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Finance From A to Z: Week 14 (N)

Finance From A to Z: Week 14 (N)

Arguably the trendiest of developments within the world of financial assets as of late, non-fungible tokens, often abbreviated and referred to as NFTs, may be a confusing idea for the majority of people. Hence, in this week’s submission, we will take a deeper look at them to help build a better understanding as to what exactly an NFT is. So, without further ado, N stands for NFTs!

What are Non-Fungible Tokens?

Non-fungible tokens are technically cryptographic assets on a blockchain with unique identification numbers and metadata that set them apart from one another. Understandably, it may be difficult for the non-crypto enthusiast to decipher the actual meaning of NFTs given that this definition is riddled with jargon. With that said, it is necessary to define a few key terms. 

Cryptographic assets are transferable digital representations that are built in a way that makes copying or reproduction impossible. A blockchain is a technology that facilitates the transfer of these cryptographic assets by storing data in a manner that makes it difficult or impossible to modify, hack, or game the system. Last but not least, metadata is data about data. When applied to NFTs, metadata describes an NFT's name, description, and any other necessary details that add to the NFT. These additions improve pre existing data by including information that makes it simpler to find, use, and manage the data.

Knowing what cryptographic assets, blockchains and metadata are, NFTs are essentially one-of-a-kind digital tokens that are encrypted with the artist's signature and permanently tied to a work of art. It certifies the object's ownership and legitimacy, rendering it untransferable (unable to replace or be replaced by another identical item).


Significance of Non-Fungible Tokens

Despite the fact that the concept of using unique identity and digital representations of physical goods is not new, when these ideas are combined with the advantages of a tamper-resistant blockchain, they constitute a powerful force for change in many areas of the real world.

Market efficiency is arguably the most evident advantage of NFTs. A physical asset being transformed into a digital one simplifies procedures and gets rid of middlemen. There is no longer a requirement for intermediate agents to let artists interact directly with their fans since NFTs are a type of digital asset that can be used to represent real-world objects like music, film, and in-game equipment on a blockchain. As a result, artists are given a special chance to market goods that weren't previously monetizable and profit more.

NFTs are also excellent for identity management. According to Eric Anziani, the COO of Crypto.com, NFTs will “enable people to demonstrate and have an identity across platforms that they can clearly own and use on different ecosystems” [1]. NFTs may also help with the hassle of having to keep a physical passport safe and ready to use while traveling. It is feasible to simplify the entrance and leave procedures for countries by transforming individual passports into NFTs, each with its own special distinguishing qualities.


Where and how to purchase NFTs

Purchasing NFTs requires that one possess a crypto wallet containing cryptocurrency and the ability to store NFTs. The most common cryptocurrency used to purchase NFTs is Ether, which can be purchased at any cryptocurrency retailer such as Coinbase, Netcoins, Kraken and Wealthsimple Crypto for Canadians. Once one owns cryptocurrency, they may head over to an NFT marketplace. Notable marketplaces include OpenSea, Axie Marketplace and Rarible Coinbase, Netcoins, Kraken and Wealthsimple Crypto for Canadians. Once one owns cryptocurrency, they may head over to an NFT marketplace. Notable marketplaces include OpenSea, Axie Marketplace and Rarible.

Risks associated with NFTs

The crypto marketplace is, by nature, volatile and unpredictable. The NFT marketplace is no different, given that it operates utilizing the same technology as many cryptocurrencies and requires cryptocurrency to even purchase them in the first place. It is necessary for any investor to exercise caution when dealing with NFTs, for the value of an NFT is based completely on the willingness to pay another investor. Infamously, Jack Dorsey’s first tweet was sold as an NFT for $2.9 million and later bid for $3600. The future of NFTs is uncertain, and their initial popularity have seemingly diminished recently, with weekly NFT sales cliff-jumped from $3.9 billion to $964 million between February 2022 and March 2022. Ultimately, however, it is still up to the individual investor to decide if investing in an NFT is worth it or not. As with any sort of investment, every potential upside comes with a downside as well.


That’s all for this week’s submission. Thank you for reading!

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