EXPLAINER: Debunking Non-Fungible Tokens (NFTs) and What Makes Them Valuable

NFTs can be described as unique assets in the form of digital representation which cannot be traded with each other. They are created through a process known as minting and once minted, they cannot be deleted or edited by anyone.

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Non-Fungible Tokens, popularly known as NFTs, have become more popular in the blockchain space in 2021 regardless of having been initially introduced in 2014.

NFTs can be described as unique assets in the form of digital representation which cannot be traded with each other. They are created through a process known as minting and once minted, they cannot be deleted or edited by anyone.

However, if one wants to destroy them, it is done through a process called burning.

NFTs include digital art, domain names, virtual property and even documents attached signifying assets in the real world such as a Certificate of Title or Deed to land. 

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SEE ALSO: [WATCH] It is Completely Free to Mint and Post on Momint – A Chat with CEO, Momint, a Leading South African NFT Marketplace

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For one to have a great understanding of NFTs, there are three elements they must grasp, namely:

  • Fungibility
  • Subjective Value
  • Tokens

Fungibility

Fungibility is the ability of a good or asset to be interchangeable with the same good or asset because they hold the same value. For instance, 1 Bitcoin = 1 Bitcoin, 1 Ether = 1 Ether, Kshs. 100 = Kshs. 100.

On the other hand, non-fungibility means that the goods or assets are discernible and not interchangeable. They cannot hold the same value even when divided because they have different features and specifications hence distinguishable.

For instance, houses, motor vehicles and pets. There is a variety of the aforementioned in existence with different designs, qualities, materials and when it comes to pets – different breeds and personalities. 

Subjective Value

Subjective value refers to the worth that various people attribute to an item based on their perceptions, beliefs and preferences.

For example, event tickets vary by price depending on the seat allocation – the VIP section costs more while the normal section is cheaper. Plane tickets – the cost varies depending on the dates of travel, airline used and seat allocation (aisle, middle, window), and diamonds – the color, cut and carat influence the cost of each piece.

When it comes to NFTs, their value is subjective depending on the buyer’s preferences and perceptions and this explains why they are usually issued out in the form of auctions on the digital marketplaces.

In March 2021, Jack Dorsey (CEO of Twitter) sold an NFT constituting his first tweet ‘Just Setting up My Twitter’ for $2.9 million to Sina Estavi (CEO of Bridge Oracle) when he won the auction by having the highest bid.   

Tokens

Lastly, Tokens are described as digital or physical things that can be exchanged for a good or service or to represent a form of utility.

In blockchain technology, tokens represent value such as voting rights, currencies, staking, and ownership. It is vital to note that the value of a token comes from the asset it represents and not from itself. Notably, NFTs and the assets are stored separately – the NFTs are stored on a blockchain which contains information on the location of the assets while the assets are stored on a website. 

The impact blockchain technology has on NFTs makes them valuable as digital collectibles. Based on its immutability, its coordination layer imparts various properties on these digital assets namely:

  • Standardization
  • Tradeability
  • Interoperability
  • Programmability

Standardization ensures that there are uniform specifications which define their capabilities. The first was an Ethereum standard referred to as ERC-721 which allows the creation of tokens with different values on the same smart contract. Other standards include ERC-998 which lets NFTs be capable of owning ERC-20 tokens and other NFTs while ERC-1155 permits the creation of both fungible and non-fungible assets on Ethereum.

Tradability of NFTs is facilitated by blockchain because NFTs are sold in marketplaces like OpenSea and SolSea in exchange for cryptocurrencies.

Additionally, blockchain ensures interoperability since the tokens are created and operate within the same ecosystem.

Lastly, blockchain provides a means to allow NFTs to be programmable in terms of either crafting and redeeming.

These properties have made them to be regarded as valuable and their use cases include proof of authenticity and representation of various artistic works.  

Most recently, some marketplaces, through smart contracts, have offered their users the platform to use their NFTs as collateral for loans. When the borrower takes up the loan, the lender’s account deposits Ethereum to the borrower’s account and the NFT is locked in the contract. Upon payment of the loan, the NFT is transferred to the borrower. However, upon default the asset is transferred to the lender.

With time, more use cases of NFTs will be identified and eventually, they will drive the adoption of both blockchain technology and cryptocurrencies.   

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RECOMMENDED READINGLess Than 30% of Original NFTs Sold Are Profitable, Says Latest Chainalysis Report

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