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Non-fungible tokens: What are they and why are they the hot new crypto asset?

A two-minute explainer on what NFTs are, and why they are attracting a frenzy of interest, and multi-million-pound price tags, from crypto investors

NFT

The crypto market has been rocked in recent days by the emergence of non-fungible tokens (NFTs), the newest frontier in blockchain technology that many are spying as a lucrative investment opportunity.

Celebrities and creative types have been quick to spot the potential, auctioning off digital artwork in the form of NFTs for multi-million dollar sums. Earlier this month, musician and artist Grimes sold a collection of 10 digital art in the form of NFTs for around US$6mln, while the first Tweet ever made by the platform’s founder and CEO, Jack Dorsey, is being auctioned off as an NFT with bids having already surpassed US$2.5mln.

But what exactly is a non-fungible token, and why do investors seem so willing to splash such large sums of cash on the things?

What is an NFT?

A non-fungible token as a term should be broken down into two parts.

The ‘token’ element refers to anything related to the blockchain, a digital ledger of transactions that tracks the exchange of each token on it. For example, Bitcoin is classed as a token as it operates on the Bitcoin blockchain, which tracks and records all transactions made using its tokens.

However, the ‘non-fungible’ part is the more unique aspect of NFTs, as it relates to the idea that each NFT is unique in its own right and cannot be replaced with another token. For example, Bitcoin tokens are like pound coins, which are interchangeable and worth the same as each other, while NFTs are more like original artworks, unique objects that carry features unique to each one.

READ: Non-fungible tokens could be the next frontier in crypto development

In short, NFTs allow unique things to be registered and traded on a blockchain, with different NFTs commanding different prices depending on demand for the specific work or object they represent.

Proponents of NFTs say that they serve as a digital ‘watermark’, a way to designate a digital picture or other work as original with a specific NFT, the equivalent of an artist marking a physical painting as an original to separate it from any reproductions.

However, while many may see NFTs as another way of ensuring ownership of certain works is legally maintained in the digital world, owning an NFT for a certain work does not give the owner any legal clout if another person can demonstrate they have copyright over it.

That doesn’t mean they are useless, however, as in the future NFTs could be used as a way of tracking the ownership of digital creations, although much like real-world creations, the value of an NFT for a work will only be worth as much as people are willing to pay for it.

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