The second half of this calendar year has seen an increase in blogs, posts and comments using the term “NFT”. Some may already be familiar with the trend but others may be looking at their feed and asking themselves “what exactly is an NFT?”
NFT stands for non-fungible token. Something that is fungible means that there are units that can be interchanged. For example, AED 50 can be paid with either an AED 50 note or two AED 25 notes because they all will amount to the same value. So, non-fungible means that something has unique properties and cannot be replicated.
Being assigned unique properties are typically seen with assets such as paintings. The value comes from the fact that the item cannot be replicated by another person. Previously it has been difficult to protect the intellectual property of online items – such as an online image or video game. NFTs have been used as digital tokens that indicate proof of ownership for a unique virtual asset. This has been applied to various digital media from memes to sports collectables.
Blockchain (a ledger of ownership maintained by multiple computers) is being used to ensure that the intellectual property and ownership of a unique product is protected from replication and includes digital contracts – that will direct a portion of money to the artist with every transfer of ownership. This is possible because the history of ownership is attached to the item.
This is similar to the concept of provenance in the art world – used to ensure the authenticity of a piece. The issue with this is sometimes there are gaps in the documentation of provenance because the information was lost or not properly accounted for.
Blockchain is a technology that is also being used to underpin cryptocurrencies. This can be seen in the instance of Bitcoin and Ehtereum. They host and mint NFTs. It ensures the safety of your asset because it is tamper-proof and unchangeable.
Minting is the process where digital art becomes part of the Ethereum blockchain. This term comes from the act of minting money and is the production of tangible currencies.
Anybody can tokenize their work and then sell it as an NFT. Bids can be placed by users on online platforms for the sale of the work. Interestingly, the owner will never possess the original digital file produced by the artist.
Creators can use non-custodial platforms to start the process of minting an NFT for their work. This ensures that the creative product and the funds generated are under your ownership.
Since anyone can tokenise their work, if you are looking at investing, it is important to properly research an artist or the history of the image or video before considering buying.
The aim of NFTs is to protect creators and ensure a robust primary and secondary market for goods and assets. We believe this is more than a 2021 trend and is well worth researching further if you are looking to diversify your investment portfolio.