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NFT - Digital Bubble Or Next Investment & The Spectrum of Fungibility
Posted 17,June

By Chaveendra Dunuwille

In Local News

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The 21st century can be considered as the starting point of a revolutionary  change in how we approach finances and currency as a whole. In this digital era  we have been introduced to various alternative assets through which we can  make financial transactions with crypto currencies being at the forefront. Maybe  in a couple of years with the development of the infrastructure and laws relating  to the subject we might even be able to say, “Paper money…that’s so old school” 

When we think of crypto currencies popular entities such as Bitcoin and Ether  come to mind. They are have developed to such an extent that they are now part  of everyday conversation and financial transactions with those who invested in  the early days earning millions today. What you all may not have heard of our  Non-Fungible Tokens or NFT’s for short. While they too are classified as crypto  currencies they are a relatively new inclusion into the financial sector as a whole  with the whole sector valuing at only $41 million in 2018. Come 2020 the  industry value has risen to a whopping $338 million. But what exactly are NFT’s  and why do they matter? 

Before we go into the complex mechanics we must understand what ‘fungibility’  means. Simply put the term describes the ability of an asset or an item to be  interchanged with another asset or product of the same value. To put it into  perspective suppose you have one LKR 500 note and since you want change you  ask a friend for 5 LKR 100 notes. This can be considered as the most common  fungible everyday transaction. On a scale of 0-10 experts have attempted to  classify items based on its fungibility with 0 being ‘perfectly fungible’ while 10  being considered as ‘non-fungible’. 

In such a scale gold maybe considered as ‘perfectly fungible’ whatever shape of  form it takes whether it be jewellery or gold bars it can always be melted down  into its primary state and therefore will have the same value. Although paper  currency is the most commonly transferred asset in the present day it is not  completely fungible as it is possible to have money that is actually below the face  value such in cases where the notes were involved in a bank robbery, since most  paper currencies are serialized the bank can simply inform institutions not to  accept notes with specific serial numbers therefore greatly diminishing its value.  On this notion paper currency is rated as ‘1’ in the fungibility scale. While  Electronic Funds are listed as 2, Crypto currency is listed as ‘3’. This is primarily  because in crypto currencies you can see the full history of transactions that  have taken place with that particular asset therefore tainted crypto coins would  not have the same face value. Arguably there are specific coins designed not to  include its transaction history but people would not be willing to trade with such  coins and if something goes wrong there is very little a person can do as the law  relating to the subject is in its infancy. 

What some might consider a surprise is the fact that collectibles such as cards  from the ever popular “Pokémon” franchise are listed at 9 in the scale. At the  face of it if you are playing the trading card game 2 cards of a kind would have  the same value on the deck, but as part of a collection it is an entirely different  matter. You would have seen first edition Charizard cards being sold for $300  000, hard to believe a piece of cardboard has such a high value. Look closely and  you will see that all the cards being sold at a high price have been well preserved,  if someone were to find a similar card that has been significantly damaged the  price would not be so high.  

To have an proper understanding of the value of NFT’s such as the Original Neon  Cat Gif which sold for 300 ether in February 2021 which the equivalent of $600  000 at the time the best comparison would be to priceless works of art such as  the Mona Lisa. Unlike crypto currencies such as Bitcoin NFT’s are one of a kind  and cannot be easily substituted for something similar, thus being included  listed at 10 in the scale. The digital signature of these tokens are akin to a famous  artist such as Leonardo da Vinci placing his signature on the Mona Lisa. This  ability of NFT’s has helped digital creators profit from their creations as no matter  how many people copy his/her work the original creation will still be considered  scarce and therefore more valuable, case in point the Neon Cat Gif we mentioned  earlier.  

Despite the potential advantages in the fledgling sector of investors it too comes  with its fair share of disadvantages. The possibility of fraud has been an  underpinning concern of many investors as the realm of crypto currency as a  whole is widely susceptible to scams and it is difficult to ascertain whether the  person in question is indeed the original creator of the asset in question. This is  partly the reason governments have been hesitant to accept crypto currencies as  authorized modes of financial transactions.  

At present investing in Non-Fungible Tokens is considered as ‘gambling’ rather  than investing and there are a lot of things that can go wrong. Some experts  consider the trend to be a digital bubble in the making and like all bubbles it is  only a matter of time before it explodes. But we must not be quick to dismiss its  potential for the future as after all it may only be a matter of time before crypto  replaces paper currency as the most common mode of financial transactions.