NFTs: What is a Non-Fungible Token?

In recent headlines, you may have been hearing a lot about crypto currencies and NFTs. NFTs are the newest trend sweeping through the world of art collectors. But many are still left puzzled as to what an NFT actually is. In today’s blog, we break down the basic of NFTs and discuss whether they’re a worthy investment.

What is an NFT?

NFT stands for non-fungible token. This digital token is a digital ledger (blockchain) full of data that proves the originality of a digital good, similar to a piece of paper that provides proof of authenticity for a piece of artwork along with the history of previous owners (or provenance). The difference is that NFTs are all digital. They are backed by the crypto currency Ethereum, which is currently the highest priced crypto currency after Bitcoin.

NFTs are really taking off because now people can buy a digital item such as a song, gif, photo, digital art creation, or video, and prove that they hold ownership of the very first and unique file. When it comes to digital files, there are a lot of fraud and copyright issues at play. Many people can right-click to save an image that they see online, download it as their own, or take a screenshot. While this can still happen when a collector owns an NFT, the ownership doesn’t transfer when someone “copies” a piece of art. Many people are comparing it to the difference between owning an original painting on a canvas versus a mass-produced print or photo of the artwork. In this example, the NFT would be the original canvas panting.

What are the Pros and Cons of NFTs?

As you may expect, there are pros and cons of owning NFTs that can be unique to these digital forms of artwork.

  • The value of the purchased artwork can go up and down, so years down the road your investment may or may not be worth your initial purchase price.
  • Contracts can be written into the blockchain so that the original creator may receive funds in a set amount or percentage for all future transactions of ownership.
  • If the server holding your NFT goes down, your artwork may be lost. Although you “own” the NFT, in order to view it you must click a link to the location where it is being hosted.
  • When buying original pieces, it can be difficult to verify you’re buying from the original artist. Similar to buying anything online, there are people who sell merchandise and designs from other artists and pretend that they are their own unique work.
  • NFTs play a part in the environmental problems caused by mining crypto. They take up a lot of computing power and physical storage that may have an impact on climate change.

If you or someone you know is an avid art collector, NFTs may be a good investment for them. NFTs are still new to market and may become more mainstream down the road. We have already seen high-valued auctions for NFT basketball “cards,” Kings of Leon auctioned an NFT album that sold for $2 million, and music artist Grimes sold an NFT digital art piece valued at $6 million.

Perhaps insurance options for NFTs will be a topic in the future as well as what happens if the server hosting your NFT goes down or you find out the piece you bought wasn’t from the original artist? What are your thoughts on NFTs? Let us know in the comments below!

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