How NFT tokens work and what they are worth
NFT tokens rocked the cryptocurrency industry and began to proliferate in 2021, despite the fact that the technology was created much earlier. In this article, we will talk about what they are and how they are used.
What is NFT?
NFT stands for "non-fungible token." It's a unique asset that is inherently different from payment instruments.
It's a digital element that can be verified and identified and offers the owner the ability to own one or another attached object in the online space.
Today, they are most often used in the art sector, thanks to which they gained their popularity. Important: they provide ownership of the token, but don't provide all intellectual property rights to the original. Despite this, such assets have value and are sold at a price that is determined by the mood of the public, and sometimes the price is very high:
NFT vs cryptocurrency
There are a number of significant differences between cryptocurrency coins and NFTs. While cryptocurrency coins are "digital coins" and the equivalent of traditional money with the same value, NFTs are "digital tokens," each of which differs not only in value but also in properties.
If you and your friend have one dollar each, you can exchange them without losing anything. The banknotes will be identical, as will the bitcoins sent from account to account. The NFT exchange can be compared to the exchange of handmade postcards; they are objects of the same nature, but with different content and form. They are unique.
Non-fungible tokens are not even a means of payment: they can be bought, sold, and stored, but you will not be able to use them to buy goods or services in the classic format. At the same time, most cryptocurrencies fulfill this function.
There are also similarities: Bitcoin and NFT are digital products that operate on the web. They contain metadata, use blockchain technology, and are stored on wallets.
Non-fungible tokens are created as a unique hash code associated with an art object. Once the hash is received, it's stored in the blockchain with the appropriate timestamp. Traces of subsequent hash operations are stored in the NFT. Thus, you can restore information about the authenticity and ownership of a work digitized in this format.
The use of a distributed ledger guarantees technological security, reliability, and transparency. It also ensures the immutability and integrity of the data structure.
Areas of use
The advantage of this technology is, first of all, a decrease in the likelihood of fraud: for example, if a property is associated with an NFT, at that moment the history of previous exchanges, a change in the property value, and all other details usually stored in databases are attributed to a cryptographic asset, preventing its duplication and, therefore, any attempts by attackers to intrude into the transaction.
In 2021, the virtual model is used mainly in the areas of art and collecting, but it has other scenarios of use:
- Identification and confirmation of identity. By linking a token to your passport, you can simplify and speed up the data verification process. This is useful for using KYC services, travel services, and other areas.
- game industry. Tokenizing in-game items can add value and give players additional incentives. Developers are already implementing projects of this type.
- The property's progressive approach to registering physical property will simplify, secure, and reduce the cost of processes.
Tokens of this type are most often created and sold on specialized platforms and auctions. The most famous of these is the OpenSea platform, which is used for token registration and initial sales.
Risks and benefits
The main advantage lies in the ability to indicate and certify authorship of digital works, while at the same time commercializing ownership. The buyer will be able to invest and collect, as well as profit from resale on investment websites.
And don't forget about all the advantages of the blockchain structure, such as security, distribution, and immutability, and about its contribution to the development of the areas of art, music, and the investment market in general.
The first problem of the sector is the lack of legal regulation. First of all, this factor poses a particular danger to the investor: if a conflict or a doubtful situation arises, you will not be able to solve it so easily with the help of the law. Because of the opaqueness of the underlying markets and the influence of external factors such as news and statements by famous people, NFTs run the risk of becoming the subject of speculation.
Another risk factor is the danger of losing tokens, but here everything depends only on the security measures of the user himself, and you can't avoid such threats.
Moreover, the author of the object has the opportunity to sell copies of the work: he only needs to slightly change the color correction or swap a couple of pixels and register a new NTF, which will look absolutely identical to the first one to an ordinary user. This negates the whole concept of owning a unique item.
Finally, you shouldn't underestimate the environmental impact of special coins as well as other blockchain products. In fact, large, power-hungry servers are required to manage non-fungible assets. This factor now doesn't bear direct risks for the investor, but if the problem escalates, government regulation of the area from the point of view of environmental safety may negatively affect it.
The market is developing, and in the next couple of years, a solution to these problems can be found. In the meantime, investing in NFT promises the investor good dividends: The Non-Fungible report for the last year looks like this: