Science

The rise of the mysterious new crypto craze: NFTs

by Ayush Raj (’23) | May 10, 2021

In 2006, Jack Dorsey, founder and CEO of Twitter, made his first tweet. In March of 2021, he put up the same tweet for sale, and the CEO of a Malaysian Blockchain company purchased it for almost three million dollars. In case you are wondering how such a sale even exists, let alone how it works, you are not alone. 

With the purchase of Dorsey’s tweet, the Malaysian CEO became the owner of an NFT or Non-Fungible Token. According to the New York Times, an NFT is a new kind of digital collectible item stamped with a unique bit of code that serves as a permanent record of its authenticity and is stored on a blockchain—the distributed ledger system that underlies bitcoin and other cryptocurrencies. It is a unique proof of ownership over something that one cannot hold in his/her hand, such as Dorsey’s first tweet, digital art, a video clip, or maybe a digital coupon. 

To understand NFTs, it helps to know about digital currency. In simplest terms, digital currency is a type of money. Varieties include Bitcoin and Dogecoin; they can be stored online in an account, on a USB drive, or even on your phone. Bitcoin, for example, uses blockchain, a special type of database where information is stored in groups or blocks with a storage capacity. Once filled, a block is chained to a previously filled block to form a “blockchain.” Blockchain uses highly sophisticated cryptography to ensure its authenticity. 

When it comes to the virtual realm, it is easy to pirate objects. For example, anyone can take a screenshot of a copyrighted photo, and it is almost impossible to tell the difference between the original digital photo and the copied one. Enter NFTs. They are the marriage of the world’s digital assets and the security of cryptocurrency. Buying an NFT means that public ownership of a digital object is hacker-resistant. Like Bitcoin, NFTs rely on blockchain technology for their authenticity.

NFTs are unique cryptographic tokens that cannot be replicated. Unlike Bitcoin, they are not interchangeable, meaning they cannot be swapped, and therefore, the name “non-fungible.” A $10 bill can be swapped for two $5 bills. That makes it fungible. However, an NFT is one of a kind. 

One of the first examples of NFTs was Cryptopunks, created in 2017. Cryptopunks are 10,000 unique collectible characters with proof of ownership blockchain. What was started by the creators as a brainstorm for a video game ultimately turned into the basis for the CryptoArt craze. One Cryptopunk (#7804) recently sold this year for $7.57 million.

Why are NFTs popular now? Vivian Fang, an accounting professor at the University of Minnesota’s Carlson School of Management, believes that the pandemic forced the world to become creative in the digital space. Everyone from artists to professional sports leagues had to find new ways to market their products and collectibles to their fans. Even Topps, the baseball card maker, is getting into NFTs, offering digital collectibles. 

While it is nice that Dorsey donated the money he received from selling his first tweet to charity, NFTs are not for everyone. Although some investors are betting big on it, if the hype dies down (and it could at any time), the value of an NFT could drop just as easily as any stock. So, even if you have some money to burn, think twice before investing in an NFT.

Categories: Science

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