Non-Fungible Tokens (NFTs) Simplified

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By Boo Kok Chuon

It was reported in the news yesterday, that local celebrity, Edmund Chen, sold his NFT painting at a whopping $53,000. Though this appears to be quite a fortune for many of us commoners, it is as a matter of fact, just a tiny-weenie achievement when compared to the NFT issued by Taiwanese singer Jay Chou earlier this year, which was reportedly valued at US$53,000,000.

With so many celebrities rushing to ride on the NFT wave, many are trying to capitalize on the craze while the market continues to inflate exponentially. This begs the questions: what exactly are NFTs? Is NFT really just a hype or does it actually contain tangible values? 

What are NFTs, really?

Investopedia describes NFTs as

“Non-fungible tokens (NFTs) are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can serve as a medium for commercial transactions.” The concept of cryptocurrency is complex enough for some who has totally no experience with digital assets, the definition of Investopedia only serves to make the concept even more abstract.

In this article, let us discover how NFTs work in a more simplified approach and we hope that this serves to answer the many questions that many of us may have about the mysterious NFT. 

An avatar of underlying intangible assets

Primarily, an NFT is a digital asset that represents underlying assets like music, artworks, videos or even certain intangible perks and benefits. They are usually traded online with cryptocurrency, and are built based on similar technology of many cryptocurrencies.

NFTs are unique, or at least, issued with a limited supply, and bear unique identification codes. The fixed and limited supply implies that when the demand for the underlying assets of the NFT increases, the price of the NFTs will follow suit. 

On the surface, it may be difficult to comprehend why people would pay millions of dollars to purchase an NFT when digital assets (such as a digital artwork) could be duplicable. There are generally two main reasons why NFTs are so highly sought after.

First of all, NFTs predominantly sell on their exclusivity and uniqueness, which make them collectors-worthy. Think of it as an artwork by, say, Claude Monet. Obviously, it can be reproduced by print too, however only the original piece is valuable. In the case of NFT, the artwork created is “minted” onto the NFT, thereby making the ownership rights exclusively tagged to the NFT, and whoever pays for it, shall own the artwork exclusively. The most distinct difference is the ownership of a physical artwork is physical, whereas for the case of NFTs minted assets, they are virtual. It does not change the fact that they can be equally exclusive and equally in demand. 

In reality, however, the fact about digital assets is the rate of production can be massive. With the advent of digital production softwares such as Adobe Creative Suites, millions of creative works are being produced around the world. When the market is flooded with such massive supplies of creative work, albeit all are “unique” in their own right, would NFTs still be able to hold its value? Perhaps, the second reason for its demand may shed some lights on this question:

Membership has its privilege

NFTs are designed and built around the same technology as cryptocurrencies. The conditional framework that defines the constitution of cryptocurrencies are “Smart Contracts”. Coinbase defines Smart Contracts as:

A smart contract, like any contract, establishes the terms of an agreement. But unlike a traditional contract, a smart contract’s terms are executed as code running on a blockchain like Ethereum. Smart contracts allow developers to build apps that take advantage of blockchain security, reliability, and accessibility while offering sophisticated peer-to-peer functionality — everything from loans and insurance to logistics and gaming.

To not complicate things, let us just take it that Smart Contracts as basically the terms and conditions that attach to a digital asset, much like a physical contract, albeit a digital one.

Similarly, NFTs are constituted by Smart Contracts, which sets out the terms and conditions between the creator and the holder of the digital asset. Smart Contracts are encrypted, decentralized and therefore cannot be tampered with, which reduces risks of fraud which may occur in physical contracts.

When creators create NFTs, aside from minting the intellectual property rights of their creations to the NFTs, creators can stipulate certain rights to it. For instance, a celebrity may include certain entitlement like free tickets each time they hold a concert; a property owner may include certain rights of use to his property for holders of the NFTs perpetually etc. With all these additional use-case prospects customised in the Smart Contracts, it explains why NFTs can be a promising and sustainable framework for the long run application. 

One can view it with the analogy of a ‘membership’, save that such memberships are in the form of NFT. Unlike traditional membership programmes, NFTs are protected from fraud (due to its decentralized nature), issued in exclusive and limited supplies, transferable and publicly verifiable. 

Fundraising tool for creators

We mentioned that NFTs are transferable. The interesting thing about NFTs being transferable, is whenever NFTs are being transferred, the creator can actually set a certain royalties of up to 10% of the transacted value, to be attributed to the creator each time the NFT is being transacted. This provides the creator with the incentive to continue to build up the values in their NFTs: the more underlying values the NFTs contain, obviously the demand will be higher, which will translate to higher royalties payout each time it changes hand. Therefore, this makes NFTs a good fundraising tool for creators to raise funds for projects. 

Consider this instance: supposedly a band is planning to tour Asia, however, it needs funding. It can create an NFT that promises a certain benefit to its holder, say, priority queue when their fans book their tickets, or a certain exclusive autograph session. This would attract their die-hard fans to buy their NFTs, which will serve as their funds to kickstart their tour. As their tour started, due to the limited supplies, the NFTs may be traded in the secondary market and price may increase, which at the same time, while enjoying the income of the tour, the band received royalty from the transactions of the NFTs.

Ready to kickstart with launching your own NFT?

CEO of Iconomy Holdings, Boo Kok Chuon with CEO of EO Technology, Edison Oh

The possibilities of the application of NFTs are only limited by your imagination. However, developing your own NFT may be a technically demanding chore, and many may face financial and compliance concerns. At Iconomy Holdings, we advise and collaborate with our digital assets alliance partner EO Technology in delivering tailor-made NFT solutions.

EO Technology, founded by her CEO, Edison Oh, is involved in Edmund Chen’s NFT entitled “Eternal Collections”. 

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