Melissa M. Dunn 
Data from market tracker DappRadar further revealed that some of the world’s biggest brands like Coca Cola and Gucci also sold NFTs. NFT’s sales volume totaled $24.9 billion in 2021, up from just $94.9 million the previous year. It has now become extremely difficult to miss the onslaught of conversations around NFTs. So what are they exactly?
What is an NFT?
An NFT is a non-fungible token. And what that means is that an NFT is a unique token on the blockchain that cannot be replaced with anything else. NFTs can really be anything digital, including drawings, music, photographs, videos, and any type of digital file. Interestingly, digital art is not the only way NFTs can be used, as they can be used to represent ownership of any unique asset, such as a deed for an item that can be digital or even a physical item. Basically, these tokens are transferable but not replicable tokens on the blockchain.
How it works?
NFTs function as unique, one-of-a-kind digital collectibles that cannot be exchanged for another token as can be the case with other cryptos. “A creator of these tokens launches it on a blockchain and offers it for sale. Buyers can again offer it for sale to secondary buyers, either directly or through marketplace platforms,” says Sathvik Vishwanath, Co-Founder and CEO of Unocoin Technologies Ltd.
What are the risks associated with buying NFT?
Currently, there are several risks associated with crypto collectibles, as NFTs pose significant market risks, including financial and regulatory risks. As we have witnessed the many cases of fraud, experts believe that any digital underlying can be easily replicated and can lead to counterfeiting, which is one of the biggest risks associated with NFTs.
Amit Jaju, Senior Managing Director of Ankura India, who is a digital forensics expert, explained, “Crypto collectibles are not controlled by any entity and therefore you are responsible for your own security (unlike fiat currency where the banks hold your money for you). If you lose the private key (similar to a username) associated with an NFT, no one else will be able to access it, and you will not be able to spend or transfer the NFT. This means that if you lose your private key, you risk losing all of the value stored in that NFT.”
Another risk is associated with data fragmentation, Jaju explained, “if you buy an ERC-20 token, for example, which bundles many different types of NFTs together, then a single token is just a number on the blockchain. If you want to exchange this Ethereum ERC-20 token for another form of crypto-artifact, it requires reading and processing the data associated with each NFT in this bundle.” Thus, the more NFTs grouped in a token, the greater the risk of fragmentation.
What Buyers Can Do to Protect Against These Risks
According to Jaju, buyers can avoid risk by ensuring they have a trusted source from which they buy the NFT directly or through a platform. Additionally, buyers should also review the relevant terms and conditions associated with the transaction, including the platform’s exclusivity and liability for breaches.
“It is important that the buyer confirms that the creator of the token they are purchasing is genuine. care of the token as if it were real money,” Vishwanath noted.
In addition to this, to prevent cyber breaches, buyers should back up their private keys and explore hybrid wallets, as well as all other basic security measures associated with protecting a crypto wallet.
Does Crypto Market Volatility Impact NFTs?
The value of NFTs is determined by a variety of considerations, including their rarity, the demand for the underlying artwork or even artist, and the prices of the underlying cryptocurrencies. “Many online marketplaces that trade NFTs are blockchain-based. The Ethereum blockchain currently powers the most popular ones. If you want to trade NFTs through one of the more popular marketplaces, you will almost certainly need Ethereum’s native currency, ether, for the transaction,” Jaju said.
Crypto markets and NFTs are not directly linked when it comes to token and coin prices, Vishwanath explained, “however, many people try to buy NFTs using other crypto coins or tokens. and so if the crypto market is boring, buyers prefer not to buy NFTs at that time because the buying power of cryptos would be less.”
Interestingly, not all NFTs follow the prices of their underlying crypto. “Even though crypto markets are down overall, the OpenSea NFT Market has traded $2.3 billion so far this year and is on track to break its monthly volume record if the trend continues. “, said Jaju. Going forward, it is likely that the demand for an NFT may impact the value of a cryptocurrency due to demand.
Many online marketplaces that trade NFTs are blockchain-based. The Ethereum blockchain currently powers the most popular ones. “If you want to trade NFTs through one of the more popular marketplaces, you will almost certainly need Ethereum’s native currency, ether, for the transaction,” Jaju added.
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