Ever since pictures of apes were sold for millions of dollars, people have been asking: what are NFTs? Here we’ll tell you all there is to know about NFTs.
So what is an NFT?
NFT stands for Non-Fungible Token.
“Non-fungible” means that the token is unique and can’t ever be replaced with something identical, because there isn’t one. NFTs are one of a kind.
For instance, cash or Bitcoin are fungible. Every $1 or 1 Bitcoin is the same, and can be used interchangeably. On the other hand, a one-of-a-kind collectible trading card is unique. If you trade it for another card, you’ll have a totally different card.
In the same vein, an NFT is unique and no two non-fungible tokens are identical, which is what makes them non-fungible. You can trade one with another, but then you’ll end up with a totally different NFT.
Are they the same as cryptocurrencies?
That’s a common misunderstanding since both NFTs and cryptocurrencies are stored on the blockchain.
As we already said, the biggest difference between them is that cryptocurrencies are fungible, while NFTs are non-fungible. Secondly, cryptocurrencies can be divided into smaller parts, so you don’t have to, for instance, always trade 1 BTC. However, an NFT isn’t divisible, and has to be traded as a whole.
Read: Many of the world’s richest plan to add NFTs to their portfolio
If you translate them into the real world, cryptocurrencies can be thought of as currency or money. NFTs are more like title deeds stored on the blockchain.
So how do NFTs work?
Although many blockchains support non-fungible tokens, the most popular blockchain is Ethereum. Ethereum (ETH) is a cryptocurrency, like Bitcoin (BTC). But Ethereum is also a blockchain that keeps track of who’s holding and trading NFTs.
On Ethereum, NFTs are built following the ERC-1155 standard. Originally, on Ethereum they were built on the ERC-721 standard, but the ERC-1155 that came in a few months later fine-tuned the process and helped reduce the transaction costs.
Like we’ve said before, NFTs are unique and cannot be duplicated. While the digital file behind the tokens can be copied many times over, the ownership of the work can’t be forged.
Think about it from the perspective of collectible fine art. You and your friends can have a copy of the Mona Lisa in your drawing rooms, but the real one is the one on display at the Louvre museum in Paris. In the same vein, anyone can copy the digital file behind an NFT, but there can only be one original.
What can be NFT-ized, and where did they come from?
Digital art is the most visible form of NFTs these days. But in essence they can really be anything digital. The popular NFT marketplace OpenSea has several NFT categories such as music, photography, trading cards, art and more. In 2021, Twitter’s co-founder Jack Dorsey sold his first ever tweet from 2006 as an NFT for $2.9 million.
Read: NFTs on Bitcoin – To be or not to be
At its core, an NFT is just a mechanism to ascertain ownership. This means it can be used to own in-game items in the metaverse. One popular application for these tokens is to own virtual real estate in Web3 games like Wolf Game and Decentraland. If blockchain stalwarts have their way, we could perhaps one day even use NFTs to prove ownership of real land in the physical world.
And although NFTs have become popular only recently, they have existed for almost a decade now. Many credit Kevin McCoy’s digital artwork titled Quantum as the first NFT, designed and tokenized on the Namecoin blockchain back in May 2014.
How are they created?
The process of creating a non-fungible token is called minting. During minting, the digital file’s information is encrypted and recorded on a blockchain.
There are various online platforms that will help you mint non-fungible tokens, and most will also allow you to list and sell your creations.
OpenSea is the most popular platform for Ethereum-based NFTs. The platform lists millions of NFTs and has clocked billions of dollars in trading volume since its launch in 2017.
Why do they matter?
For artists and creators, NFTs enable them to sell their digital creations to a global audience. To sell a piece of art in the real world, for example, an artist will have to depend upon an auction house, or a gallery, which limits the audience, and will also take a sizable chunk of the sale proceeds.
Some marketplaces also let artists define a royalty for the digital artwork. This ensures the artist gets paid a percentage each time the NFT changes hands. In fact, William Shatner (Captain Kirk of Star Trek fame) uses this as a source of passive income.
For collectors and gamers, non-fungible tokens allow them to become immutable owners of a digital asset. As we explained earlier, this could be everything from a unique costume for their digital avatar or a piece of land or structure in the virtual world.
The tokens can also work like any other speculative asset. You can buy and hold it and hope its price goes up, and you then sell it for a profit.
Is anyone besides individuals using NFTs?
Oh yes. A couple of years ago, many brands were using them as part of their marketing strategies. The tokens offered brands a novel way to engage with their consumers.
Popular fast-food giant Taco Bell created a whole bunch of artwork called NFT Taco Art inspired by their tacos. Similarly, TIME magazine created and auctioned a handful of their most iconic covers as non-fungible tokens.
Read: Here’s how you can make money by lending your NFT
McDonalds, too, used them to boost engagement. Instead of auctioning NFTs to the highest bidder, the fast-food chain offered them as prizes in a competition.
French car maker Citroën created NFTs of their cars, which owners can use to race in the Riot Racers game.
Are they safe?
They are virtually impossible to hack. However, just like with cryptocurrencies the weak link in the security of a non-fungible token is the key. As long as your keys are safe, so is your NFT. But the devices you hold the key in can be stolen, lost or destroyed. So the cryptocurrency mantra, not your keys, not your coin, applies to NFTs as well.
That said, scams are not uncommon.
There’s nothing to stop someone from copying an already NTF-ized digital asset and then mint another non-fungible token for it. However, it wouldn’t be the authentic original, but a counterfeit. This is one of the biggest scams at the moment.
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