NFT Explained and How does an NFT work?
Non-Fungible Tokens (NFTs) seem to have exploded out of Ether this year. From art and music to tacos and toilet paper, these digital assets sell like exotic 17th-century Dutch tulips, some for millions of dollars.
But are NFTs worth the money or the hype? Some experts say they are a bubble waiting to burst, like the dot-com craze or the Beanie Babies. Others believe that NFTs are here to stay and will change investing forever.
What is an NFT?
An NFT is a digital asset that represents real-world objects such as artwork, music, game items, and videos. They are bought and sold online, often with cryptocurrencies, and are often encrypted with the same underlying software as many cryptocurrencies.
Although they’ve been around since 2014, NFTs are now gaining notoriety as they become an increasingly popular way to buy and sell digital artwork. A staggering $174 million has been spent on NFT since November 2017.
NFTs are also usually one of a kind, or at least one of a very limited series, and have unique identification codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, chairman of the Washington Tech Industry Association’s Cascadia Blockchain Council and CEO of Yellow Umbrella Ventures.
This is in stark contrast to most digital creations, which are almost always endlessly available. In theory, cutting off the supply should increase the value of a given asset, assuming there is demand.
But many NFTs, at least in those early days, have been digital creations that already exist in one form or another elsewhere, like iconic music videos from NBA games or secure versions of digital art already floating around Instagram.
For example, renowned digital artist Mike Winklemann, better known as “Beeple”, combined 5,000 daily drawings to create perhaps the most famous NFT of the day, “EVERYDAYS: The First 5,000 Days”, which sold at Christie’s for a record. exceeding $69.3 million.
Anyone can view the individual images, or even the entire collage of images online for free. So why are people willing to spend millions on something they could easily capture or download?
Because an NFT allows the buyer to own the original item. Additionally, it contains built-in authentication, which serves as proof of ownership. Collectors value these “digital bragging rights” almost more than the item itself.
How is an NFT different from a cryptocurrency?
NFT stands for non-fungible token. It’s usually built using the same kind of programming as cryptocurrencies like Bitcoin or Ethereum, but that’s where the similarity ends.
Physical silver and cryptocurrencies are “fungible”, which means that they can be traded or exchanged for each other. They also have the same value: a dollar is always worth another dollar; one bitcoin is always equal to another bitcoin. Crypto’s fungibility makes it a reliable way to transact on the blockchain.
NFTs are different. Each has a digital signature which makes it impossible for NFTs to be exchanged or equal to each other (therefore non-fungible). An NBA Top Shot clip, for example, is not the same as EVERYDAYS simply because they are both NFTs. (An NBA Top Shot clip isn’t even necessarily the same as another NBA Top Shot clip, by the way.)
NFTs exist on a blockchain, which is a distributed public ledger that records transactions. You are probably most familiar with blockchain as the underlying process that makes cryptocurrencies possible.
Specifically, NFTs are typically held on the Ethereum blockchain, although other blockchains support them as well.
An NFT is created or “minted” from digital objects that represent both tangible and intangible items, including:
• Arts
• GIF
• Sports videos and summaries
• Collectibles
• Virtual avatars and video game skins
• Brand sneakers
• The music
Even tweets matter. Twitter co-founder Jack Dorsey sold his first tweet as an NFT for over $2.9 million.
Essentially, NFTs are like physical, digital-only collectibles. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file.
They also get exclusive property rights. That’s right: NFTs can only have one owner at a time. Unique NFT data makes it easy to verify ownership and transfer tokens between owners. The owner or creator can also store specific information inside. For example, artists can sign their work by including their signature in the metadata of an NFT.
What are NFTs used for?
Blockchain technology and NFTs offer artists and content creators a unique opportunity to monetize their products. For example, artists no longer depend on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT, which also allows them to keep a larger share of the profits. Additionally, artists can schedule royalties to receive a percentage of sales each time their art is sold to a new owner. This is a nice feature because artists usually don’t receive future income after the first sale of their art.
Art isn’t the only way to make money with NFTs. Brands like Charmin and Taco Bell have auctioned themed NFT art to raise money for charity. Charmin dubbed its offering “NFTP” (non-fungible toilet paper), and Taco Bell’s NFT art sold out within minutes, with the highest bids hitting 1.5 wrapped ether (WETH), or 3,723, $83 at time of writing.
Nyan Cat, a 2011 GIF of a cat with a pop-pie body, sold for nearly $600,000 in February. And NBA Top Shot generated more than $500 million in sales by the end of March. A single standout LeBron James NFT has grossed over $200,000.
Even celebrities like Snoop Dogg and Lindsay Lohan are jumping on the NFT bandwagon, releasing unique memories, artwork, and moments as secure NFTs.
How to buy NFTs
If you want to start your own NFT collection, you will need to purchase a few key items:
First, you will need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You may need to purchase a cryptocurrency, such as Ether, depending on the currencies accepted by your NFT provider. You can buy crypto with a credit card on platforms like Coinbase, Kraken, eToro, and even PayPal and Robinhood now. You can then move it from the exchange to the wallet of your choice.
You’ll need to keep fees in mind when researching options. Most exchanges charge at least a percentage of your transaction when you buy crypto.
Popular NFT Markets
Once you’ve set up and funded your wallet, there’s no shortage of NFT sites. Currently, the largest NFT marketplaces are:
• OpenSea.io: This peer-to-peer platform advertises itself as a provider of “rare and collectible digital items”. To get started, all you need to do is create an account to browse NFT collections. You can also sort the pieces by sales volume to discover new artists.
• Rarible — Similar to OpenSea, Rarible is an open and democratic marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform allow holders to have a say in features such as fees and community rules.
• Foundation: Here, artists must receive “upvotes” or an invitation from other creators to publish their art. Community exclusivity and cost of entry (artists also have to buy “gas” to hit NFTs) means you can boast of higher caliber artwork. For example, Nyan Cat creator Chris Torres sold NFT on the Foundation platform. It can also mean higher prices, which isn’t necessarily a bad thing for artists and collectors looking to capitalize, assuming demand for NFT stays at current levels or even increases over time.
While these and other platforms are home to thousands of NFT creators and collectors, be sure to do your research before buying. Some artists have fallen victim to imitators who published and sold their work without their permission.
Additionally, verification processes for creators and NFT listings are not uniform across platforms; some are stricter than others. OpenSea and Rarible, for example, do not require owner verification for NFT listings. Buyer protections seem to be slim at best, so when buying NFTs, it may be best to heed the old adage “caveat emptor” (buyer beware).
Should you buy NFTs?
The fact that you can buy NFT means you should. It depends, says Yu.
“NFTs are risky because their future is uncertain and we don’t have much track record yet to judge their performance,” she says. “Since NFTs are so new, it may be worth investing small amounts to test them for now.”
In other words, investing in NFTs is largely a personal decision. If you have the money to spend, it might be worth considering, especially if a piece makes sense to you.
But keep in mind that the value of an NFT is entirely based on what someone else is willing to pay for it. Therefore, demand will determine the price rather than the fundamental, technical or economic indicators, which generally influence stock prices and, at least generally, form the basis of investor demand.
All of this means that an NFT can be resold for less than you paid. Or you may not be able to resell it if no one wants it.
NFTs are also subject to capital gains tax, just like when you sell shares at a profit. However, because they are considered collectibles, they may not benefit from the preferential long-term capital gains rates that stocks receive and may even be taxed at a higher collectibles tax rate. although the IRS has yet to rule. which NFTs are considered for tax purposes. Note that cryptocurrencies used to purchase NFT may also be subject to tax if their value has increased since you purchased them, which means you may want to consult a tax professional when considering adding NFT to your wallet.
That said, approach NFTs as you would any investment: do your research, understand the risks, including the fact that you could lose all your investment dollars, and if you decide to take the plunge, proceed with a good dose of caution.
I am Kingsley Obiakor, a crypto freelance writer with Upwork and an educationist with vast cross-industry knowledge and experience in Blockchain on Cryptocurrency, NFT, Web3, DeFi, DAO, Metaverse, and FinTech. I can write an article on cryptocurrency, NFTs, or product-oriented. You can reach out via: ambkingsley28@gmail.com :
