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What is value? how does one simply define it? for example, a car could be worth a certain amount but for a person who has driven it for his entire life, that car has an immeasurable amount of value we call sentimental value. But this value is not the same for everyone thus it is not a value everyone agrees on, so does true value come if everyone accepts it at a certain amount?
Now the above paragraph may appear to be rather abstract but do not worry as it will all tie in together later on, as of now let’s first focus on the main topic, NFTs…. What are they? Well, they called Non-fungible tokens, but to understand it we need to split the words and understand what they mean!
Non-Fungible:
Fungible, in business lingo, means exchangeable, so non-fungible means non-exchangeable or unique. For instance, a normal pencil is mass-produced. Millions of copies exist in the world and their value remains the same, let's make that 1$ as an estimate. So one pencil is worth 1$. And every other pencil is also worth 1$ and if you wanted to exchange any of the pencils for another, the value would remain the same. This is called being fungible. If the same pencil were to be used by a celebrity, suddenly the value of that pencil is not the same as the rest of the pencils as only one of them exists. Thus making it non-fungible or unique. So to sum up, Anything that is unique and non-replaceable.
Block-Chain
The other word of NFT is token, but to understand what a token is, we need to delve into the fascinating world of blockchain technology.
A transaction between two parties is quite simple when a transaction between two parties happens through a debit card, the bank checks if the required amount of money exists with the giver and approves of the transaction, then the receiver's bank receives the confirmation and adds the amount to his account. Since this transaction has been made via the bank, the bank has a record of the transaction that is stored in the bank's ledger accounts. This is the job of the banks but simplified! To keep a record of everyone's transactions and make sure the process is done smoothly.
Now, what if the banks were removed from this entire transaction? What if instead of the banks, there was a decentralized network of computers around the globe that had a ledger of everyone's account, keeping track of every transaction. That way any transaction made in this system is public. This is the basics of blockchain. A decentralized way of handling transactions.
Now, this is where the token comes in, let's take the previous pencil example, anyone were to buy a pencil that was used by some celebrity. You can prove the ownership of that item because it has a physical presence. What if that item instead of a pencil, was a digital image? A tweet? A movie clip? That. is called an NFT, a legitimate way to prove the ownership of digital media. A token is a sort of currency used in blockchain for NFTs. When an NFT is bought by an individual, the blockchain only checks if that individual has the required amount with him, with which digital ownership is transferred via a token. Now the legitimacy of this transaction is proved because of the nature of blockchain being public, since the transaction itself was public, it cannot be erased thus no one can prove otherwise. That is how NFTs work.
(This Nyan Cat image was sold to a user identified only by a cryptocurrency wallet number. The price? Roughly $580,000)
The principle of human scarcity:
While this all sounds good, what is the need and drive for these simple images being sold for millions of dollars? It sounds ridiculous in hindsight to imagine pictures that do not even exist in real life, being sold for millions of dollars. But in reality, that is what's happening and it all relies on the fundamental principle of human scarcity. Once something is scarce, there is a demand for it. And this way of proving ownership over historically significant internet images happens to be a rare commodity as it's new. Thus there is a sprawling market that people want to invest in. Once something becomes popular, demand for it follows suit.
The reality check:
So what's the final verdict? Well like everything else in life, this is a double-edged sword. Digital artists struggle to legitimize their work in meaningful ways, digital art can easily be stolen with a simple right-click, NFTs are exactly what digital artists need to prove their work is original. But the downside to this is its popularity and hype surrounding it. More than deserving artists exist opportunistic businessmen who see this hype as nothing more than as a side business venture and make money off it. It is important to see through this hype and see the true value. At the start of the blog, the importance and understanding of value were questioned, for its value is inherent in the people who perceive it to be. Right now the value of NFTs is greatly bloated beyond proportion because people perceive it as that. We need to understand this and let the dust settle. --- Sai Charan