Now that the subject of cryptocurrency has entered the zeitgeist of Malaysia’s financial technology culture, one hot related topic is artists and their use of Non-Fungible Tokens (NFTs).
NFTs are best described as pieces of art or visual records that are stored as digital assets using blockchain technology. An NFT is a unique cryptocurrency that can be anything digital – including art, GIFs, music or even real estate – that is tokenised. For the uninitiated, to “tokenise” is to turn meaningful data, such as an account number, into a random string of characters that has no meaningful value if breached.
When you purchase an NFT, your ownership is certified by the blockchain, which is essentially a system of recording information that is transparent and is difficult or impossible to manipulate. While others may be able to appreciate the artwork, you are the only one who has the certificate of originality.
Artists and followers can build a more formal relationship through NFTs, but the technology itself has several pros and cons.
Pros
1. Uniqueness
When someone buys an NFT, they get ownership of a one-of-a-kind token that exists exclusively on the blockchain. NFTs provide a channel through which items such as art pieces can be tokenised and owned virtually, preventing duplication and limiting ownership. This, in turn, produces scarcity and, consequently, value for the artwork.
2. More liquidity
When assets are tokenised, investors have more control over them. Ownership rights of assets – virtual assets, financial instruments, physical assets and even physical real estate – can be converted into digital tokens. For example, TechCrunch founder Michael Arrington is selling his Kiev apartment as a prime collectible asset with digital ownership rights. This could be the beginning of many more real-estate-related NFT transactions.
3. Potential for growth and development
NFTs can help certain sectors grow and thrive. In real estate, for example, owning and controlling virtual land gives you the authority to choose what you want to do with your land, and tying NFTs to land pieces has shown significant promise for growth and development. You have the option of renting it out, establishing a stable and secure business for advertising, or selling it online.
Cons
1. Sustainability
The question of sustainability has dominated the NFT and crypto scenes. NFTs are linked to greenhouse gas emissions because they are mostly bought and sold on Ethereum-based marketplaces like Nifty Gateway and SuperRare.
Ethereum, like most major cryptocurrencies, is based on a technique known as “proof of work”, which consumes a lot of energy. On Ethereum, there is a cost for completing a transaction, which is humorously referred to as “gas.”
The sale of Canadian music artist Grimes’ NFT collection of short films is one of the most highly discussed cryptoart transactions in recent times. The videos fetched a whopping US$6 million (RM25 million) and utilised as much energy as an average inhabitant of the EU would in over three decades. This presents a critical concern about their environmental impact.
2. Ownership rights
As NFTs have gotten more prominent, the music industry has become a battleground due to the complicated matter of copyright.
Artists have initiated legal action against the purchasers of NFT-related songs. The most typical defence offered by sellers is that they are selling the experience of owning the original version of the song, rather than the ownership rights themselves.
3. The speculation bubble
A significant threat to the long-term viability of NFTs is the belief that the technology is nothing more than a speculative bubble.
Many financial leaders suspect that it will shortly drop in popularity, while some have compared it to other blue-chip phenomena, which do well for a while but then fade away.
Artistic value and the NFT
As confusing as it may seem, NFTs can be likened to fine-art pieces that hang in physical galleries. There is no intrinsic value except for what is subjectively decided by the viewers of the art.
NFTs are being created at massive volume by countless people around the world, but not many of them will be considered as important or noteworthy as they expect down the line. The NFT pieces that stand the test of time are produced by famous artists, celebrities and other influential figures who have weight to add behind that perceived value.
In the end, NFTs, cryptocurrencies and all derivatives stemming from the blockchain technology revolution are filled with promise and potential. These concepts, however, may be too new and too bolstered by hype to see the true extent of their value.
This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.