What are Non-Fungible tokens (NFT)? How do they work?

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NFTs are generally built using the same kind of programming as cryptocurrency, like Bitcoin or Ethereum, but that’s where the similarity ends.

Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another.

Fungibility

It refers to the ability of an asset to be exchanged or substituted with similar assets of the same value such as currency. you can exchange 5 notes of Rs 100 for 1 note of Rs 500. The value is Rs 500 (despite being in another form)

NFTs are the opposite of that. Each one is unique and can’t be substituted for something similar. Think of the Mona Lisa painting – an original piece of art. It can’t be swapped for a poster of the same painting from a gift shop because the poster doesn’t hold the same value.

An NFT winds up having a digital signature through the blockchain where the information is recorded. NFT has a digital sign in the same way that a great work of art has the sign of the original creator which is the complete reason of high value. You can look at the original painting and say, yes this is the real one. This is authentic.

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Bitcoin v/s NFTs

NFTs are cryptocurrencies but unlike fungible cryptocurrencies like Bitcoin, they are completely unique. NFT exist as a string of letters and numbers on a blockchain ledger. This info can contain who owns the digital asset, who sold it when it was sold.

This info is encrypted ensuring authenticity and scarcity. They fix a problem with this for digital creators on the internet by making their creations more scarce and valuable.

How?

As NFTS are nonfungible, there is only one of these tokens that can exist. It cant be traded for anything similar as nothing similar exists, so you wind up getting that scarcity premium, that helps drive prices.

Bitcoin – Underlying technology of blockchain

But Non-Fungible tokens tech is different, you can do a lot more complex things with NFT. You can set terms inside it, you can have an NFT that mints Non-Fungible tokens, really untested applications. The surface has only been scratched in terms of its potential.

Example of NFT

NBA Top Shot – allows users to procure a collection of digital basketball highlights, such as a video clip of a posterizing dunk All highlights are Non-Fungible tokens and have become big business. By mid-March, NBA Top Shot had clocked in over 338 mn $ in sales since it went live in Oct2020 NFTs are making entry into the mainstream art world too Auction house Christie’s opened bidding for its first pure digital art Non-Fungible tokens. Bids rocketed into millions of dollars in no time!

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NBA topshot NFT

History

One of the early applications of creating the scarcity was the digital collectible game Cryptokitties which emerged in 2017. Users were able to buy, trade, and breed digital cat collectibles. Each new cat was an NFT which verified its originality and ownership. Since then NFTS has been applied to video games, digital art, and sports memorabilia.

Concerns

  • Not all NFTs verify the person selling a digital art piece is the original creator
  • Anyone can come to these marketplaces and say they are the person who created this token originally, and it can be hard to verify that.
  • Ownership alone doesn’t necessarily mean that digital assets have to be so valuable. (For physical painting, the sign makes it valuable and the original)
  • Digital art owner owns the digital image but they can’t stop others from copying the image and sharing/changing it online
  • The NFT space can very well be a bubble being pumped by a few players.

Are the assets really worth the value assigned to them? Especially given how all it takes to view them is an internet connection? Time will tell!

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JST Investments

JST Investments

JST Investments is a Mumbai-based investment firm that believes in long-term wealth creation. It's a brainchild of Aditya Kondawar, Aditya Shah, and Anish Moonka.
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