Here is what you need to know about non-fungible asset world

Since Jack Dorsey -the immediate former head of Twitter- sold his first tweet for a whopping Sh270 million, the world of non-fungible tokens or NFTs has witnessed quite a steep rise.

By 2021, sales had soared to over Sh22 trillion - a feat that is leaving many baffled as to why so much money is being spent on items that do not physically exist and, which anyone can view online for free. Today's article is a short take on the wonderful world of this nascent asset class.

Let's start with; what are NFTs? These are crypto assets that exist on a blockchain, a record of transactions kept on networked computers. The blockchain serves as a public ledger, allowing anyone to verify the NFT's authenticity and who owns it.

So unlike most digital items which can be endlessly reproduced, each NFT has a unique digital signature, meaning it is one of a kind.

How does one buy NFTs? First, one needs an Ethereum-compatible crypto wallet and some cryptocurrency (mostly Ethereum) to get started. This is because most NFTs are Ethereum-based tokens and also most NFT marketplaces accept only Ethereum tokens as payment.

Where can one buy Ethereum? You need an account with a cryptocurrency exchange such as Coinbase where you can purchase.

Thereafter, you can send your Ethereum to your wallet such as a Coinbase Wallet, which is separate from the exchange. After all this is done, head over to an NFT marketplace. Currently, the biggest marketplace is OpenSea.

What type of NFTs exist? All kinds of digital objects or collectibles – images, videos, music, text and yes, even tweets – can be bought and sold as NFTs.

What are the risks? Like cryptocurrencies, NFTs are largely unregulated. Anybody can create and sell an NFT and there is no guarantee of its value. Losses can stack up if the hype dies down. Fraud and scams are also a major risk. Increasingly, cryptos assets are getting lost through hacking.

Are NFTs important? For artists, NFTs could solve the problem of how they can monetise digital artworks. They can receive more income from NFTs, as they can get a royalty each time the NFT changes hands after the initial sale.

More importantly, having created a piece of music, a digital artwork or video, “minting” it as an NFT means that the artist can prove ownership over it (as each NFT is distinct and traceable).

Previously, digital assets were fairly easy to steal. This is huge as it means artists can’t be cheated out of royalties anymore. For investors, this set up means they don’t have to worry about investing in something that’s a fake or a forgery.

The exponential growth of NFT markets opens up a new world with immense benefits. Its emergence represents the largest shift within the crypto landscape.

But like all assets, nothing is bulletproof. Given the recent rapid rise in NFT values, it is likely that this market will experience boom and bust cycles, similar to previous crypto innovations and other traditional asset classes.

Mwanyasi is the managing director at Canaan Capital