Non Fungible Tokens

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    News:

    On June 1, 2023, Nestlé through its brand Maggi, launched three of its products —Maggi noodles, Maggi masala-e-magic, and hot and sour sauce on the metaverse for a gamified version wherein people in their virtual avatars can compete to win the “Golden Maggi NFT”.

    Implications:

    • People will be able to trade this NFT for a digital dish or in the offline world, for discounts on meals, exclusive access to the restaurant’s kitchen, or exclusive diner experience that would include sampling dishes that are in the testing phase.
    • Besides helping to build a loyalty base among consumers and target a younger audience, NFTs can also help the F&B industry to create online events that can be leveraged in the offline world. Plus, NFTs can be monetised.

    In the last two years, brands such as Starbucks, McDonald’s, Burger King, Pizza Hut, KFC, Taco Bell and Coca-Cola have launched their NFTs.

    What are NFTs?

    • In economics, a fungible asset is something with units that can be readily interchanged – like money.
    • An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos. 
    • They are  like any other piece of property, but which have no tangible form of their own. The digital tokens can be thought of as certificates of ownership for virtual or physical assets.

    How Is an NFT Different from Cryptocurrency?

    • NFT stands for non-fungible token. It’s generally built using the same kind of programming as cryptocurrency, like Bitcoin or Ethereum, but that’s where the similarity ends.
    • Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another. NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible). 

    How Does an NFT Work?

    • Traditional works of art such as paintings are valuable precisely because they are one of a kind. But digital files can be easily and endlessly duplicated.
    • Hence, with NFTs, artwork can be “tokenised” to create a digital certificate of ownership that can be bought and sold.
    • NFTs exist on a blockchain, which is a distributed public ledger that records transactions. Specifically, NFTs are typically held on the Ethereum blockchain, although other blockchains support them as well. 
    • An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including: Art, GIFs, Videos and sports highlights, Collectibles, Virtual avatars and video game skins, Designer sneakers, Music, etc.
    • Even tweets count. Twitter co-founder Jack Dorsey sold his first ever tweet as an NFT for more than $2.9 million.
    • Essentially, NFTs are like physical collector’s items, only digital. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead.

    What Are NFTs Used For?

    • Blockchain technology and NFTs afford artists and content creators a unique opportunity to monetize their wares. For example, artists no longer have to rely on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT, which also lets them keep more of the profits. In addition, artists can program in royalties so they’ll receive a percentage of sales whenever their art is sold to a new owner. This is an attractive feature as artists generally do not receive future proceeds after their art is first sold.
    • They also offer exclusive ownership rights. NFTs can have only one owner at a time. NFTs’ unique data makes it easy to verify their ownership and transfer tokens between owners. The owner or creator can also store specific information inside them. For instance, artists can sign their artwork by including their signature in an NFT’s metadata.
    • Art isn’t the only way to make money with NFTs. Brands like Charmin and Taco Bell have auctioned off themed NFT art to raise funds for charity.

    What are the concerns?

    • Scams, including emergence of fake marketplaces, unverified sellers often impersonating real artists and selling copies of their artworks for half prices. Recently, at least 1,330 people lost 14.6 ETH ($40,895) in a live event by pop culture icon Ozzy Osbourne’s NFT collection CryptoBatz where people got a phishing link shared by the artist that was draining their crypto wallets.
    • Not environmentally friendly: Most NFTs trade on the Ethereum network. This means that each transaction uses a mining process to confirm the trade and transaction. The energy used in mining concerns many who feel that it can add to carbon emissions if non-clean energy sources are used.
    • Risky: NFTs are risky because their future is uncertain, and we don’t yet have a lot of history to judge their performance. 
    • NFT’s value is based entirely on what someone else is willing to pay for it. Therefore, demand will drive the price rather than fundamental, technical or economic indicators. All this means, an NFT may resale for less than you paid for it. Or you may not be able to resell it at all if no one wants it.
    • Taxable: NFTs may also be subject to tax as will the cryptocurrencies used to purchase the NFT be. The Indian Budget 2022 proposed imposing withholding tax on transfer of virtual digital assets — which should include NFTs and cryptocurrencies. It is yet to be seen how the taxation will work and that means you may want to check in with a tax professional when considering adding NFTs to your portfolio.

     

     Way ahead

    • Experts suggest investing very small amounts in these assets, if one wishes to, as there is a lot of uncertainty attached with it. 
    • A proper regulatory mechanism should be put in place to deal with the emerging technologies like NFTs.
    • Above all, awareness should be generated about such emerging trends so that people will not be scammed therein. 

    https://indianexpress.com/article/explained/everyday-explainers/what-are-non-fungible-tokens-nft-7783662/