What is NFT? Get to Know and Understand It Before Making a Decision

Before deciding to invest, let’s get to know NFT – the trending digital assets on the market — whether it’s similar or different from cryptocurrency? Is it worth the risks? A lecturer from Chula Business School offers his advice and warnings on investing in NFTs.

An NFT is a new form of digital asset that has been gaining attention, especially in the past few years. The news on how the first tweet of the world was auctioned for $2.9 million US dollars and the news on how Christie’s, a world-class auction house, sold Beeple’s NFT entitled “EVERDAYS: THE FIRST 5000 DAYS” for 2,204 million Baht, along with celebrity NFT owners, have all contributed to an NFT fever. Artists and creators in all industries from art, photography, entertainment, game, fashion, and music, to other creative fields, are keen on having their originals minted and sold on NFT marketplaces. Investors are also becoming more interested in investing and hoping to profit from NFTs.

Before jumping on the NFT train, Assistant Professor Dr. Roongkiat Ratanabanchuen, a lecturer from the Department of Finance and Banking, Chula Business School, offers some advice for enthusiasts and investors for this particular form of digital assets. It is a good idea to learn the definition of an NFT, know the differences between them and other digital assets, and be informed on the risks involved so that one can avoid falling victim to online investment scams as often seen in the news these days.

What is an NFT? How is it different from other digital assets?

NFT stands for a non – fungible token which is a form of digital asset that has a unique identity and cannot be substituted.  Though considered a cryptographic asset, it is different from cryptocurrencies, like bitcoins or ETH, which are fungible tokens, exchangeable and substitutable. To put it simply, though the identity of each cryptocurrency coin is unique, the value is always the same. Therefore, a coin is substitutable in the same way foreign currency exchange works.

In the case of NFTs, each ID uniquely represents a particular token. That is to say, its originality can be authenticated, and this is why NFTs are used for digital artwork, music, audio and video files, games, and even virtual land in the Metaverse. An NFT gives its owner the exclusive right to access the token. The ownership is automatically stored on a blockchain (a network that records online transactions) and cannot be altered. The structure transparently verifies ownership of each NFT.

Let us look at how to mint and trade an NFT. Say you have an image file that you would like to turn into an NFT, you can choose to do that on one of the many NFT platforms such as Opensea, Rarible, and Foundation. Your NFT can then be bought with cryptocurrencies and stored in a digital wallet like other digital assets.

Smart Contracts: Digital Transactional Procedure

Assistant Professor Dr. Roongkiat explains how in the world of cryptocurrencies, a smart contract is a digital procedure with predetermined transactional processes via a blockchain without the need for any third-party intermediary or human verification. A smart contract can be self-verified given that it meets the requirements which have been programmed or coded in the system.

An example of a smart contract in our daily life is a vending machine. To purchase an item, we can insert cash or pay through other methods at a set price. The machine will dispatch the chosen item along with changes if any. All activities occur according to automated programming or coding without any intermediary.

In Blockchain or a smart contract network, a smart contract can be compared to a standard set of codes that can be used to transform anything into a digital asset. Bitcoins and NFTs, for example, are created by their standard set of codes. Smart contracts are why NFTs can easily be created and accessed.

What determines the value of an NFT?

NFTs are popular in many industries. In the gaming industry, popular play-to-earn NFT games are Axie Infinity and The Sandbox, for example. Many sports fans buy and sell all-thing-NBA NFTs on the well-known sport NFT marketplace called NBA Top Shot. The fashion industry has seen Louis Vuitton’s Louis the Game and Gucci’s short film which was sold as an NFT for more than 934 million baht. Even the first tweet posted in 2006 by Twitter CEO Jack Dorsey, was auctioned as an NFT for more than 90 million baht!

Assistant Professor Dr. Roongkiat says celebrity NFT creators and owners have been hyping NFTs and this majorly affects their value.  

Just like regular artworks, the price of an NFT is determined by the forces of market demand and supply, value given, and personal preferences. In other words, an NFT has no intrinsic value and is only valuable when a person decides so.

2 things to consider before investing in an NFT

When the value of an NFT depends on demand or consumers’ needs, and the concurrent trends or fashion, Assistant Professor Dr. Roongkiat stresses 2 factors one must keep in mind before investing in an NFT.

1. Do you truly like and derive pleasure from owning and consuming the NFT?
2. If you want to invest for profits, not only that you must see the value of the NFT you are buying or investing in, but also must be able to anticipate how much value other people value the NFT you possess. The only NFTs worth investing in are the ones people take pleasure in owning, just like you would. This strategy applies when a future trade with profits is expected.

“You might purchase an NFT for 1 million baht— because the value of your happiness as the owner is worth 1 million baht, so you decide to buy it. One day when you need the money and decide to sell at 2 million baht or even 1 million baht, there might be no one buying. Therefore, before investing in an NFT, make sure that you truly feel happy being its owner. if you want to make profits, you need to have a vision, knowledge, and the ability to forecast demands in the NFT market,” says Assistant Professor Dr. Roongkiat.

How to tell when an NFT price is being manipulated?

Another concern is how the value of an NFT we see might be manipulated by a group of people or from a few wallet accounts. 

Imagine that I create a few digital wallets and I use them to trade NFTs back and forth to drive up the price of an NFT I own. In the cryptocurrency world, no one bothers to check whether the wallets or accounts that have been trading back and forth belong to the same person. The technology doesn’t allow such investigation, and it is not legally binding for the information to be revealed. As the information remains unregulated, we need to be wary of NFT prices.

How to tell whether an NFT is a duplicate or a counterfeit?

Typically, an NFT is created from a digital file. Therefore, you need to be careful and make sure that the digital file of the NFT we own will not be copied or duplicated into other NFTs.

 “Suppose I have an article saved in a word document file format. I can use the file of this one piece of article to create multiple NFTs simply by saving it under different file names, for example, File A, File B, and File C before minting them into NFTs. The content of these files is still the same, isn’t it? How then can you be sure that the NFT you own is one-of-a-kind and not a duplicate of another NFT? This is difficult to check and complicated if there is to be a dispute in the future.”

Credibility in the virtual world?

Assistant Professor Dr. Roongkiat states that NFT investors now typically buy from an individual or representative with credibility— like someone whose identity can be legally verified or a celebrity. It can be said that NFT trading relies mainly on reputation. He asks, “How can you be sure that the seemingly credible person will not try to scam you?”

Cryptocurrency and its world outside the law: opportunities and risks

Assistant Professor Dr. Roongkiat further explains that the world of cryptocurrency is ungoverned by the law. Investors need to be well informed on the risks involved before placing any bets.

There is neither the police nor the court to help you in the crypto world and that is the appeal for many people who are firm believers in cryptocurrencies. It may be true that computer coding can be verified and that smart contracts are unparalleled, but once a mistake is made, you cannot file complaints against anyone. The identity of a wallet owner remains anonymous. I could own 10 different wallets without you knowing— you would assume that 10 wallets equal 10 individuals.

 “I am not saying that NFTs are horrible or wrong. Computer coding or a smart contract works exactly the way it should. The problem lies with the users. A user may be someone who is looking for a way to scam people. As I said, people can manipulate the price by creating fake demand in the market or they can create multiple tokens of NFTs from the same file.”

The future crypto world inside the law

Assistant Professor Dr. Roongkiat believes that NFTs will still exist, but probably will not remain underground. NFT trading will become legally binding as NFTs will be issued by the government or by organizations with credibility. Property ownership may be verified through a government-issued NFT, for example. This means title deeds will never be burned by a fire, damaged by a flood, or lost.

“It did not take only a few years for law and order to be in place. It took hundreds and thousands of years before society became what it is now. I believe that cryptocurrencies will eventually be regulated and governed by the law, otherwise, they will meet a dead end underground,” Assistant Professor Dr. Roongkiat concludes.

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