Unless you are living under a rock, you might have heard about the new digital ledger, the Non-fungible token, or NFT. The new digital currency has made headlines for allowing some lucky individuals to become rich by converting certain data into NFTs. Despite its rather recent rise in popularity, NFT is actually created long before the year 2021. The ledger was actually originally presented at the Seven on Seven conference back in 2014. The ledger was originally coined “ Bitcoin 2.0,” and does have a potential to become that.
Though this new currency has been around for a while, there are a few reasons for its recent rise in popularity. Firstly, the format is relatively new and volatile. Volatile markets such as these in a capitalist economy always equate to the same thing,
high risk, high reward.
While we are certainly hearing a lot about success stories found with NFT, it is important to remember that at the end of the day it is essentially an expiremental cryptocurrency that has a few key differences from other cryptocurrencies. So what exactly is an NFT, and is it worth watching for investment?
In order to understand NFTs, as well as the lot of other ledgers in the world of cryptocurrency, we first need a solid foundational understanding of blockchain. The name blockchain refers to a growing list of records, the blocks, that are chained together using some sort of encryption. The unique thing about blockchain technologies is that they are virtual ledgers that use a universal unique identifier to be owned. These identifiers are called hashes, and they are what you technically own whenever you own a Bitcoin.
For a metaphorical look at what that might mean, imagine you have a one dollar bill. However, the one dollar bill happens to be magical, and you may spend the dollar wherever and whenever you want completely anonymously. Every piece of U.S. currency has a serial number, and that serial number is what your magical one dollar bill uses to be identified when you decide to spend it. On U.S. currency, this serial number is printed on the upper right hand corner and bottom left hand corner of the hem decorating the edges.
On paper, this sounds like it would be something that is incredibly easy to create yourself — I mean a simple hash seems easy to mimic, so why do we not all just create a bunch of hashes and all be millionaires? This is where the chain for the blocks come in. The chain is the block’s connection to the previous hash. The block firstly contains the previous block’s hash, allowing it to be verified in a proper place of chains and blocks. The block also contains a timestamp. This timestamp is used to guarantee authenticity, as if your ledger were to contain the a hash from a block that was created after your ledger, then it is likely that it is fake. Furthermore, each block is created consecutively with a certain amount of time in between, meaning that if your block’s timestamp is not precisely that time away from the other block’s timestamp, then it is not authentic.
Adding to the security of this type of ledger, these hashes are not viewable — and extremely long. This is where the name encryption comes from, as these blockchain ledger’s hashes are highly encrypted, meaning that they cannot be seen. This also creates an obvious question of volatility in the case of a production server outage, for example. There might be concerns of hashes being invalidated due to a gap in epoch time.
Back to NFTs…
Now that we understand blockchain technology at its core, we can start to understand what an NFT actually is. NFTs of course follow the same concept as other cryptocurrencies such as Bitcoin or Ethereum, but instead of being arbitrary hashes that represent some sort of value, the NFT hashes are more like certifications of digital assets that are unique and cannot be duplicated. Therefore, it makes sense that art pieces, music, and movies have all been converted into NFT hashes that represent their value.
A unique aspect to NFTs is that there ownership almost acts as a copyright hold on an asset. When purchasing an NFT, you are purchasing the legal right to the original inception of the NFT version of that piece. In other words, you will be the only person in the world that has the hash block of that digital medium that is chained to the block before it.
So are NFTs worth your time? More importantly are they worth your investment? The answer to those questions both depend on who you are and what you have to offer for the blockchain currency. In order to truly NFT something, it needs to have some sort of original value, otherwise it is just a digital hash that does not really mean anything.
It is also worth noting that the NFT market is incredibly volatile, and is likely to stay that way for a few years before stabilizing. That being said, a simple analysis of some data on cryptocurrency will quickly reveal that blockchain currency can only get so stable before becoming volatile again. Of course, the volatility is at its peak whenever the market is new and unsaturated, as it is now. With this volatility, however, does come the reward factor. As I touched on in the introduction, volatile markets are most certainly very profitable — but it is a gamble. Investment is likely going to require you to buy some sort of NFT, for example if you wanted to buy the Mona Lisa’s NFT, it would be like buying the Mona Lisa at a 600-percent markup.
NFTs are definitely a cool and emerging blockchain format. With that exciting and cutting edge factor, however, comes a lot of concerns with volatility. If the currency ends up stabilizing at a high-exchange rate, there could be profit yields into the thousands and even millions, even for NFTs with lower value. The investment of NFT is going to pan out only if the value of the blocks becomes higher, and given how the technology has soared in popularity in the past few months — I consider likely to crash. Not to say that NFT is going to be a total flop, but it is likely that right now is the worst possible time to invest in NFTs, because as demand goes up in the general public, which has certainly happened given all of the news stories of celebrities and artists striking gold, so will the inflation of the exchange rate between these tokens and U.S. dollars. As this excitement then settles down, so will the inflation of the exchange rate between these tokens and U.S. dollars. I hope this article was helpful in teaching a little bit about technology and blockchain! I would love to do a Data Science project using Bitcoin’s time-series data as a model to predict the rise and falls of the NFT currency. Thank you very much for reading!