In the past year, non-fungible tokens – NFTs – have created such a buzz that can’t be ignored. Naturally, the initial reaction to the trend was to associate it with cryptocurrencies. Well, I wouldn’t blame anyone who has made that connection; the two have a lot in common. However, this assumption is mainly a result of the fact that we don’t know what NFTs are.
I’m Ofir Bar, an investor in real estate and tech startups. In today’s blog post, let’s take time to interrogate this new trend in fintech. We’ll explore everything that you need to know about NFTs, including their differences from crypto and how to safely use them.
What are NFTs?
NFTs are cryptographic assets stored on a blockchain. Each block in a non-fungible chain is assigned a number of transactions. New transactions open a new ledger. As non-fungible tokens, they are not identical to each other. This is the sole reason why we cannot use them for commercial transactions.
However, you can use them to store original copies of any digital file that can be reproduced easily. It could range from art, music and photography, to tweets, videos and even memes. We use them to store anything that holds value and can be stored digitally. Think of them as collectors’ items – just like an antique painting would be. The difference is that you don’t buy the physical painting but its digital file, which proves you are the owner of the original file.
The difference between NFTs and cryptocurrencies
The similarities between these two digital assets are plenty, but once you dive in and get to know them, you realize that they function completely differently. Here are the two main distinctions between NFTs and cryptocurrencies:
Unlike crypto, non-fungible tokens are unique. This uniqueness is the non-fungibility that defines them. Assets are stored in the blockchain with unique identification codes and metadata. Cryptocurrencies are identical to each other.
Medium of exchange
You cannot use NFTs as a medium of commercial transactions. As a trader, you cannot trade non-fungible tokens. Therefore, the purposes of NFTs and crypto are quite different though the two are important developments in the digitalization of money as the world embraces digital currencies.
Pros and Cons of NFTs
Are you thinking of jumping into these waters, and investing in NFTs? Hold on for a second. From my experience as an investor in tech startups, I see a lot of potential in these assets. With that in mind, I still advise potential investors – especially inexperienced ones – to be aware of the risks as well.
The benefits of NFTs
Once the authenticity of an NFT is verified on the blockchain, it cannot be changed. Both the intrinsic and extrinsic value of authenticity becomes actual, which makes it less prone to malicious attacks.
- Smart contracts
The heart of the blockchain is in its automated executions. Take the example of an artist who sells digital assets and attaches royalty to a contract. Such an artist will get compensated for profits emerging from resells. This holds great potential, profit-wise.
- A new revenue stream for artists
Not only are NFTs a source of pride for investors, but they also gives us the chance to support arti. We can now promote our favorite artists by buying their digital assets. A new digital art boom is created by this digital transaction method and we have a chance to be part of it.
Disadvantages of NFTs
- Speculative market
The worth of NFTs is aesthetic and sentimental. We cannot correctly gauge the long-term investments in this field. It relies almost solely on speculation, and that’s not a good sign.
- NFTs can be stolen
These digital assets have become a target of security breaches. Without proper security protocol, they are not immune to theft – and you can be sure that the crooks are already working on sophisticated methods.
- Sustainability in question
Sustainability is in question because of environmental concerns. Just like any other blockchain transaction, we need a lot of power to sustain NFTs. This can cause serious harm to the environment, so there is also an ethical issue here.
- Ownership doesn’t mean control
Just because you have bought an original asset, don’t think that you control its distribution or duplication across platforms. Ownership only gives you access to the original copy.
What you need to take from this blog post is the fact that NFTs are still new, and there is a lot more we still have to learn about them. Having said that, if you feel like this concept speaks to you, feel free to explore NFTs and see how they work for you.