The vast majority of transactions still rely on fiat currencies like the USD, EUR, JPY and others. The digital currency has made some inroads, but it remains a niche solution for trade finance. If you’ve heard of non-fungible tokens (NFTs), you’ve probably thought about investing in them on nft-profit.me. But another significant change underway could disrupt this paradigm: the emergence of non-fungible tokens (NFTs). Non-fungible tokens are digital assets that uniquely represent an item or stake in a virtual world, so these assets are not interchangeable. They are not fungible.
The primary benefit of NFTs is that people can use them to represent assets of value in a digital or virtual space. The big reason for their emergence stems from the advent of blockchain technology, which makes the creation, issuance and exchange of these tokens possible.
The most significant use cases for NFTs seem to be related to art and collectables. Many believe this goes back to the notion that all forms of art, both low and high, can represent large sums of value because they create an emotional reaction in those who view them. It creates a massive demand for these objects but limits their liquidity. Let’s discuss both advantages and disadvantages of Non-fungible tokens.
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Advantages of Non-fungible tokens:
A blockchain secures NFT ownership:
NFTs are designed to be digital assets behind which there’s no need for trusted third parties. Ownership of these assets is recorded on the blockchain, and intelligent contract rules dictate all transactions, so there’s no human intervention required. Since ownership is guaranteed and every transaction is recorded in a public ledger, NFT owners have a transparent record of their ownership and can trade tokens with complete confidence.
NFTs increase liquidity:
The more it happens that people recognize the value of owning certain NFTs, the more they understand they can sell them on exchanges for higher prices. It creates a cycle where increased demand leads to increased liquidity, which increases the price per token.
NFTs allow for the creation of a personalized virtual world:
NFTs represent a piece of data that are digitally connected to an object or asset. They’re used to create digital content and shelter it from defamation. Here are some examples where NFTs can be used:
- For example, purchasing branded merchandise with your favourite sports team’s logo.
- Create your avatar to dress up in the newest and coolest clothes and accessories.
- Tying your digital currency (bitcoin, ethereum etc.) into one of several stock markets. Creating your own virtual world and making your own virtual assets.
Disadvantages of Non-fungible tokens:
NFTs are not fungible:
When it comes to tokenized ownership of a non-fungible asset, the value of that asset is dependent on being able to sell it for another asset. As such, these tokens are not fungible because users can use no standard to determine the value of an NFT relative to others. Therefore, if you lose or damage your NFT, no one can use it to re-purchase something else with the same attributes.
NFTs are not an asset class:
While some NFTs are designed to represent ownership in an asset class, most are used to create digital content that only has value in the virtual world. In other words, for NFTs to have value, you need a community of individuals who will buy and sell that particular token within a specific marketplace. Undeniably, there is numerous open market facilitating the trade of NFTs, but the value of every NFT is derived from the market hype and demand.
To trade non-fungible tokens, you need platforms with support for smart contracts and the ability to transfer ERC-721 tokens, which are used as non-fungible assets. For example, you can trade non-fungible assets on Open Ledger DEX, where all ERC-20 compliant assets (fungible) also trade.
NFT generation is highly energy-intensive:
Creating every NFT requires a lot of computational power, and it isn’t easy to scale up the generation mechanism as more tokens are issued. It is why you find a majority of applications where ERC-20 tokens are used as keys that unlock the value of non-fungible assets.
NFTs aren’t compatible with most payment systems, and in some instances, the private key used to create an NFT could be sufficient for decrypting other people’s private keys. As a result, it can create risks when it comes to sending and receiving payments with this particular token because the risk exists that someone could intercept your data without your knowledge. In addition, minting NFTs is as energy-intensive as cryptocurrencies, and the gas fees to mint NFTs on the ethereum network have been on the roof lately.
Pump and Dump schemes in NFTs:
Pump and dump is a fraudulent scheme where a stock or cryptocurrency’s price is artificially inflated and then sold to unsuspecting buyers who are left holding devalued shares. It can also happen with NFTs and platforms that facilitate their trading. For example, let’s say you create an NFT and sell it for $10. You can set a sell order for $12, but no one buys, and your asset drops in price because no one wants to pay the higher on-exchange price. As soon as you realize your asset has dropped in price because of poor market conditions, you can put it in an even higher order, effectively triggering the “pump” part of the scheme.
