5 Common Misconceptions about Non-Fungible Tokens (NFTs)
Not only did Collins Dictionary select “NFT,” the more frequently used abbreviated version for Non-Fungible Token, as word of the year, but it was also one of the most searched words in 2021. However, being one of the buzziest words in the mainstream media does come with its repercussions- more specifically, the rise of misconceptions. Let’s debunk five common misconceptions about NFTs and clarify the truths to better understand the potential value and utility of NFTs.
1. NFT is a blockchain or a type of cryptocurrency.
Truth: NFTs are neither a blockchain nor a cryptocurrency.
People often think this because conversations about blockchain or cryptocurrencies like bitcoin usually include the term ‘NFT.’ Although NFTs are essentially different from blockchain or cryptocurrencies, NFTs are closely related to both notions. Learn more about what an NFT is and the potential applications of NFTs in this article.
NFTs utilize blockchain technology to produce an immutable proof of ownership. Blockchain is a disruptive technology for storing, processing, and conveying immutable information across a network. Think of blockchain as any other technology utilized to store, process, and convey information, such as the internet or email.
NFTs and cryptocurrencies are fundamentally different assets.
Although they both utilize blockchain technology, there is a fundamental distinction between the two assets: fungibility. Non-fungible means something is indivisible, irreplaceable, and has an unique value. A painting of the Mona Lisa is one example of a non-fungible asset because there can’t be another identical painting with the same qualities. Similarly, non-fungible tokens can also represent a unique physical or digital asset, such as digital artwork or intellectual property.
On the other hand, cryptocurrencies are fungible in nature, meaning they are divisible, interchangeable, and non-unique. For example, regardless of when or where it was created, one bitcoin is worth one bitcoin. Another example of a fungible asset is fiat currency (cash). A one dollar bill in Los Angeles is worth the same as a one dollar bill in San Francisco.
2. NFTs have zero utility and are worthless.
Truth: A NFT’s true utility comes from its underlying blockchain technology that enables the ownership, transparency, and security of digital assets. Furthermore, a NFT’s true value lies in its provenance.
The current uses for NFTs have sparked discussions questioning the utility and value of NFTs–more specifically in regards to digital artwork, avatars, and collectibles. When the majority of people think about NFTs, they think of aesthetically strange digital avatars used as profile photos on social media profiles or meme art pieces being sold for millions of dollars. However, even NFT art and avatars show the potential utility and value of NFTs.
NFTs allow artists to easily monetize their work without a third party.
They can do this by minting their artwork as NFTs to sell directly on NFT marketplaces like OpenSea. If you are contemplating which wallets to use to hold your NFTs or other crypto assets, take a look at FiO’s selection for the four best NFT wallets. This provides artists with new revenue streams from an untapped market. Additionally, traditional artists can now explore new digital mediums to express their artistic vision. Now, you may be thinking: NFTs are just digital image files. What stops people from copying the image from the internet and selling it as their own? Doesn’t the original NFT artwork become worthless? This is where blockchain technology is able to help. Each NFT has provenance via its record of ownership and transactions on the blockchain, making the artwork unique and valuable.
Digital avatars on social media profiles, like the Bored Ape Yacht Club NFTs, are another popular application for NFTs. Celebrities, entertainers, and crypto enthusiasts purchase these trendy NFT avatars and use them as profile photos on social media. From an outsider’s perspective, it may all seem a bit silly. However, from an ownership perspective, the avatars are access keys to exclusive events, offers, and promotions, ultimately providing more value than just their aesthetics. Essentially, whoever owns those NFTs are members of an exclusive community.
Aside from artwork and digital avatars, NFTs have various other use cases, including but not limited to, collectibles, online ticketing, and document verification.
3. NFTs are a scam/get-rich-quick-scheme.
Truth: NFTs themselves are not scams or get-rich-quick-schemes; however, there are many crooks who are luring in and scamming people with hopes of using NFTs to become rich.
NFTs, in addition to other crypto assets, are unfortunately associated with scams such as phishing and ponzi schemes. These scams have unfairly given NFTs a terrible reputation in the mainstream media, despite the existence of positive use cases for NFTs. It is true that NFTs can be used to scam people, but this could be said for any predecessor technology. Con artists have created scams created for phones, emails, and the internet even before blockchain and NFTs.
NFTs have also been largely associated with digital art and other digital media (e.g. tweets, meme gifs). Some of these NFT-minted pieces have been sold for hundreds of thousands to millions of dollars. It gives the impression that anyone can create a piece of digital art and quickly sell it for large sums of money as well. However, this is not the case.
It is significantly difficult for anyone to create an artwork, mint it as an NFT, give it a high price tag, and sell it for thousands of dollars. Minting an NFT doesn’t automatically make something valuable. The value will not increase if it was not valuable before minted into an NFT. In most cases, artists who have successfully sold their artwork as NFTs have already been established with a preexisting fanbase and recognition in the industry. Their cultural significance is directly related to the value of other digital media, such as tweets and meme gifs.
4. NFTs are harmful to the environment.
Truth: This is not entirely correct. NFTs can have a significant negative environmental impact when minted using more energy-intensive consensus mechanisms like Proof of Work (PoW).
The Ethereum blockchain executes the majority of NFT transactions. NFT transactions on the Ethereum blockchain consume considerable amounts of energy, contributing to carbon emissions, because Ethereum uses a PoW consensus mechanism. Therefore, it’s easy to think more blockchain transactions and more minted NFTs are harmful to the environment. However, this is not true. The real issue is the PoW consensus mechanism used to process transactions and mint NFTs.
Fortunately, Proof of Work blockchains like Bitcoin and Ethereum only make up a small percentage of all blockchain activity. There is hope. NFT artists and blockchain industry leaders are pushing for more sustainability. Alternative methods that have been suggested are “off-chain” transactions using an additional transaction layer, renewable energy, or less-energy intensive blockchains like Algorand and Tezos with Proof of Stake (PoS) protocols. Using these alternatives, NFTs can significantly reduce environmental impact.
5. NFTs are difficult to understand.
Truth: In the beginning, the notion of NFTs may seem complicated and daunting. But once one looks past the current trends and rudimentary use cases of NFTs, and views it from a fundamental perspective, one can understand how transformative the technology can be.
Think of NFTs as a way to prove official ownership of digital assets, similar to how a property deed enables ownership of a home or a copyright enables ownership of an artwork.
As mentioned earlier, blockchain technology is the driving force behind an NFT’s true utility and value to enable security, transparency, authenticated ownership, and provenance.
Before NFTs, it was difficult to own the rights to digital assets due to a lack of security, transparency, authenticity of ownership, and provenance. Through the use of NFTs,
- Immutability of transaction records or the ownership of an asset addresses the lack of security
- Visible transactions with a token’s unique serial ID number addresses the lack of transparency
- Confirmation of transactions and ownership on the blockchain addresses the lack of authenticity and provenance
Lastly, NFTs are here to stay. From the arts and media to education to ticketing, various industries are already seeing the potential applications and implementing NFTs to create more opportunities. To stay educated, there are many resources on the internet to learn more about NFTs. For example, check out FiO’s NFT Creator if interested in learning about how to mint a NFT. It simplifies the minting process, so that anyone can create their own NFT.