Editor’s Note – The following is simply an informative article whose sole purpose is to shed light on what NFTs are, the reasons why people are drawn to them, their downsides, and potential adverse effects. Rotaract Arts does not in any way, shape, or form condone or encourage the use of NFTs.

We’ve been hearing the word NFT like a mantra in the past couple of months. But what exactly is an NFT? Is it as good as some people claim it to be? Is it all sunshine and rainbows, however? Are there no downsides to engaging in this form of investment? To gain a better understanding of what they are, and to find the answers to these questions, let’s take a moment and start at the beginning.

NFT stands for Non-Fungible Tokens, the name itself is quite self-explanatory, but to understand an NFT, we need to gain an understanding of what a blockchain is. A blockchain is a decentralized public digital ledger that records transaction information. Each ‘block’ of information is digitally verified and given a unique identity and added to the public ledger. Cryptocurrencies (another trendy topic!) are digital currencies that are based on this blockchain technology. NFTs are also built on a blockchain, using similar programing as cryptocurrencies, but unlike cryptocurrencies, they cannot be interchanged. For instance, let’s take a cryptocurrency such as Bitcoin, they can be exchanged with one another of the same value, thus they are fungible. However, NFTs are unique, there aren’t two exactly similar NFTs out there, making them non-fungible.

NFTs can be created out of any digital or even non-digital assets. Art, music, GIFs, designer sneakers, and according to experts it can even be “your brain downloaded and turned into an AI”. However, nowadays the trend lies around using this technology to monetize digital artwork. Another factor that draws individuals in to invest in NFTs is their repetitive royalty function, meaning the artist keeps on getting a commission every time the artwork is used online even after it has been sold. The sale of NFTs provides its seller with a range of options as well, which serves as another reason as to why more and more people are attracted to the world of NFTs. This is because NFTs can be sold at a fixed price, at a timed auction, or at an unlimited auction. 

Sri Lanka also hosted its first NFT auction in 2021, which gave the opportunity for several artists to sell their digital artwork for interesting prices. The headliner of the auction, Sigiriya 2077 by Adaash Lanthra was auctioned at $1,275, and the most interesting thing is the final bid had come up in the last second, topping the previous bid. Just like in the movies, isn’t it? Although Sri Lanka is still entering the world of NFTs, there can be more developments in the future, including a local platform for local artists to sell their NFTs. 

However, while it may seem like a lucrative form of investment, it is equally important to understand the downsides and potential adverse effects of NFTs. Let’s explore some downsides first. A question that is widely asked in the world of modern trade is the effectiveness of NFTs. Investment in NFTs has its own demerits. The market for NFTs at present is relatively small with a smaller number of potential buyers and sellers (compared to other investment tools) affecting the ability to trade them. Further, NFTs aren’t similar to traditional income-generating investments such as stocks or interest-bearing bonds. Thus, the returns associated with NFT investments are based entirely on market phenomena such as price appreciation. Moreover, apart from low liquidity and profitability, NFTs are often misused to perpetuate trade. This violates the entire purpose of creating NFTs. When considering potential adverse effects, it is important to know that the creation of NFTs poses a substantial environmental cost. This is because records that are entered into the Ethereum blockchain require a significant amount of computing, which to occur, would require the use of a significant amount of energy. Thus, trading in NFTs is not an environmentally friendly process.

Therefore, the world of NFTs is something people should approach with caution. Many argue that it’s still in a stage of infancy while some others disagree. It is interesting to note that the NFT market which was in a period of growth just a few short months ago, has begun to lose traction. As of the time of writing this article NFT sales are down by 92%. Whatever the full story may be behind this, what we can gather is that the market for NFTs as of present is highly volatile. While NFTs pose some eye-opening benefits on paper (and at times in reality), when weighed against the disadvantages and potentially harmful effects and practices it brings about, it is advisable to stay away from them.

– Rtr. Kavindi Gunawardena

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