NFT Advantages and Disadvantages

NFT Advantages and Disadvantages

There is an explosion of interest toward non-fungible tokens or NFTs beginning in 2021 when several digital artworks and memes were auctioned and sold for hundreds of thousands to millions of dollars. Video games based on NFT such as Axie Infinity have also become more mainstream while more startup and established developers are launching their NFT-based game titles.

For starters, an NFT is a unit of data first and foremost. This data is stored on a digital ledger and added or ascribed to a digital file or a digital representation of a physical item to certify its uniqueness and document its ownership using the same technology that forms the basis of cryptocurrencies: blockchain technology. Hence, by extension, the term “NFT” also colloquially represents a class of digital assets certified as unique.

Remember that the authenticity and ownership of non-fungible digital assets are verifiable via the blockchain ledger. Nevertheless, although NFTs have been around since 2014, turning digital files into digital assets using blockchain technology has become increasingly popular because of the range of advantages and specific applications of doing so.

The Pros of NFT: Advantages of Non-Fungible Tokens

A Solution for Licensing Digital Creations

The process of turning a digital file such as an image or video clip into an NTF is fundamentally akin to licensing it for authenticity and ownership, as well as for the further possibility for transferring its ownership or the rights to use and distribute or sell.

NFTs cannot be easily duplicated or endlessly copied. There is a distinct value attached to each of them because each non-fungible token exists on a decentralized and public digital ledger based on blockchain technology.

At the heart of the entire NFT craze is tokenization, and it serves as a solution for digital content creators and digital artists, including music producers and software developers, to license their creations and turn them into digital assets.

Possibility of Profiting from Digital Assets

Monetization is another possible advantage of NFT. Turning digital items into digital assets essentially means assigning them a monetary value. The first early use case of non-fungible tokens is in monetizing digital artworks.

Note that Michael Joseph Winkelmann, also known as Beeple, sold his digital artwork “Everydays—The First 5000 Days” for USD 69.3 million in March 2021 while Kristy Kim sold the 3D-rendered house model “Mars House” for USD 500,000.

Several internet memes have also been turned into digital assets. These include the Charlie Bit My Finger viral video clip, the Disaster Girl meme, the Nyan Cat YouTube video. The popular Doge meme was sold for USD 4 million in June 2021.

Collectibles, Fundraising, and Gaming

A number of companies have launched NFT-based digital collectible products. Physical collectibles such as baseball and NBA cards have been turned into digital assets by generating their digital equivalents and representing them with non-fungible tokens.

NFT minting can also serve as a solution for raising funds by enabling individuals to tokenize and auction digital creations such as film and literature, digital collectibles, other digital contents, as well as documents such as a contract and patents.

The rise of NFT games or blockchain gaming is also notable. NFTs can represent in-game assets such as digital plots of lands or playable characters and items. Tokenization of these in-game assets can also provide the foundation for developing play-to-earn video games.

Investing and Trading Non-Fungible Tokens

Turning digital files into non-fungible digital assets creates supply limitations or restrictions. The uniqueness of a tokenized digital asset creates scarcity. In certain situations, especially if there is a demand, scarcity and supply limitation raise the value of a particular asset.

Numerous individuals have acquired NFTs either as part of their collection of assets, similar to the collection of physical artworks, or with an intention to trade them in the future once their values increase. The potential for profits through investing or trading is an advantage of purchasing an NFT.

As an example, the collectible digital item known as “CryptoPunk #3100” was first sold for USD 2127 in 2017. When it was sold to another collector in 2021, the original collector generated more than USD 7.5 million on investment return.

The Cons of NFT: Disadvantages of Non-Fungible Tokens

NFT Hype and Concerns Over Uncertainty

Those who have bought NFT-minted digital assets believe that what they hold are investments. The numerous examples of NFT digital artworks sold for hundreds of thousands to millions of dollars are also a testament to the value of investing in these digital assets.

However, the ongoing craze toward purchasing these assets has prompted several experts to compare the phenomenon to an economic bubble that would eventually collapse, analogous to the dot-com bubble of the late 1990s and other similar events.

Of course, several non-fungible tokens have proven their value and growth potential. However, it is also important to note that not all digital assets would be worth as much. There is still a potential for over-speculation and herding in NFT investing.

Environmental Issues of Blockchain Technology

A noteworthy disadvantage of NFT is that the underlying blockchain technology that powers its creation has a significant environmental impact. Similar to the disadvantages of cryptocurrencies, tokenizing digital files requires significant computing capabilities.

The combined energy consumption of computers and servers, as well as cooling systems, used to mine and run systems for cryptocurrencies is equal to a million transatlantic flights. By extension, the further utilization of NFTs would increase the existing energy requirements of blockchain technology.

Remember that the world is still dependent on the consumption of fossil fuels to generate electricity. Greenhouse gasses from burning these fuels are the main culprit behind the ongoing climate emergency. Even renewable technologies have environmental costs. NFT fundamentally inherits the disadvantages of blockchain technology.