NFTs explained

In March 2021, a single piece of digital art – the artist Beeple’s ‘Everydays: The first 5,000 days’ – was sold for over $69 million by the auction house Christie’s. This artwork – which is a massive 21,069 x 21,069-pixel digital canvas composed of 5,000 smaller images created one per day over 13 years – is the most expensive Non-Fungible Token (NFT) in the world. 

2021 was the year when NFTs went mainstream, going from a niche market with a total sales of less than $100 million in 2020 to a massive boom in sales of over $23 billion in 2021. Celebrities across the world have jumped onto the NFT bandwagon and every cryptocurrency enthusiast appears to be touting NFTs as the next step forward for the art market and for digital ownership. But while some call it an innovative and revolutionary new technology, others see it as a threat to the environment and as one more way in which capitalism is destroying art.

But what exactly are NFTs? How do they function? Can Nepalis own NFTs? All of these questions and more, answered by The Record.

What are NFTs?

In order to understand NFTs, which stand for ‘Non-Fungible Tokens’, it is first necessary to understand what ‘fungible’ means. Fungibility is a term in economics that refers to a commodity that can be exchanged with another individual unit of the same commodity without losing any value. For instance, a thousand-rupee bill is fungible because it holds the same value as any other thousand-rupee bill and can be interchanged without each losing its value. Other examples of fungible commodities include gold, as 1 kilogram of pure gold can be exchanged with another kilogram of pure gold without losing value, crude oil, and government bonds. 

Artwork, however, is non-fungible as they usually cannot be replicated exactly and cannot be exchanged with another without losing or acquiring value. For instance, Da Vinci’s ‘Monalisa’ is non-fungible because there is only one such painting in the whole world.

Digital art, on the other hand, can be fungible since anything digital can be copied and reproduced exactly as it originally was. This is where NFTs come in. NFTs turn digital art ‘non-fungible’ by establishing a ‘proof of ownership’. So even though that same piece of digital art might be replicated, copied, and shared, there will only be one ‘true’ owner and that owner can be verified through the blockchain. Anyone can view, screenshot, or even download the piece of art but there will only be a single minted token of that digital art, locked behind a unique token address. The key to that address is only available to whoever owns it. This key provides proof of ownership and is transferred by the seller to the buyer over the blockchain, officially handing over ownership rights. 

“Without the NFTs, there just legitimately was no way to collect digital art," the artist Beeple told Reuters. “I do really think that this is going to be seen as the next chapter of art history.”

These NFTs can be anything from digital images to gifs, videos, songs, and photographs. They are traded via cryptocurrency like Bitcoin and Ethereum and the sale is logged into a secure blockchain.

But what are blockchains?

In cryptography, a ‘block’ is a record of the transaction made combined with a timestamp and a ‘cryptographic hash’ of the previous block. These blocks are linked together with each succeeding block referencing the preceding block in a series called a blockchain. These blockchains are virtually impossible to falsify or break because editing one block would require editing every other block that came before it.  

The Ethereum blockchain, like all other blockchains, is a decentralized ledger, which means that every transaction can be validated by multiple independent computers on the internet. This is where blockchain technology is considered revolutionary because it takes place outside the centralized control of governments and banks.

“Decentralized blockchain is an open ledger which holds accounting information accessible to anyone with an internet connection,” says 36-year-old Saurav Shrestha, a crypto-trader and senior computer engineer based in Fairfax, USA.

Whenever a transaction occurs on the blockchain, all ledgers on all of these independent computers around the world are simultaneously updated. These public ledgers hold information on the history of ownership, who is the current owner as well as the amount paid in each transaction. Even if suspicious activities or alterations take place on one or some of these computers, others will maintain the integrity of the public ledger.

Shrestha says the decentralized blockchain is so secure, “nothing in the world can destroy it, without destroying the entire internet.”

Most NFTs are traded on the Ethereum blockchain but there are also other blockchain platforms like Solana and Cardona.

What is the link between blockchains, cryptocurrencies, and NFTs?

The blockchain was originally used as a platform to trade Bitcoin, Ethereum, and other cryptocurrencies. The blockchain was first conceptualized in 2008 in a white paper by a person or group of individuals known by the pseudonym Satoshi Nakamoto, who also invented Bitcoin. Since then, numerous cryptocurrencies have sprung up that utilize the blockchain, like Ethereum and Dogecoin. The blockchain for Ethereum was the first to support NFTs but others have also implemented their own. Most NFTs are assigned a token address on the Ethereum blockchain and require the native cryptocurrency Ethereum, Ether, or ETH to be bought and sold. 

What can be considered an NFT?

Anything really. Twitter CEO Jack Dorsey minted his first-ever tweet as an NFT and sold it for $2.9 million. The National Basketball Association has been selling clips of game highlights as NFTs. A highlight of Lebron James scoring a slam dunk sold for $ 71,000. Quartz and The New York Times have even sold news articles as NFTs.

“The impression of NFTs around the world has been growing ever since their mainstream adoption by global organizations like Twitter, Adidas, Nike, Samsung, Visa, and other billion-dollar organizations,” says 27-year-old Jenish Bajracharya, a resident of Australia who recently began trading NFTs.

Bajracharya had been trading shares and cryptocurrency to earn some side income as a student when his friends introduced him to NFTs. His first purchase was a plot of digital land in a virtual world named PAVIA.

“I held the land parcel for a couple of months. Its value began to appreciate when PAVIA garnered the attention of other crypto-holders. My land parcel even began generating income,” Bajracharya said.

According to Bajracharya, NFTs are the future and we are in the early stages of their adoption. To him, NFTs will be as revolutionary as the internet.

Kings of Leon, a popular band, has also been selling their albums as NFTs while other popular artists and public figures have also adopted NFTs. Bajracharya says that NFTs went viral after Mark Zuckerberg, CEO of Meta, announced the use of NFTs in their ongoing project the ‘Metaverse’. In a video, Zuckerberg wears digital clothing as NFTs in the virtual reality space of the Metaverse.

“NFT will play a vital role in this new age of cryptocurrency, metaverse, and gaming,” Bajracharya said.

Some of the most popular NFTs include the Bored Ape Yacht Club, which provides 10,000 unique digital collectibles that have already been snapped up by the likes of Snoop Dogg, Eminem, Shaquille O’Neal, and Neymar. There’s also a Nyancat gif of a pixelated cat hurtling through space that sold for $690,000.

Can NFTs be tied to physical objects?

Shrestha says that NFTs are not only limited to digital assets but can also serve as a mechanism to provide various forms of proof of ownership on the blockchain.

“You can have a club pass as an NFT on your phone. You can have streaming access to Hulu/Disney as an NFT. You can have an NYC taxicab medallion as an NFT. But we are not quite there yet,” says Shrestha.

Nike is already experimenting with NFTs by providing proof of authenticity for branded sneakers called ‘CryptoKicks’ on the blockchain.

“In the current state of things, it's pretty useless,” says Shrestha. “It’s only use is as a collector’s item and even then, prices are volatile and the market is pretty illiquid. There are use cases where it could be useful (e.g. subscription keys, access to dbs) but right now, the NFT craze only applies to a very small subset of the possible use cases such as a handful of ProfilePicture (PFPs) collections on Opensea.”

How to trade NFTs?

Crypto-traders like Shrestha use Opensea, the largest NFT marketplace, to buy and sell NFTs. Opensea supports crypto-currency like Solana, Cardona, and Avalanche, alongside Ethereum, the “king-crypto provider of NFTs”, according to Shrestha. NFTs purchased on Ethereum, however, are not transferable into other cryptocurrencies at the current time.

A browser extension called MetaMask, which acts as a digital wallet, is necessary to make transactions on Opensea, and any other NFT marketplace. Metamask uniquely identifies traders in marketplaces, as well as holding cryptocurrencies and NFTs.

“From this point on, it's pretty straightforward. You buy an NFT and you own it. No one else can claim it since the keys are in your MetaMask. You are free to sell it, not only on OpenSea but on any marketplace. You can even sell it directly to a friend without a marketplace. The transactions are irreversible and unstoppable as long as you have an internet connection and a willing counterparty,” says Shrestha.

However, NFTs are very volatile, warns Shrestha. People who get rich on crypto and NFTs “really lucked out” by buying the right assets at the right time and that “most of the time, you are more than likely to lose money in the short term,” he says.

Why are NFTs harmful to the environment?

NFTs have also gained notoriety for being harmful to the environment. According to the World Economic Forum, NFTs have a heavy carbon footprint, comparing the annual energy cost of the Ethereum blockchain to the nation of Ireland which is a hidden cost for many buyers. As the hype increases, the energy consumption to run the Ethereum blockchain is also on an exponential rise.

Ethereum uses an energy-intensive ‘proof of work’ model which pays crypto miners to maintain the Ethereum blockchain. In the case of Ethereum, every crypto miner not only helps do complex calculations of various transactions on the blockchain, they also keep an updated ledger every time a transaction takes place, which allows the ledger to be decentralized. There are more and more crypto-miners cashing in on the NFT and cryptocurrency hype, which is using up very high amounts of computing power. 

“It is a lot of energy and to think that that much energy is not being used to move people around or produce things, it’s used to crunch numbers in weird computer warehouses,” said Johnny Haris, in a popular YouTube explainer about NFTs. He warns that people buying digital assets are having real-world consequences.

Are there environment-friendly NFTs?

There is a popular environment-friendly alternative to the proof of work model called the ‘proof of stake’ model. The marketplace where NBA highlights can be bought and sold as NFTs is situated in the Flow Blockchain, which operates through this alternative model. However, proof of stake is a more centralized blockchain model which “move(s) away from what cryptocurrencies were supposed to do in the first place, which creates a decentralized network where anyone can make transactions without the oversight of a single institution,” writes Justine Calma in an article on The Verge.

What is the scope of NFTs in Nepal?

Cryptocurrencies remain illegal in Nepal, according to the Nepal Rastra Bank Act and the 2019 Foreign Exchange Regulation Act. Recently, three crypto traders were even arrested by Nepal’s Metropolitan Crime Bureau.

Regardless, Shrestha says NFTs are a great opportunity to bring Nepali art to the rest of the world.

“I remember walking around in Bhaktapur and seeing countless art shops selling beautiful paintings and portraits. NFTs could unlock the global market for those, bringing in a lot more revenue for the artists,” said Shrestha.

However, Nepal needs to allow conversion of Bitcoin (BTC) or Ethereum (ETH) into Nepali Rupees (NPR), a term called ‘fiat-ramp off’, according to Shrestha, for NFT trades to occur.

“Trading NFTs can be considered partially illegal as they live on a blockchain and require their native cryptocurrency to be traded,” confirmed Bajracharya.

Lack of adoption into such industries and the lack of government policies on international payments limits Nepal’s potential but in terms of art, Nepal possesses big scope for NFTs, he added. 

So what exactly do you get when you buy an NFT?

Bragging rights, and that’s about it. An NFT owner ‘owns’ the artwork but it can still be downloaded, copied, and shared freely. Think of it like Van Gogh’s Starry Night. The original is owned by and housed at New York’s Metropolitan Museum of Art, but anyone can make a print of Starry Night and put it up on their wall. The thing with NFTs is that they are pretty much like other pieces of art – their value really depends on what someone is willing to pay for it.