NFT is the latest craze in the industries of art and gaming. While non-fungible tokens (which is exactly what NFT stands for) are on everyone’s lips in the avant-garde digital communities, ordinary people, that are weak on sophisticated technologies, may feel stumped when hearing about this neoteric virtual phenomenon. If you too get confused about NFTs, we have your back. In this simple guide, we will cover the essentials of non-fungible tokens, so after reading it to the end, you will easily speculate on this topic like a pro.
What Is an NFT?
Non-fungible tokens seem to be making the world go round these recent months. From art and music to in-game items and movie tickets, some electronic assets sell for the price of the house, say millions of dollars!
Digital artists are raking in the dough by selling their digital creations to a new crypto audience. And celebrities are jumping on this bandwagon when they spot a new (and rather profitable) opportunity to connect with fans.
But digital art is just one of the ways NFT can be used. In fact, these non-interchangeable tokens serve as proof of ownership of any unrepeatable, one-of-a-kind asset, such as a document on an item in the digital or physical realm.
But are NFTs worth the price, or the hype around them? Some say this is a bubble that is doomed to burst someday. Others believe that NFTs will stay, at least, for a while and transform the way people invest.
Let’s now come to the merit of the matter.
A non-fungible token (NFT) is a digital asset that represents some really-existing objects like artworks, musical pieces, in-game items, and videos. NFTs are unique items that provide gamers and collectors with full ownership of their digital assets.
NFTs are bought and sold over the Internet, and buyers often pay for them with crypto. Like many popular cryptocurrencies, NFTs are usually encoded by the appropriate software.
NFTs cropped up in 2014, but they are gaining prominence in these latter days because they present a convenient way to buy and sell digital artwork. Users have spent a whopping $174 million on NFT virtual items since November 2017.
Non-fungible tokens are generally one-of-a kind assets, or, at least, they are of a very limited edition and NFTs also have their own unique identification codes. Essentially, the purpose of NFTs is the creation of digital scarcity.
This is why NFTs stand in sharp contrast to most digital creations, which are almost always endless in supply. Hypothetically, if the supply stops one day, this will translate into the given asset increasing in value in case there will be some demand for it.
But as we can see, many NFTs present digitalized creations that already exist in one form or another elsewhere, such as legendary video clips from NBA games or securitized versions of digital art that are already flooding Instagram.
For example, renowned digital artist Mike Winklemann, alternatively known as Beeple, built a collage of 5000 digital images to create what is arguably the most famous NFT to date, “EVERYDAYS: The First 5000 Days”, which was sold at Christie’s for a staggering price of 69.3 million dollars.
Any user can view individual images or even an entire collage of images on the Internet for free. So why are people eager to spend insane millions of dollars for something that they can easily copy-paste or download?
The thing is that an NFT allows the buyer to possess the original item. Not only that, a non-fungible digital asset contains integral authentication to be used as proof of ownership. For ardent collectors, those “virtual bragging rights” are even more desirable than the item itself.
Features of Non-Fungible Tokens as Digital Art
One of the main advantages of owning a digital collectible over a real-world collectible like a Pokémon card or rare-minted coin is that each NFT contains distinctive information that sets it apart from any other NFT and makes it easily verifiable. This makes the creation and distribution of fake collectibles useless, as every item can be traced back to the original creator.
Unlike regular cryptocurrencies, non-replaceable tokens cannot be directly replaced with each other. Non-fungible means that the item is unique and cannot be replaced by something else. For example, Ethereum (ETH) is fungible: exchange one ETH for another and you get pretty the same thing. However, the unique trading card is not fungible. If you were to exchange it for another card, you would have something completely different.
This is so because there are no two identical NFTs – not even those that exist on the same platform, in one computer game, or in the same collection. Think of NFTs as a ticket for an invitation-only party. Each ticket contains specific information, including the invitee’s name, the event date, and venue. This data makes it impossible to swap a given private ticket for another one.
A good share of NFT tokens was created using one of the two Ethereum token standards (ERC-721 and ERC-1155) – an infrastructure created by Ethereum that allows software developers to easily deploy NFTs and ensure their interoperability with the rest of the ecosystem, including cryptocurrency exchanges and wallet services. Tron, EOS, and Neo also offer their own NFT token standards to allow developers to design and host non-fungible collectibles. Solana and Tezos are also blockchain networks supporting NFT art.
Other key peculiarities of NFTs include:
- Incompatibility. It is not possible to use one NFT asset as a full-fledged substitution for another.
- Indivisibility. An NFT asset cannot be split into smaller denominations in the way the dollar is divided into cents or Bitcoin is divided into Satoshi. NFTs exist exclusively as a whole thing.
- Imperishability. Since all historical ownership data of an NFT is recorded on the blockchain through smart contracts, it cannot be destroyed, deleted, or duplicated. The ownership of these tokens is also immutable, which means that this is gamers and collectors who actually own their NFTs, not the companies that issue them. This drastically contrasts to buying things like an app from Google Play where users don’t actually possess what they buy but obtain a license allowing them to use the app.
- Verifiability. Since all NFT data is stored on the blockchain, items such as digital artwork can be traced back to the original issuer, allowing items to be authenticated without the need for third-party verifications.
Why Are NFTs Important?
NFTs have become extremely popular among both crypto users and companies as they revolutionized the industries of games and collections. Thanks to the advent of blockchain technology, players and collectors can become permanent owners of in-game items and other unique digital assets, as well as earn money from these items.
For example, certain computer worlds like the Sandbox and Decentraland allow players to monetize structures they build in the game, such as casinos and theme parks. Players can also sell individual digital items that they acquire during gameplay (this includes skins, weapons, in-game currency, and those sorts of things) on the secondary market.
For artists, NFTs offer the ability to sell their artworks in digital form directly to a worldwide audience of buyers without the use of an auction house or gallery, so that artists can retain a remarkably larger share of the profits they generate from sales. Royalties can also be turned into digital artwork pieces, allowing creators to receive a percentage each time their artwork is sold or changes hands.
William Shatner, better known as Captain Kirk from Star Trek, decided to engage in digital collectibles in 2020 and issued 90,000 digital cards on the WAX blockchain, displaying various images of himself. Cards were originally sold for about $1 per unit, and now this gives Shatner a fairish passive royalty income every time an image is resold.
Why do NFTs Have Value?
Supply and demand determine price – it is the market axiom. Since these irreplaceable tokens are designed to be rarities, people are often willing to pay big bucks for a thing that is inimitable and difficult to be found. This way, the space of NFTs is a happy hunting ground for gamers, collectors, and investors.
Some NFTs can also bring huge profits to their owners. For example, an investor spent $222,000 to buy a segment of Monaco’s virtual racetrack in F1 Delta Time. With this digitized file at hand (that represents a fragment of the digital track), the owner can now receive a 5% dividend from all races that take place on the track, including a portion from entry ticket fees!
How Do NFTs Differ from Cryptocurrencies?
NFT stands for Non-Fungible Token. These pieces are usually designed using the same type of programming as cryptocurrencies like Bitcoin or Ethereum, but similarities end at this point.
Physical money and cryptocurrencies are “swappable,” meaning they can be sold or exchanged for each other. They are also equal in value: one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. It is exactly the fungibility that makes cryptocurrencies a reliable means of performing transactions on the blockchain, as surely as fiat money is a trusted means of payment in the real world.
NFTs work differently.
Unlike cryptos, NFTs cannot be traded or exchanged at equivalency. This sets them apart from fungible tokens like coins, which are identical to each other and, therefore, can be used as a medium for payments and transactions.
Each non-fungible unit is digitally signed, making it impossible for NFTs to be swapped for one another. No NFTs are ever equal or interchangeable. For example, one “NBA Top Shot” clip is not equivalent to “EVERYDAYS: The First 5000 Days” simply because they both belong to the NFT class of asset. Even two NBA Top Shot clips are not necessarily intersubstitutable.
How Does an NFT Work?
NFTs work on top of the Ethereum blockchain. Non-fungible tokens are found within a distributed public ledger or blockchain where transactions are recorded. You are probably most familiar with blockchain as the main mechanism that powers cryptocurrencies.
In particular, NFTs are usually hosted on the Ethereum blockchain, although other blockchain technologies support this type of digital assets as well. You can create NFTs from almost anything unique that can be digitally stored and offers some value. They are just like desirable collector’s precious things, a painting or antique statuesque, but instead of buying a physical item, you literally pay for a digital file and proof that you possess the original thing, not a copy.
Any type of easily reproduced digital file can be turned into an NFT to identify the original piece, like a photo, an artwork, music, a video clip, a GIF, a meme, a virtual real estate, and even a post on a social network (Twitter co-founder Jack Dorsey gained over $2.9 million for selling his first tweet as an NFT).
In fact, NFTs can be anything digital (like a painting, music, and even your brain downloaded and turned into Artificial Intelligence). But much of the current hype has to do with using this up-and-coming technology to sell digital artworks. There is a lot of talk about NFT as an evolution of fine art collecting, but in regards to virtual art.
This is where NFTs may get a little baffling. You can scour the Internet, find an image to your liking, download it on your device, and use this file as many times as you like, including images that constitute the particular NFT. Who can stop you?
But NFTs are meant to give you something that cannot be replicated: the ownership of the work (although an artist can still retain copyright and reproduction rights, just as with physical objects of art). When it comes to collecting physical art, anyone can buy a Picasso picture replica. But only one person can own the original.
The authenticity and ownership rights of the NFT can be verified using the blockchain. NFTs were first launched on the Ethereum blockchain, but now these electronic treasures are also supported by other blockchains, including FLOW and Bitcoin Cash. Whether the format of an original file is a JPG, MP3, GIF, or anything else, the NFT that proves its ownership can be bought and sold like any other piece of art, and as with real-world art, the price is largely driven by consumer demand.
If you go to a gift shop or art gallery, you will find several reproductions of famous masterpieces – certain NFTs can also operate in the same way. There are blocks of the blockchain that are totally valid, but they will not hold the same value as the original.
Non-fungible tokens will most likely come with a license for the digital asset they are associated with, but this does not automatically give ownership of the copyright. The copyright owner can reproduce the work and the NFT owner will not receive any royalties.
NFTs come with exclusive property rights: an NFT can only have one owner at a time. Since every NFT has unique data, it is possible to easily verify their ownership and send tokens between owners. The owner or content author can also store certain information in their NFTs. For example, artists can sign their creations by including their signature in the NFT metadata.
A Non-Fungible Token (NFT): What Is It Used For?
Blockchain technology and NFTs provide artists and content makers with a unique opportunity to monetize the products they create. For example, artists no longer need to apply to galleries or auction houses to sell their artworks. Instead, the artist can sell their creations directly to the consumer in a form of an NFT, which also allows them to retain most of the profit.
Moreover, artists can attach royalties to their products, so that they will receive a percentage of the sales whenever their work is sold to a new possessor. This is an attractive feature as artists generally do not receive future gains after the first sale of their art.
Art isn’t the only way to profit off non-fungible tokens. Brands such as Charmin and Taco Bell have auctioned NFT art pieces to use the raised funds for charity. Charmin titled its offering “NFTP” (Non-fungible Toilet Paper). Taco Bell’s NFT art units were sold out in mere minutes, with the highest bids being 1.5 Wrapped Ether (WETH), which is approximately $4000.
Nyan Cat, a cartoon kitten with a pop-tart body flying in the cosmos and leaving a rainbow trail behind, was sold for nearly $600,000. NBA Top Shot made a crazy $500 million by selling digital collectibles in form of trading cards embedded with iconic game moments.
Even famous persons like Snoop Dogg and Grimes are joining the NFT feast, releasing unique memories, artwork, and moments in form of securitized non-fungible assets.
A Non-Fungible Token (NFT): Can I Create Mine?
Technically, anyone can create a piece of art, turn it into an NFT on the blockchain (a process called “minting”), and put it up for sale in any market. You only need a crypto wallet, some ETH funds, and an account with in a reliable NFT marketplace where you can upload and turn the content into an NFT or crypto art.
Your NFT can even be programmed to come with a commission, which will be paid to you every time someone purchases an item at resale.
As with buying NFT, you need to set up a wallet and it needs to be filled with cryptocurrency. This prepayment requirement is challenging.
Hidden fees can be overwhelmingly astronomical: websites charge a “gas” fee for each sale (the price for the energy required to process a transaction), not to mention fees for selling and buying.
It is also necessary to take into consideration the conversion commission and price fluctuations depending on the time of the day. All of this means that the fees can often be much higher than the price you receive for selling an NFT.
A Non-Fungible Token: How to Buy?
Once you understand how NFTs work, you may think “Okay, you’ve sold me, I want to buy NFTs.” To start your own collection of non-interchangeable tokens, you first need to acquire a digital wallet that supports the storage of NFTs and cryptocurrencies.
You will most likely need to purchase some cryptocurrency, such as Ethereum (ETH), depending on what cryptos your NFT provider supports. You can buy popular cryptocurrencies with your bank card using the Crypterium app. Crypterium supports the hottest cryptocurrencies including Bitcoin, Ethereum, Ripple to name a few. The solution also offers a bevy of helpful services such as AI-powered market predictions, rate comparisons, crypto loans, crypto savings, and crypto VISA cards, which together allow users to send, receive, and manage their electronic holdings in a single, sleek and secure, interface.
Popular NFT Marketplaces
Once you’ve set up your wallet and deposited some funds into it, there’s no shortage of NFT websites to choose from. Currently, the most visited NFT marketplaces are:
While these and other platforms are used by thousands of NFT creators and collectors, consider doing your own research before making a purchase decision. There is always a risk of buying something valueless or fake.
In addition, the processes for verifying authors and their NFT proposals are inconsistent across platforms – while some are doing their due diligence, others let things slide. OpenSea and Rarible, for example, do not establish owner verification procedures for NFT proposals. If you decide to invest your hard-earned money in NFTs, make sure the marketplace of your choice has some buyer protections in place.
Why Are NFTs Controversial?
Huge sums of money are currently circulating in the NFT market, but this space is not free of some controversy. Many people are skeptical about NFTs blaming tokens to take a toll on the environment and climate. Building blockchain assets, including NFTs, requires an enormous amount of computing power – and therefore a prodigious amount of energy. Some are worried about the real environmental impact of this blockchain craze.
Ethereum, Bitcoin, and others of their ilk are built on a “proof of work” mechanism (that is all about solving a complex series of puzzles) to safeguard users’ financial statements. And this mechanism consumes an incredible amount of energy. In fact, Ethereum alone uses about the same amount of energy as all of Libya. Ouch.
Many representatives of the art and design community are also unhappy with the fact that NFTs change hands for such astronomical amounts of dollars, and often it does not reach the creator. Given that NFTs were originally conceived as a way of transferring control by asserting digital property, the idea that they are becoming increasingly elitist is causing tension. The buy-in fees are prohibitive for many, and the actual purchase price means the market is becoming something of a playground for the super-wealthy.
Are NFTs A Good Investment?
While anyone can purchase an NFT file through an appropriate platform, it does not make NFTs a safe investment instrument.
Like Bitcoin, Ethereum, and other cryptocurrencies, NFT assets are risky because their future is unable to be predicted, and their effectiveness has yet to be evaluated. Since NFTs are new, it might be a smart decision to invest small amounts and test them in action. Buying exclusive non-replaceable tokens is largely up to people themselves. If you have some bucks to spare, it’s worth considering, especially if the piece is meaningful to you.
Bear in mind that the value of an NFT depends entirely on how much someone else is willing to pay for it. Hence, the price will be driven by demand, not by the fundamental, technical, or economic indicators that usually affect stock prices and provide the foundation for investor demand.
All of this means that NFTs can be resold for less than what you paid for them. Or you may not be able to resell it at all if no one needs it.
Gains from NFTs are also subject to income taxes – just like when you sell stocks and gain some profits. However, these tokens are considered collectible assets, they may not receive the preferential long-term capital gains that the stocks have. Some NFTs may even have a higher tax, although the IRS has yet to decide what NFTs are liable to tax.
Be mindful of the fact that cryptocurrencies used to purchase NFTs can also be taxed if they have risen in value since they had been purchased, which means you might want to consult with a tax professional when considering whether you should include non-fungible tokens (NFT) in your investment portfolio or not.
However, approach NFTs the same way you approach any other investment: do your research, evaluate the potential risks – including that you could lose all of your investment – and if you do decide to plunge into action, proceed with caution and consideration.