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Understanding NFTs

By Ali Hyder

NFT is an acronym for Non-Fungible Token. When an asset is fungible, it can be interchanged with other assets or goods of the same type. For example, a twenty- rupee note is fungible because it can be replaced with two ten-rupee notes. A non- fungible asset means that the asset is one of a kind and it has unique properties so no other asset can be replaced in its stead. Just like The Starry Night by Van Gogh is non fungible.

NFTs for the most part belong to the same category as art. Some artworks are worth millions and are carefully placed in bullet proof cases. Even large-scale heists take place only so that people can get their hands on a painting. At the same time other paintings are worth next to nothing. People often say, one needs an ‘advanced level of intellect’ to appreciate art but I am not very convinced by that statement ever since I saw the following painting sell for a whopping $84.2 million dollars.

The only reason NFTs make the news is because it's a recent phenomenon and is based on blockchain technology. The same technology that made crypto-currencies like bitcoin. Think of NFTs as a digital form of art and then probably it won’t seem too crazy that a virtual real estate plot recently sold for close to a million dollars (It is located in the virtual blockchain based world called ‘Decentraland’).

Getting up to speed with Blockchain

Naturally, we first need to understand exactly how blockchain technology works before seeing how NFTs incorporate the same. Contrary to most laymen’s belief, blockchain is actually a pretty simple tool. It is merely a unique type of database (A database stores large quantities of data). Just like excel is a type of database thatstores data in rows and columns, blockchain stores data in the form of blocks and chains.
Blocks are the units that actually store the data while the chain simply connects the blocks to each other. These blocks must be arranged in the order of their formation. As new data is received, it is stored in a block and connected to the blockchain. Every block has a hash (a unique code) and also has the hash of the previous block. This way all blocks are chained together and changing a single block would mean having to change every single following block in the chain because the hash would no longer match. The process of creating a new block of data and adding it to the chain is called mining. Almost any type of data can be stored inside a block but the most prominent are ledger transactions (A ledger is a collection of transactions under particular heads e.g.: Cash, purchases, sales etc).

How do NFTs use blockchain technology?
For Bitcoin, the information stored in the blocks is a list of transactions, but it is possible to input various other types of data. The vote count of political candidates, smart contracts, medical records but in the case of NFTs digital art is not exactly stored inside the block (the size of digital arts is too big). Instead, a simple link is stored in the block that will redirect the person who clicks on that link to the digital art. But the silly thing about NFTs is that since they are based on digital assets, the same digital asset can be copied as many times as you want. For example, the Crossroad video sold by Beeple as an NFT for $6.6 million can be downloaded for free as many times as you want. The only thing you purchase while purchasing an NFT is its ownership. It’s like buying the original copy or the autographed one.

The Pros.

NFTs enable artists to get paid for digital art that they have created. They no longer have to ask for credits or subscriptions, they can simply sell the art and a collector or enthusiast will buy it. Now, the owner of the NFT doesn’t get a copyright but only the ‘ownership’. Several artists have made a living off of the NFT craze. NFTs allow valuation of digital art by the idea of demand and supply. Even though they don’t have any financial intrinsic value, the perception of value is enough to create a demand.

The Cons.

NFTs, like the dot com, are just a bubble. Almost everyone accepts that this market is speculative and NFTs are in a practical sense worthless. Why spend a million dollars to watch something you can watch for free? But nobody buys NFTs with the intention of making a profit from them (or at least I hope they don’t). NFTs also face a lot of backlashes because of the environmental impact it has since mining blocks in a blockchain requires immense computing power which requires electricity which is generated by using natural resources. The amount of energy used in mining the Ethereum blockchain is equal to the energy usage of Serbia. It is mind blowing to see something virtual and essentially worthless have a drastic impact on the real world.

NFTs in the Gaming industry

Another virtual but booming environment is gaming. It is not uncommon to hear virtual items like skins and weapons sell for hundreds of thousands of dollars. In fact, many gamers buy skins that simply change how a weapon or character looks and has no real impact on the performance. NFTs can now be used by creators of skins and items to sell them to enthusiasts of the game. Virtual property like worlds made by players in building games like Minecraft and Cities: Skylines can also be sold as NFTs. NFTs also make it possible touse a skin across different games. Enjin is one amongst many gaming platforms that enables users to trade their in-game accessories and collectibles and also use it across different games. Theplatform uses Enjin coin as its cryptocurrency.

NFTs in India

India’s biggest cryptocurrency exchange platform WazirX launched the first NFT marketplace in India. It allows Indian creators to add digital art to their crypto wallet as an NFT and sell it using a smart contract. This smart contract gets automatically executed when a payment confirmation is received. The artists can decide whether they wish to transfer copyrights and royalty to the buying party. There is no legal framework specially designed for NFTs in India so concerned individuals will have to follow the Indian Contract Act for sale and purchase of goods to make sure no forbidden practice takes place.

Conclusion The NFT craze is not rational. Physical art for once has a significant difference between original copies and the duplicate ones. Digital art however is exactly like the original. There is no sense in buying a digital art except to support an artist you like or just for bragging rights. Despite that, NFTs in my opinion, will remain popular for a long time because humans don’t care about rationality most of the time. Is it rational to climb Mount Everest or memorise the value of pi up to a hundred decimal places? Is it rational to have a world record for the greatest number of eggs balanced in one hand? It’s not! But we humans do it all the time. Some things just seem to slip into the realm of stupidity and NFTs are probably one of them. Sources

Luke Conway (June 1, 2021) Blockchain Explained
Retrieved from:

Simply Explained (November 14, 2017) How does a blockchain work - Simply Explained
Retrieved from: March 2021, what are NFTs and why are some worth millions?
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How NFTs can disrupt gaming
Retrieved from: Abhinav Kaul & Neil Borate (8 April 2021)

Non fungible tokens are now in India but mind the legal pitfalls
Retrieved from mind-the-legal-pitfalls-11617557315927.html

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