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What is an NFT? The Ultimate Guide To Non-Fungible Tokens

Have you heard of non-fungible tokens (NFTs) but don’t know what they are? You may be asking yourself, what is an NFT? If so, you’re not alone! NFTs are a relatively new concept in the world of crypto, and they can seem really confusing at first. But don’t worry, we’re here to help! 


Some people say they aren’t worth it. Many are even saying that they are a total scam—but companies like Ubisoft and Sequoia Capital are investing in the technology. In this post, we’ll break down what NFTs are, how they differ from other types of cryptocurrencies, and why they are so exciting. 

Table of Contents

What is a non-fungible token (NFT)?

stands for “non-fungible token.” NFTs are known as digital assets that link ownership to unique physical or digital goods, such as artworks, real estate, music, and videos. They are non-replicable cryptographic tokens that reside on a blockchain and have a unique identification code and associated metadata.

How are NFTs made(minted)?

NFTs are made/minted on any of the smart contract enabled blockchains like Ethereum, Polkadot, Cardano, Solana, etc. that support NFTs. The meta data is encoded, and fused with tokens of the underlying blockchain.

To familiarize yourself with the idea of minting, think about how the United States Mint makes all of its quarters, nickels, dimes, and other collectible coins or medals. 

The difference is, with blockchain technology it enables more features such as digitalization, embedding metadata, decentralization, transparency, and non-fungibility.

Why are NFTs valuable?

Each is unique, and has large potential for different use-cases. NFTs do not have duplicates, and cannot be confused for another NFT even though they may appear to be similar on the surface(appearance wise). There are unique identifiers(metadata hashed through a cryptographic function) tied to each NFT.

That is why NFTs are non-fungible, which is what makes it a valuable technological advancement in digital asset ownership, as well as in keeping track of physical assets.

The world has $520 trillion dollars in real assets(defined as machinery, equipment, infrastructure, buildings, natural resources, and intellectual property) that one day can be represented through NFTs.

But, let’s not get too far ahead of ourselves.

The more immediate use-cases are in the digital industries such as art, gaming, music, and finance. These industries have assets that are more easily minted onto the blockchain because of their digital natures.

Technical Details 

NFTs are generated when blockchains append records with cryptographic hashes that uniquely identify a set of data to preceding records, hence forming a chain of identifiable data blocks. This cryptographic transaction method guarantees the authenticity of each digital file by establishing a digital signature that monitors the ownership of NFTs.

NFTs function similarly to cryptographic tokens, but unlike cryptocurrencies such as Bitcoin or Ethereum, they cannot be exchanged for one another and are therefore not fungible. 

What is the purpose of NFTs?

The purpose of NFTs depends on what they are used for, but overall, using blockchain technology allows the use of a decentralized distributed ledger, transparency, and confirmation of the supply for the end-user to keep track of their digital and/or physical assets.

It’s up to debate at the moment how useful it would be for physical assets, or how it would be implemented safely. It wouldn’t be a fun situation for anyone, if the deed of a property became a lost because the owner lost access to their digital wallet.

Generally, the possibilities are endless in the digital world with NFTs.

Ownership

Protection of digital asset ownership is one of the most important developments with and blockchain technology. At the moment, whether you’re buying an online course, or gaming items from a game, they are all stored in a centralized server run by the company distributing the assets. 

If those companies wanted to, they could revoke your assets from you, and you wouldn’t be able to do anything about it. 

If your assets were NFTs on a decentralized blockchain like Ethereum, Cardano, Polkadot, or one of the Ethereum scaling solutions like Polygon, then there isn’t an authority that could take your assets away from you.

Buying and Selling

Much like any asset in the world you can buy NFTs to use, to sell, to  rent, or to own.  

Renting

Digital assets will be able to be rented, all it takes are smart contracts programmed into their respective blockchains for this feature to be enabled. 

For example: 

Let’s say you earned or created a rare item in a game. Instead of a new player having to earn or create it themselves, which might take a lot of hours, they would be able to just rent it. 

The owner of the digital item will be able to earn from their rental, and the renter will benefit from being able to use the item that they wouldn’t otherwise have access to.

Identification

Soul Bound Tokens were coined by Ethereum’s co-founder Vitalik Buterin. He theorizes that institutions or even social groups can distribute these Soul Bound Tokens to verify your credentials. They wouldn’t be able to be transferred again once they are distributed to you because they are meant to verify, for example, that you were in the graduating class of Cornell University in 2022.

Access

NFTs can all have different properties. One function is having access to physical areas such as a private party for all holders of a certain company, or VIP access to NFT holders for a group of DJs who collaborate throwing events.

They of course can give you digital access in a game to special map areas for holders who kick-started an indie-developer’s game in the beginning, or whatever other benefits that the creator of the NFT wishes to provide.

Rewards

NFTs can act as a membership card, or as previously mentioned, being in a group that supported a  game prior to launch. These holders can be rewarded with air-dropped NFTs, in-game currency, or anything that the creator wishes to distribute.

Types of NFTs

There are many different types of NFTs, and even more use-cases that have yet to be discovered.  Let’s explore the realm of NFTs.

1. Art NFTs

Source: Open Sea

At the moment, the most popular category of non-fungible items are artworks. The digital ledger on which they are housed, such as Ethereum, Solana, Polygon, etc., issues a public certificate of authenticity and ownership for most of these digital artworks. The digital artwork by artist Beeple, “The First 5000 Days,” was sold at a Christie’s auction in March 2021 for an astounding $69.3 million. 

2. Music NFTs

Music is another form of NFTs. Artists who are fed up with music piracy and mediators use NFTs to release music straight to fans. DJ Steve Aoki claims that he earned more money with his in 2021 than he did in a decade of performing songs. Artist’s pre-release their albums on NFT markets before releasing them on standard streaming platforms. Consumers can purchase a portion of the record, such as a share, and then receive a part of the album’s revenues when it is released through traditional channels.

3. Personal Financial Profiles (PFP) and Avatars

A Twitter search for “NFTs” will provide a sea of messages from people whose avatars include Bored Apes, CryptoPunks, Cool Cats, Doodles, and all of its offshoots and spinoffs. Owners of a PFP or avatar are permitted to use them on their personal social media pages, typically as a digital flex. This online flexing has one crucial benefit for the NFT community: they are practically free advertisements for NFTs. In addition, numerous celebrities’ social media pages have featured PFP NFTs.

4. Video Game Items

Source: EnjinX

Video games are an additional frontier in the field of NFTs. Businesses can sell games as NFTs, but also every digital asset within their games. In-game assets such as skins, characters, and items. Currently, millions of copies of DLC assets are sold to players. MMORPGs(Massive Multiplayer Online Role-Playing Games) are the most interesting to see how it unfolds. If VR(Virtual Reality) and MMORPGs can be combined and appease the masses, which Meta(formerly Facebook) is hinting at, there will be a full-scale economy in these worlds.

5. Collectibles

Source: RTFKT

Trading cards have always been popular and seen as valuable collectibles. The release of NBA topshot has ushered in a new age of trading cards that come along with video highlights as NFTs. The most expensive NFL trading card sold was a Kansas City Chiefs’ quarterback Patrick Mahomes card, which sold for $3.1 million dollars. It remains to be seen if other sport based  trading cards will reach such high levels. Blockchain technology allows confirmation of NFT scarcity, and other value-adds. Maybe in the metaverse, your card will give you access to an NFL player-only lounge, or exclusive access to meet the player on the card. There’s a lot to be excited about as collectibles are adapted into the NFT and blockchain world.

How to create/make NFTs?

Minting is known as the process of creating a NFT(non-fungible token). The word refers to transforming a digital asset into a blockchain asset. The general steps for creating NFTs are:

1. Creating a cryptocurrency wallet

To construct your NFT, you will need a cryptocurrency (like Ethereum) wallet to create an account on any NFT marketplace.

2. Creating an account on an NFT marketplace

Spend time customizing your NFT marketplace account by including a banner image and social network links. The more time spent ensuring your socials are connected, the better; the more time you devote to adding information to your profile, the more visible your art will be.

3. Create artwork digitally or take a photograph

An NFT can be any digital file, so make whatever artwork you wish to keep or sell.

4. Select a platform for selling NFTs

To sell the NFTs, dozens of platforms allow you to sell NFTs on several blockchains, making it nearly hard for a single guide to cover them all, much alone determine which one is best for your project.

For a more in-depth guide, check out our article on How To Create/Make NFTs?

How to buy NFTs?

  1. To begin, you will need to acquire a cryptocurrency and non-fungible token (NFT) wallet that may be stored in a digital format. 
  1. Next, you might have to buy some cryptocurrency, such as Ether; however, this will depend on the currencies that your NFT provider is willing to deal in. Coinbase, Kraken, eToro, and even PayPal and Robinhood now allow customers to buy cryptocurrency using a credit card as a payment method. 
  1. After that, you will be able to transfer it from the exchange to your wallet.
  1. When the cryptocurrency is in your wallet, you can purchase NFTs on your chosen marketplace.

For a more in-depth guide on how to buy NFTs, read this article.

How to sell NFTs?

  1. To start selling an NFT, you must first “mint” one of your digital assets as an NFT or non-fungible token, or if you bought one, then have it in your wallet to transfer to a marketplace. 
  1. Then, move the NFT to the marketplace where you want to sell it (if it’s not already there, or if you’re keeping your NFTs in your crypto wallet and not making them visible on a marketplace). 
  1. Then, on the page of the NFT you want to sell, click the “Sell” button.

For a more in-depth guide on how to sell NFTs, read this article.

NFT usage and ownership rights

Even though ownership of the NFT can be bought and sold, the owner of the intellectual property rights associated with the digital asset that is tied to the NFT will not transfer ownership of those rights to the buyer unless the transfer is specifically outlined in the smart contract that is encoded into the NFT.

Ownership of NFTs and usage rights are frequently confused, some buyers purchase NFTs with the erroneous understanding that an NFT effectively grants them the rights to expand upon and capitalize on well-established intellectual properties.

What is the difference between cryptocurrencies and NFTs?

The main difference between cryptocurrencies and NFTs is the fungibility aspect.

Bitcoin is a type of currency. Like all other currencies, it can be used to buy things and has only a monetary value. This means that within a given cryptocurrency, it doesn’t matter which crypto token you have; they all have the same value: 1 $ETH = 1 $ETH. But NFTs can’t be changed into other things, and their value goes way beyond economics.

Cryptocurrencies work like money by storing value or letting you buy and sell goods. Cryptocurrency tokens are like fiat currencies like the dollar in that they can be exchanged for other things. 

NFTs are one-of-a-kind tokens and can be used to prove ownership and rights over digital goods.

Are NFTs a good investment?

NFTs can be a good investment. It depends on what industry you are investing in.

When traditional assets are made into NFTs, those assets are of course going to be worth investing in. It would be no different than investing in physical assets now, but with the advantages of blockchain technology.

Art NFTs are going to be subjective, the big challenge now is what novel functionality will come with the digital purchase of these types of assets. In a virtual reality world where you have the NFT equivalent of the Mona Lisa in your club house, where everyone can see it during a party, it could have value as a one of a kind piece of art. 

In that metaverse, where mass adoption has already happened, if that art piece is unique, highly sought after, and has 1 unit of supply, you would have an extremely valuable piece of art. That might be a long way away, or maybe not? It is hard to tell with the rapid development of this technology.

Gaming NFTs that are rare and have special utility in the game that they are made for can be a good investment. But, don’t think that you are investing your money into it. It is more than likely that you would be investing your time, in playing the game, and earning these NFTs. 

Play-To-Earn games as we know them now in 2022 are pyramid schemes that require new players to invest in NFTs. Ideally digital items in games will be backed by initially low-cost NFTs, and the free-market will determine which NFTs are valuable based on their utility in their respective games.

As mentioned above, NFTs will have a wide range of use-cases and back both real-world and digital assets. Approaching these assets with the same approach you would in the traditional asset market makes the most sense. The challenge is with digital assets, and determining what type of functionality in the digital space will translate into real world value.

Conclusion

In a world where digital assets are increasingly being owned, non-fungible tokens are a definitive improvement in digital asset ownership. Instead of relying on centralized companies to keep track of your assets where they potentially can be modified or removed, NFTs will allow your digital assets to be on a decentralized server and on a public ledger where it can’t be modified or removed by a centralized authority.

It is likely that the convergence of social media, the metaverse, gaming, virtual reality, and augmented reality(AR) will play a larger role in society. Meta(formerly Facebook) acquired Oculus Rift in 2014 in anticipation of this convergence of social media and virtual reality, and even renamed their company to Meta in order to bring this vision of the future into reality. 

image

imageWhen you look at the amount of users of both social media and gaming, you can see that their user base each is reaching 4 billion users. At the same time, the blockchain gaming world is building its infrastructure to be interoperable. It’s quite possible that a singular entry point into virtual reality will connect to all other virtual spaces that include social media and games together, or that all entry points will lead to 1 shared space. Considering the world’s population is 7.7 billion people, 4 billion users means more than half of the people are on social media or playing games.

NFTs have endless possibilities and use-cases. We’re living in the most exciting time to be alive. The world is moving rapidly towards digitalization, and the value of assets represented on the blockchain with NFTs will potentially be trillions upon trillions of dollars. 

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