What is NFT? Why are NFTs so Valuable?

I don’t understand. What’s is this buzz around NFTs? Why are people buying images of rocks for a million dollars? Am I missing on to something? Well, you have come to the right place today. This newest fad of cryptoverse is taking over everything else with a storm. Suddenly, everyone is talking about NFTs. Until early 2021, it was all a distant phenomena which could safely be put on a back burner without wrapping my head around it. But now, Mr. Bachchan is coming up with his NFT collection. If an 80 year old man understands this new age business, it is imperative for you to at least know that basics right? So what is NFT? And why are they so valuable? Let’s get started.

What is NFT?

NFT stands for non fungible token. Non fungibility is the ability of an asset to possess unique features thus making it non interchangeable. Think of it like this. When I give you a Rs. 100 note, you can return back any other Rs. 100 note without impacting the quality of our transaction. In other words, currency notes are fungible. Similarly, if me and my brother both decide to draw a portrait of our mother, it couldn’t be replaced with each other. Even though we were drawing the same person, the value of each would be much different in terms of emotions, drawing skills, effort deployed etc. Think of NFTs as the digital version of such paintings.

As per Wikipedia, non-fungible token (NFT) is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable.

What do you mean by buying an NFT?

This is where most of us get confused. Buying NFT simply means buying rights to a particular digital asset. Currently, these rights are NOT backed by any government legislation. However, they are stored in the form of immutable records on a blockchain. This means that although you can instantly prove the ownership of a digital asset, government may or may not chose to recognize it.

Also, NFT simply represents a piece of data with an address. This address may point towards an external server which carries the actual NFT asset (Image, GIF, Video etc.). Whosoever has the key (password) to this address becomes owner of this data. So technically, owning a NFT means writing on a blockchain that you own the item placed on address X. The image above will help you visualize this.

The authenticity of this address is verified through blockchain. The legitimacy of ownership and history can be seen and validated by anyone.

Where’s the Catch?

What makes NFTs so Valuable?

All this time while you were wondering that why would a picture of rock sell for $1.3mn, you missed on a key aspect of NFTs. It’s not the image, GIF or the video that is valuable. Rather, it’s the story behind it. Let’s explore the framework to decide the net worth of NFT. In other words, where does the actual value of NFT (Digital collectible) lies:

A. First:

Why is Bitcoin so popular? Why does it have a market dominance of over 60%? Because it’s the first ever cryptocurrency. It all started with it. Whosoever will enter the world of crypto will have to come through Bitcoin. Similarly, all the NFTs which are first of a kind would be extremely valuable.

Example? A not so famous Indian daily soap actor Vishal Malhotra was able to sell his NFT for Rs. 4L. Why? Because it was first ever NFT by an Indian celebrity. So rather than riding on the back of his own fame, he took the NFT hype train instead.

In another example if government of India decides to mint NFT of Indian flag, it will be extremely valuable. Because it’ll be the first ever flag minted by any government body.

Fun fact: First project to feature ERC721 token (protocol for NFTs) is called su squares. Read more about their crazy story and price here.

B. Utility: Real World Benefits

If I were to buy a digital collectible ever, this would probably the most important deciding factor. If an NFT has a real use case attached, it becomes instantly valuable. For example, Mr. Bachchan launches an NFT of his photo. One may not purchase it as it’s not unique. However, if Mr. Bachchan claims that he would have a dinner twice an year with the holder of that NFT, the price will skyrocket.

In an example closer home, say Myntra mints an NFT of one of their exclusive designs. They could say that whosoever holds this NFT will also get a Rs. 5000 worth voucher from them. This gives NFT a real life use case.

C. Unique and Rare:

Economics 101 any one? Lesser of something, more is it’s value. So NFTs which have an element of scarcity attached to them are valuable in nature. Let’s take a real world instance. Everyone knows about Monalisa right? There are thousands of copies of Monalisa floating in the market. However, the most valuable of them is the one which is hung in Musee du Louvre in Paris. Why? Because it was painted by Leonardo Da Vinci. Now you may get the world’s best artists and try to replicate it. They may even make a 100% replica of that painting but the real value still lies in the one painted originally because it’s unique and only one!

Coming back to the virtual world. Now think of that glorious moment where MS Dhoni hit a six off the last ball to win World Cup for India (Damn, those goosebumps!). If he decides to mint 3 copies of that image and sell them as NFTs, it would sell like hot cakes. People may copy it, reproduce it but the ones minted by the man himself are only three.

D. Ownership History:

I am also a low key painter. Just kidding, the best I could do is stick figures. However, say one of my stick figures catches the eye of Shahrukh Khan (beauty lies in the eyes of beholder eh?) and he decides to buy it and hang it in his house. A few years later, he clicks a photo of that painting and puts it up as NFT. What do you think would happen?

That NFT is not famous because I painted it. It’s famous because of it’s history of ownership. Mr. Khan owned it.

Conclusion:

So what do we learn here? Real value of NFT lies in some sort of underlying feature and not the actual NFT. But guess what? Digital collectibles is just one of the use cases of NFT. There’s a lot more to explore. But that’s a topic for another day.

What is your PoV on this madness?

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Until next time..

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