC Canada, Ontario resident Marco Monardo discovered the Frosties NFT project in December 2021. The project managers gave constant updates on the project, so Monardo was convinced of their legitimacy. However, once the NFT was sold to Monardo, the creators went dark and stopped communication. This is just one example of a rug-pull scam, in which an asset is hyped in value and sold to a victim before the creators leave, and the asset steeply declines in value.
Moreover, activists criticize the negative environmental impact of NFTs. Earlier, we learned that NFTs can be traded for another cryptocurrency, such as Bitcoin or Ethereum. But where exactly do these currencies come from? In simple terms, a computer uses its graphics processing unit (GPU) to perform mathematical calculations in return for fractions of a cryptocurrency. The issue is that GPUs have a high energy demand and toll on the power grid. In fact, Bitcoin and Ethereum mining is estimated to have released approximately 78 million tons of CO2.
To the general public, the news and scale of NFT and cryptocurrency fraud may draw potential investors away from the technology, but, fraud and environmental impact isn’t the only hurdle NFTs are facing. Some believe that the explosion of popularity in NFTs is only a temporary fad. As a whole, NFTs are a new and interesting technology that demands caution and careful attention.
[FEATURED IMAGE (at the top of this post): The word NFT surrounded by other words that make up what an NFT is. (CREDIT: NFT Education)]