What Are NFTs and Why Do They Matter?

by Pranav Ramesh
March 15, 2022

Baseball cards. Paintings. Human hair. Plants. Cookie Jars. Dolls. Sculptures. If you’ve ever noticed, people collect many different types of items. Some of the things people collect are incredibly valuable. Others…not so much. And not only do humans collect some eccentric items, but we tend to build communities of like-minded people based on what we collect.  

NFTs (non-fungible tokens) can be added to that list as one of the newest things people collect, even though they’re not “physical” things. NFTs have been garnering a lot of attention lately, in part because of the astronomical sale prices some have fetched, but also because of the buzz around NFT marketplaces and all the potential that lies within.  

Are you looking to educate yourself about them? Let’s learn more about NFTs to see if collecting them, or investing in them, could make sense for you.   

What is an NFT? 

NFTs are one-of-a-kind digital assets (often artwork, but increasingly collectibles, event tickets, and even tweets) that exist entirely in the virtual realm. NFTs, a wholly digital commodity, are not interchangeable (hence non-fungible) which means they are totally unique. This is unlike paper bills and other cryptocurrencies, which have unique markers to identify them, but identical functionality. 

Pieces exchanged in NFT marketplaces are usually organized into sets that share some similarities. These sets, or collections, can vary wildly in substance, from collectible trading cards to art pieces to virtual spaces in online games. One study of the NFT revolution categorized collections into six types: Art, Collectible, Games, Metaverse, Other, and Utility. 

Why do NFTs have value while other digital assets don’t? 

NFTs have revolutionized the market for digital assets because of their ability to guarantee ownership of a digital piece. Think about the value of a physical piece of art, say a Monet or a Murakami or a Kahlo without any provenance associated with it. The provenance of a piece is that crucial bit of information detailing, generally, who created the piece and serves as a record of ownership used as a guide to the piece’s authenticity. Who would willingly purchase a piece of art without the ability to prove authenticity and ownership? It’s not just high-end art that values authenticity and provenance. Even used cars have increased selling value when their history and provenance can be authenticated! 

Before NFTs, there was no way to determine who owned a piece of digital art from someone who downloaded a copy of the file to their computer. We know a basic principle of markets is they can’t operate without clear rights of ownership. In order to have a functioning market, and for someone to buy a product, it needs to be clear who has the right to sell that product. And once sold to a new “owner” there needs to be able to be something that can confirm a transfer of ownership from the person selling the product to the buyer/new owner. NFTs created a market because they give the seller and buyer something that represents ownership.   

This is feasible because NFTs are stored on blockchains, which are essentially digital ledgers of transactions that are duplicated and distributed across the entire network of computer systems on the blockchain. Blockchains allow for the ability to prove who owns any given NFT at any time and can trace the history of previous ownership, much like provenance for physical art. Or a used car. 

Another reason for the popularity of the NFT marketplace is that it’s easy to transfer NFTs between different people. It’s revolutionary that, for the first time, ownership of a digital asset is easy for consumers to certify and transfer. This allows for the possibility of outfitting NFTs with other facets that can extend their purpose as time goes on.   

Ownership of NFTs allows for people to have access to special perks in both the physical and digital world. We’re starting to see NFTs function as a sort of membership or a ticket, providing access to exclusive events, physical and virtual merchandise, and discounts. It’s also feasible for creators to send other products to anyone who owns an NFT already. These benefits give NFT owners a sense of community and provide creators an easy way to connect with consumers, build a community and develop a brand. 

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Can NFTs be considered a secure investment? 

As with any new technology, currency, or community, there are risks associated with purchasing or investing. Questions naturally arise about the safety of something so new, intangible, and unregulated. Just how secure are NFTs? Are NFT marketplaces vulnerable to hackers? 

Unfortunately, but not unsurprisingly, that answer is already a resounding yes. One cybersecurity threat involved hackers compromising several user accounts within one NFT marketplace. They were able to transfer the already purchased NFTs from the owner’s account and purchased new NFTs with payment cards on file in the digital wallet.  

Another threat is the potential of email scams. Hackers send emails notifying users that their accounts have registered suspicious activity. The email instructs the account holder to open the attachment and verify their account with the login and password. If this is done, the hacker then has access to the account- similar to other email scams run on different platforms.  

The best security for NFT owners is to make certain they have multi-factor authentication (MFA) enabled. In addition to MFA, users shouldn’t be lax with their password protection. Creating a password of sufficient complexity that is not used for other accounts can help protect your virtual assets. 

Likely, the most valuable functions of NFT marketplaces haven’t been developed yet. Is this a chance to get in on the bottom floor of a completely new tech trend? Or should you sit back and see just how integrated NFTs become into mainstream markets? Get started by researching different NFT marketplaces to see if getting involved makes sense for you.  

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