NFTs are not the only Bridal partySeptember 30, 2021
The craze for NFTs or non-fungible tokens, which are nothing but digitalised assets of anything from drawings, art, music to even a hypothetical brain download made into an AI, has taken everyone by surprise. This is yet another example of retail investors expressing their desire for innovative assets; newer forms of digital assets in this case.
A Reuters report pegged the collective volume of the NFT sales in the first half of this year at well above $2.5 billion and it is now clocking $1.24 billion a quarter with 10,000 to 20,000 new accounts being created every week.
Indian investors are also joining the party. According to a report by
The Economic Times, WazirX sold over 160 pieces of digital art in just one month after the launch of its NFT marketplace. NFTs have piqued the interest of the new-age collectors as well as artists, who now think they will have a wider market base to sell their products.
But what is an NFT? What is one really buying? And what does one need to know before buying? Is NFT the only token? Let’s understand NFTs and tokens in general, a little better.
What is a Token?
We have all used physical tokens in stores or theme parks. We pay some money and that is ‘represented’ through the token. That token represents your right to be served in a queue. Similarly, in the cryptoverse, tokens are a piece of code that only you have the password to and represents a certain record on a certain blockchain. This token is your ‘proof’ that you have the ownership of a particular record on that blockchain. You can transfer it to someone (from your wallet to someone’s wallet) and, just like in the physical world, the holder of the token will be the deemed owner of it and will draw the benefits of it.
A token is a transferable digital asset and represents a record of value from among a group of records that may collectively represent some physical composite asset or intellectual property or something abstract as well (like bitcoins). While the blockchain is the real registry, the token you hold is the proof or claim of your ownership that you can retain and use.
Fungible and Non-Fungible Tokens – What’s the difference?
There are two types of tokens – non-fungible and fungible. A fungible asset is something whose representative units can be readily interchanged. Money is a good example. Five $10 notes have the same value as a $50 note. Same logic applies to assets represented through fungible tokens (FT) like Bitcoin – 20BTC is the same as two units of 10BTCs each.
However, not all assets have fungible units. Just like real estate developers have different rates for garden view apartments or upper floor apartments, even when they are on the same location and with the same area and other specifications, the value of each apartment may still be different owing to the unit’s intrinsic character that the buyers value differently.
Similarly, tokens that represent different ‘identified’ sections, units or parts of the composite assets are called non-fungible tokens (or NFTs), as each token created to represent the asset is different, representing different parts of the asset.
Examples of these Tokens
Different real-life assets can be represented differently by the NFTs or FTs. People became aware of the cryptoverse because of the introduction of cryptocurrencies like Bitcoin, Ether etc. Almost all of the initial tokens were fungible tokens, essentially because they were designed to act as a payment alternative and, therefore, needed the same fungible character that money has.
Non-fungible tokens are a new craze. As people understood that assets can be represented, they realised that this can open up a creative set of applications to be tokenised. And NFTs that represent specific parts of such assets became a better way to break down the salable, claimable portions or units without actually breaking the composite asset itself.
This supply of non-fungible but smaller units made it possible for the retail public to participate, as they can now buy a part even if earlier they could have bought the full asset.
A lot of assets can be unlocked and sold in the tokenised form – either as NFTs or FTs. Art, craft and paintings (all physical assets that are unique in value, with their duplicates or clones or copies not having the same value) are fit cases to be created and sold as NFTs. Similarly, many of the intellectual property assets like songs, videos that have unique copyrights associated with them can be sold as NFTs. So, it is possible that you own a certain part of a song or a certain part of a painting through an NFT.
However, NFTs may not be the apt solution for all assets. This is more so in cases where homogeneity, standardisation is a more desired characteristic. As a closer example, when we designed the property market at RealX, we created a representative but standard unit called FRAX with one FRAX representing 1 square inch of an undivided area. The reason we created FRAX as an undivided unit was to ensure there is fungibility. This fungibility will generate a better secondary sale market then it did otherwise. FRAX will naturally be fungible tokens, if and when we tokenise them.
The way things are shaping up
The opening up of NFTs as another digital asset class is an amazing development. On one hand, it is unlocking economic assets and their uses, and on the other hand, it is enabling access to such assets that otherwise had a price barrier to affordability. This will change the usual matrix of investment, not just for retail investors but even for HNI and UHNI investors. That makes it a very interesting play to look forward to.
(The author, Manish Kumar, is the Co-founder of RealX and GREX. The views are his own)