It’s a question on a lot of people’s minds these days: What are NFTs?
An NFT, or non-fungible token, is a digital representation of items like art, music, videos, real estate, and video game items. They’re virtual assets that users buy and sell online—usually with cryptocurrency—and operate on the same framework cryptocurrencies use.
So, if non-fungible tokens are a thing, fungible tokens must also exist, right? Right.
Indeed, fungible tokens are nothing but virtual assets that are non-unique. Fungible assets are indistinguishable from other assets of the same type. For example, all cryptocurrencies are fungible assets, as is traditional fiat money of the same currency. If you have $1 and exchange it with someone for another dollar, you'll still have $1. Both dollar bills are indistinguishable from each other in terms of value, making them fungible. NFTs on the other hand are unique, non-replicable and cannot be traded 1 to 1 with each other.
NFTs work on the same framework as cryptocurrencies, which is the blockchain that acts as a digital ledger where transactions are permanently stored and recorded. NFT records remain on the blockchain and are impossible to alter or modify, thanks to the blockchain’s peer-to-peer (P2P) network that verifies and protects all data from counterfeit. Additionally, NFTs can include smart contracts, which contain agreements that automatically activate when a set of predetermined conditions are met between two parties.
Conventional collectibles like paintings and other traditional works of art are precious not only because they’re beautiful and significant, but also because they’re unique. A second copy will never be the same as the first; a third copy will never be the same as the second, even if it is forged to be exactly identical. However, the same logic doesn't apply to digital assets that before the invention of NFTs have been easy to replicate.
Each painting is unique, and any attempt to copy them won’t be as valuable as the originals. Similarly, NFTs allow users to "tokenize" assets, enabling them to create a digital certificate of ownership to prove the uniqueness and authenticity of a particular item, as well as its history of ownership on the blockchain. NFTs create digital scarcity of non-fungible assets similar to how cryptocurrencies create digital scarcity of money.
When it comes to NFTs, what’s truly fascinating is the fact that anybody can tokenize any asset and sell it as an NFT. You may remember Nyan Cat, a 2011 pixelated video meme of a cat flying through space. A decade later, a GIF of the same meme sold for around $488,000. But art isn’t the only asset sold as an NFT. Twitter founder Jack Dorsey put the social media platform’s first-ever tweet up for sale as an NFT, which was purchased for around $2.9 million in March 2021. These are high prices for things like memes and tweets. Wouldn’t one be able to take a screenshot of the same tweet or download the original Nyan Cat YouTube video? To understand why NFTs have value, we must understand their appeal and economics.
Supply and demand play a foundational role in determining an asset’s price, including NFTs.
NFTs are unique and non-replicable, making them scarce commodities. Since scarcity drives the price up, an NFT is deemed valuable. However, another critical criterion to factor in is the NFT itself. In truth, an NFT’s value depends on what that particular NFT is. For example, if the NFT is a ticket to an event, it’s worth the price of admission. If the NFT is a sword from a video game, it’s worth a user's time and effort to obtain it. The value of the NFT comes from the combination of what it represents, scarcity and provable ownership. One can own a sword in the digital world much like one can own a copy of the constitution in the physical world.
Many NFTs—like the Bored Ape Yacht Club—also gain value from social media hype and clout on the internet, although they may not hold any inherent value. Users simply like to own such NFTs for the sake of owning them, knowing they own a piece of NFT art that nobody else has or ever can have. Think of these NFTs like limited-edition sneakers or Supreme Hoodies.
NFTs have grown in popularity because of their influence in the gaming and collectibles industries. They grant gamers and collectors exclusive ownership of unique digital items. Users can acquire in-game items via NFT-driven play-to-earn (P2E) games, commonly referred to as "crypto games," and exchange these digital objects as NFTs to earn money.
These could be objects from video games––such as costumes, weapons, and avatars––or virtual structures––like casinos, theme parks, and even digital F1 racing tracks and cars in the metaverse. Gamers and collectors may also decide to sell these on blockchains or secondary markets, sometimes using in-game currencies.
For artists, the ability to sell artwork as NFT artwork to a large audience of consumers across the world is of great appeal. Artists can make a profit without hiring an auction house or gallery. Instead, the NFT ecosystem lets them keep a more significant share of their sales earnings. They can also program royalties into their NFTs, enabling them to earn royalties each time their NFT is sold to a new buyer. This creates a much more creator friendly environment than traditional digital platforms such as Facebook, Youtube and Spotify, where most of the value is captured by the platforms themselves rather than the creators and users.
NFTs find application in various real-world practices and can exist in forms beyond digital assets. Users can link NFTs to physical items, digital materials, and intangible concepts, like intellectual property. A few practical NFT use cases include:
All these industries can use NFTs as a secure way to verify and authenticate various documents, records, ownership rights, and agreements through blockchain technology––all while keeping users anonymous.
You can buy any digital asset as an NFT. However, there are a few factors to remember when buying NFTs for the first time, including the market you buy from, the type of crypto wallet you need to store cryptocurrency for purchases, and the cryptocurrency itself.
OpenSea, Rarible, and Foundation are some of the most commonly used NFT marketplaces (we’ve listed a few others below). But you can also buy NFTs based on a particular niche from niche-specific markets like Larva Labs for CryptoPunks or NBA Top Shot for basketball highlights.
Some markets impose a "gas" fee, which is the cost of the energy used to execute a blockchain transaction. Additional fees might include the price of conversion from a fiat currency into a cryptocurrency—most commonly Ethereum (ETH)—and closing charges.
If you want to create—or "mint"—an NFT, you can take any digital asset you've created, choose a platform where you want to sell your NFT, set up a digital wallet, and register your asset as an NFT. You can create a type of NFT—or even an NFT collection—as a digital asset that represents any item, such as:
Most NFTs exist on Ethereum's blockchain. However, Ethereum imposes high gas fees, which can ward off potential users. Fortunately, newer blockchains allow you to create NFTs without paying a fee. Your NFT will feature the same characteristics as an Ethereum NFT, but neither you nor your NFT's buyer will have to pay any fees.
An NFT marketplace is an online platform where users can register, store, buy, and sell NFTs. These marketplaces make money by imposing transaction fees, which are generally 2-5% of each sale. Some markets charge gas fees, which is the fee users pay to crypto miners for their computational power to process and validate transactions on the blockchain.
A few of the most common NFT marketplaces are:
We’ve discussed what NFTs are, why they’re valuable, and how you can create and buy them. As progressive as NFTs are in the digital world, they garner criticism on various grounds, such as:
NFTs offer an entirely new economy for internet users called the token economy or Web3. This economy minimizes—and sometimes removes—transaction and processing fees, providing a new ecosystem for a growing digital economy.
Blockchain technology allows NFTs to move beyond artwork and collectibles and become utilitarian assets for businesses and corporations with higher security, lower fees, encryption, and immutability. NFTs are a part of a larger crypto space where you don’t need to create or buy digital assets to participate. In fact, you could even get crypto for free.
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