What are NFTs?

Introduction

You’ve probably heard about non-fungible tokens, or NFTs. Crypto enthusiasts talk about how NFTs are the future, the building blocks of the metaverse, or a valuable investment tool. Skeptics mock the cartoon pictures of apes and highlight the volatility of NFT’s. It might be difficult to make sense of the subject amidst all of the buzz. This is why we wrote this article. Let us walk you through what non-fungible tokens are, how they are made, how people utilize them, and what are the future implications of NFTs. 

What are NFTs? 

NFT is a non-fungible token. Not that self-explanatory, right? Let’s break it down.

What is a Token?

Generally speaking, a token is an object that represents something else. Like in a board game, a wooden figurine might represent a soldier or a king. 

But this is a broad definition. In terms of NFTs, a token is a digital asset, created on a blockchain. It’s still a thing that represents some other thing. It is essentially a unique piece of alphanumeric code that is attached to a person’s public wallet address. This code represents a certain digital object. This object might be a unit of currency, a concert ticket, a digital artwork etc. Usually, the blockchain doesn’t hold this object itself. Instead, it holds the token that links the location of the object on the internet.

What Does “Non-Fungible” Mean?

Fungible tokens can be mutually exchanged. If you, for some reason, and your friend send each other 1 Bitcoin, nothing will really change. You will both have 1 Bitcoin, just as you did before this swap. Yeah, sure, these are different Bitcoins, represented by different tokens, but otherwise they are entirely identical in function. Imagine a pair of one dollar bills: they have different serial numbers on them, but otherwise they are identical. 

Enter the non-fungible tokens. They represent unique, one-of-a-kind things. One NFT might represent a piece of artwork, another can point to a musical composition, or a digital collectible from a game. No two NFT’s are the same, they always have some property that makes them unequal. You may think of a non-fungible token as a digital certificate that proves you are the owner of a certain (digital) thing. 
 

What Makes NFTs Unique?

You might say: sure, you can make a digital asset, but what stops someone from creating a fake version of a digital asset created by someone else? 
That’s the thing: The process through which NFTs are created requires assigning unique identification codes and metadata to them. Since blockchain holds all records of ownership, you can easily verify the authenticity of each NFT. In a way it’s like selling an original artwork with the artist’s signature.

The Technology Behind NFTs 

The existence of NFTs would be impossible without the invention of blockchain, that much is certain. But other than that how do you create an NFT? How do you take an asset and create a token that represents it?

How NFTs are Created 

New NFTs are created through minting

Minting is essentially the process of writing a digital asset onto a blockchain. So, imagine you have a digital artwork that you’ve created. What’s next?

First, you select a minting platform. Your choice should consider the type of your future NFT and the blockchain you want to mint your NFT art on. This will affect the fees involved and your user experience. 

Second, you set up your crypto wallet. Make sure it supports NFTs, since you’ll need it to store your token, once it’s minted.

Third, you upload your digital file to the platform and write all the important metadata: the title of your work, description, and all key properties, such as royalty percentage (to ensure that you will be given a certain percentage each time your work is resold). This metadata usually contains a link to a JSON file, which contains the properties of the associated digital asset, including its creator, authenticity, and history.

Then, the minting occurs on the blockchain. At the end of it, the blockchain will contain a record of a transaction that will signify the creation of your NFT art, and the fact that you own it now. 

This process has several noteworthy technological components: 

• InterPlanetary File System (IPFS)

Storing your digital asset directly on the blockchain is extremely inefficient. Changes to blockchains require a lot of computational power so it can be rather slow and expensive. Instead, NFTs contain a link to the original digital object. The problem with simple internet links, however, is that they are susceptible to becoming inaccessible due to some problem or another. That is why most NFTs use decentralized storage systems like IFPS to store the digital objects. They ensure that the object represented by an NFT will always be available.

• Smart Contracts

Smart contracts are programs that have the terms of the certain agreement directly written into code. They automatically execute when predefined conditions are met. In the case of NFTs, smart contracts govern the creation, ownership, and transfer of tokens.

When you mint an NFT, you're essentially deploying a smart contract on the blockchain that creates a new token. This contract assigns a unique ID to the token and links it to metadata (such as the digital asset's address in the internet or IPFS) that describes the NFT.

The important thing is that the token itself is not your digital object in some sort of cryptographic form. It is simply a description of your object that also records the fact that you own it.
 

Popular Uses of NFTs 

Now that we answered the ‘what’ and ‘how’, it’s time to ask ‘why’. Why do we need NFTs and what can they be used for?

Art

Uniqueness and scarcity create a new avenue of monetization for creators.Previously, there was no way to ensure that a certain digital work of art cannot be copied ad infinitum. NFTs provide a way for artists to digitally sign their works to ensure that their talent is respected and protected. This powers the global market of digital artworks.

Gaming

NFTs are interoperable, which means that as long as they are made according to the same standards, they can be used across different platforms and applications. This allows players to buy, sell, and exchange in-game items in a new way, which creates more opportunities to play-to-earn projects, as well as new tools to develop more unorthodox metagame mechanics. 

Collectibles

NFTs created the surge of digital item collections. Since the ownership of such items can now be verified, people started exploring the possibilities of acquiring and keeping rare digital items, whether for hobby-related or investment reasons.

And more

NFTs are incredibly versatile and can fulfill a variety of functions. Some decentralized crypto exchanges use NFTs to power their liquidity pools. An NFT might represent voting privileges and memberships, event tickets and any number of digital products or experiences. As long as it’s unique and digital — it can be represented by an NFT. 

For example, the creator of Twitter (now X) Jack Dorsey has minted an NFT of his own first Twitter post. This was widely covered by the news all over the world, since this NFT was bought for 2.9 million dollars in 2021. However, this example is somewhat of a cautionary tale, because since then the new owner wasn’t able to sell this NFT, as it has depreciated in value to around 4 dollars. Not millions. 

Investing in NFTs 

This is a good segue to talk about NFTs as a financial tool, something to invest in. NFTs are freely traded on many different platforms, but before you commit to investing, you should consider several things.

1. The NFT market was enormous in 2021, but in 2022 the bubble burst and over a very short time the sales of NFTs have drastically diminished. Many fortunes were made and lost, and some experts advise against investing in NFTs because of its inherent speculative nature, unless you are willing to take high risk for a chance of high reward.
2. As with any type of crypto asset, you need to be extremely conscious of the safety of your tokens. Employ the best practice security measures and be on the lookout for fraud. Keep all of your passwords safe, since you might not be able to restore access to your investments if you lose them.
3. Keep in mind that the legal landscape concerning NFTs is still being developed, so do your own research and closely inspect the relevant legislation in your jurisdiction to avoid trouble in the future. Actively monitor any changes, since they might drastically impact your investments.

The NFT Marketplace 

To buy and sell NFTs you need to access special platforms. They are called NFT marketplaces, and there are several kinds of them. For customers, these platforms work exactly like traditional marketplaces like Amazon. You log in, you browse listings of goods (in our case the goods are NFTs), and buy whatever you like. Although, you will most likely need to set up a crypto wallet first to pay for the NFTs.

There are many different types of NFT marketplaces. Do not think of the following as mutually exclusive, since there are hybrid marketplaces that combine features of different types. 

• Open. These are big platforms that have listings for any type of NFT. Traditional digital artworks, music, game items, you name it. Open marketplaces do not restrict who can sell what and to whom. If you feel like you want to explore what types of NFTs are there, you may want to check a universal NFT marketplace such as Blur, or OpenSea. The one downside is that there is nothing to ensure quality, and you can spend a lot of time searching for a diamond in the rough.

• Curated. These have a smaller selection of NFTs to choose from, but the NFTs or their creators are (in theory, at least) carefully chosen by experts. Curated NFT marketplaces bear some resemblance to traditional art auction houses that find talented artists and give them exposure by promoting them. It should be noted that some NFT marketplaces have both an open anything-goes market, as well as curated featured collections.
   
• Fractional ownership. This type of platform allows multiple people to own a part of a single NFT. This can be seen as a risk mitigating tool, since spreading your investment over multiple NFTs may be a safeguard against one of them suddenly plummeting in value. However, there are drawbacks as well, because fractional buying and selling is more difficult, and your ownership rights and control are also limited.

How to Buy and Sell NFTs 

While the NFT itself is stored on the blockchain, you still need to safekeep the private keys to it. Naturally, to buy and sell NFTs you need to set up a cryptowallet first. There are a lot of different ones on the market, just make sure that you choose one that supports NFT storage. 

Once you’ve done this you are ready to buy and sell.

To buy an NFT you need to:

• Browse the Marketplace: Search for NFTs based on your interests (art, collectibles, music, etc.).
• Check Prices: NFTs can be sold at a fixed price or auctioned. Make sure to check the pricing method.
• Purchase: If it's a fixed price, click the Buy button. For auctions, place a bid. Confirm the transaction through your digital wallet.
• Transaction Fees: Be aware of gas fees (network transaction fees) on the Ethereum blockchain. These fees can fluctuate depending on network congestion.

Once you finish, the blockchain will have a record of your ownership and you will be able to access your NFT and whatever you want with it. 

To sell an NFT you need to:

• Mint an NFT: If you want to sell your own digital asset, you’ll need to mint it. Of course, if you are looking to sell an NFT you’ve bought previously, you can skip this step. Upload your digital file (art, music, video, etc.) to the marketplace and follow the minting process. You’ll pay a gas fee for minting.
  • There is an option called Lazy Minting on some NFT platforms. It allows you to skip the minting fee when you list your NFT. Instead, you will be charged for a percentage of the selling price, when your NFT is bought. This is useful if you aren’t ready to commit your money before you are sure to sell.
• Set a Price: Choose whether you want to sell your NFT at a fixed price or through an auction.
• List Your NFT: Once minted, list your NFT for sale. The marketplace will guide you through the listing process.
• Promote Your NFT: Promoting your NFT on social media or within NFT communities can increase visibility and potential sales.