In recent months, non-fungible tokens (NFTs) have been gaining immense popularity. Every actor, singer, and celebrity seems to be coming out with their own outrageously-priced NFT, whether they have a financial or artistic background or not. But what are NFTs, what is the hype around them, and what are the issues related to their use and production?
What are NFTs?
Non-fungible tokens, or NFTs, are a way of owning an original digital image. They can be representations of things such as paintings or pictures or they can be original creations that only have a digital copy. Fungibles are assets that can be interchanged. For example, a dollar can be interchanged into four quarters. Non-fungibility means that it has unique qualities that cannot be exchanged or replicated
Cryptocurrencies are different from NFTs as they are fungible. Each NFT is a digital certificate, also called a token, stored on a blockchain. NFTs can all be distinguished from one another, and all contain ownership details within them. They are bought and sold using cryptocurrencies applicable to a particular blockchain.
Blockchains are distributed databases that are shared within parts of computer networks. Within cryptocurrencies, they maintain and keep records of transactions. This ensures that no one can forge records of transactions. They guarantee the security of data and reduce the need for a third-party source to maintain security. They store data in blocks, which are linked together via cryptography.
Cryptography is a way to protect and secure information through codes. This ensures that only the people the data is intended for can access it. Most NFTs are part of the Ethereum blockchain. Ethereum is a type of cryptocurrency whose blockchains work to support NFTs. Other types of blockchains such as FLOW and Bitcoin Cash also support them.
NFTs are created through a process called minting, which is where a digital file is turned into a digital asset or an Ethereum blockchain.
Their Purpose and Popularity
There are different types of people who use NFTs, such as artists, buyers, and collectors. Artists can create digital art and sell it in a new, unique way. This way, buyers are able to support artists financially as well as gain rights to digital art. Collectors buy and sell the NFTs when their value is high and make a profit.
The main point of NFTs is to be able to sell digital art so that the artwork remains authentic, and is easily verifiable. This means that others besides the one who has bought it cannot claim it. A point repeatedly brought up regarding NFTs is that anyone can screenshot the image and thus, have a copy. Due to this, many do not see the reasoning or point behind NFTs.
However, even if someone screenshots the image, only the owner of the token will have the original copy. Another big reason people buy NFTs is simply that they are able to. Many financially well-off people buy them as a status symbol.
NFTs have been around since 2014 but gained immense popularity in 2021. Their breakthrough occurred when artist Mike Winkelmann sold an NFT titled Everydays: The First 5,000 Days (2021) for $69 million. Because a prestigious auction house had sold the NFT, it gained credibility and many began to dive into the world of NFTs.
Issues with NFTs
The main issue associated with NFTs is their environmental impact as their production is associated with significant greenhouse gas emissions. Most NFTs are produced, sold, and bought in the blockchain Ethereum. Ethereum is notoriously inefficient due to the large amounts of energy consumed.
Ethereum is made on a “proof of work” system, which consumes large amounts of energy. This system is one in which the computers on the networks, also referred to as miners, work to be the first to solve a complex problem. Miners have to work to generate a hash, which is a long string of characters to meet the needed hash for that specific block. The first one to successfully solve it collects what are referred to as gas fees associated with the transaction on the block.
As Ethereum prices increase, so do the fees and rewards associated with each proof of work. This incentivizes miners to work harder to solve the problems which use up large amounts of energy and electricity. Ethereum prices increase due to their efficiency in terms of not requiring any third-party source. This incentivizes developers to use it more often than other blockchains which increase its popularity and market value.
This results in large amounts of greenhouse gasses being emitted, which plays a major role in harming the environment and contributing to climate change. This issue is what deters many from participating in the buying and selling of NFTs.
It will take more time to determine whether NFTs are here to stay or if they are a temporary phenomenon. However, the problems associated with them are significant and should be resolved so that independent artists can continue to benefit and share their art in a unique way.
Edited by Barbara Amona Purdie