NFT or a non-fungible token is a cryptographically-unique token stored on a distributed ledger technology (DLT) better known as the blockchain. They are non-interchangeable, meaning one NFT cannot be swapped for another and do not carry the same valuation given their uniqueness.
While the sub-sector is only just becoming popular, NFTs are producible as images, arts, videos, and other digital files. These are authentic certificates proving ownership with the ownership permanently imprinted on the blockchain, except when a new party assumes ownership.
They have also seeped into the gaming industry with popular play-to-earn game Axie Infinity heralding massive interest in the nascent industry.
NFTs grabbed headlines following the record sale of digital artist Beeple’s Everydays: the First 5000 Days NFT artwork for $69.3 million in 2021. Since then, celebrities and public figures have delved into the space. An example is Twitter CEO Jack Dorsey selling his first tweet as an NFT for over $2 million.
Learn more about NFTs within the video below:
What does NFT stand for?
NFT is short form for non-fungible token. They are “non-fungible” because each NFT cannot replace another as each comes with unique features. The uniqueness is further differentiated, with some being ‘rare,’ ‘super-rare,’ ‘limited,’ and several other types.
For example, Bitcoin and fiat currencies like the US Dollar are fungible assets. You can easily swap one BTC or $1 for another without any marked differences in either form of currencies.
NFTs are different. You can’t easily swap one asset for another.
NFTs operate on the same principle as a one-of-a-kind memento of your favourite NBA star. If you exchange it for a different trading card, you will likely get something entirely different from the former. This differentiates NFTs from other cryptocurrencies or fiat.
How do NFTs work?
NFTs are resident on the blockchain, the Ethereum blockchain to be precise.
Ethereum is different from Bitcoin because of its robust network architecture. This uniqueness allows Ethereum to support blockchain-based applications like NFTs.
Each NFT is minted on the Ethereum ecosystem, although some rival blockchains now support NFT minting. The NFTs are minted or created from tangible and intangible items and often include arts, GIFs, short video clips and sports highlights, collectibles, virtual avatar and video game skins, designer wearables, music, and even tweets.
By extension, NFTs are digital representations of physical and everyday items. They also operate on the principle of exclusivity, whereby only one owner can exist at a time. Each item can be easily verified on the blockchain even if the image or GIF is replicated.
What is NFT art?
NFT arts are a digital version of real-world art which means you cannot physically touch it, although you can own it. These NFTs are stored on blockchains that support the minting of these cryptographically-unique tokens.
Digital art has been a major contributor to the adoption of NFTs, and the foremost authority in this niche has been Mike Winkelmann, better known as Beeple.
He sold his Everydays: the First 5000 Days artwork for $69.3 million with a resale of his Donald Trump-themed digital piece called Crossroads going for $6.6 million on Nifty Gateway, an NFT marketplace for artists.
Aside from Beeple, other remarkable NFT art collections have broken into the limelight. Some of the most popular ones in 2021 were CryptoPunks which are 10,000 uniquely generated avatars and Bored Ape Yacht Club (BAYC). Other runners-up are Bored Ape Kernel Club (BAKC) and The Meebits, from BAYC and CryptoPunks.
How and where to buy NFTs
If you’re familiar with buying and storing Bitcoin in a wallet, you shouldn’t have a problem buying NFTs.
Even though NFTs are purchased slightly different from traditional cryptocurrencies, the steps are straightforward:
- Create a wallet
- Buy Ether
- Connect to an NFT marketplace or platform to buy your NFT.
The first step will be to create a MetaMask wallet or any other cryptocurrency wallet that supports the storage of NFTs. Most digital wallets are easy to set up, so you shouldn’t have problems creating one or setting up a backup phrase.
The second step would be to buy Ethereum.
Ethereum’s Ether token is the dominant force in the NFT ecosystem, and most NFT marketplaces accept Ether as payment for these cryptographic tokens. Ether is available on popular centralized crypto exchanges like Binance, Coinbase, or on crypto broker eToro.
The next step will be to transfer the purchased Ether to your MetaMask wallet and connect to the NFT marketplace from which you want to buy the NFT. The most popular secondary sales hub for NFTs is Ethereum-based OpenSea. There are also NFT-specific sales hubs like NBA TopShot for video highlights and Axie Infinity for Axies. Connect your MetaMask wallet and place a bid on, or buy outright, the NFT you want.
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What are NFTs used for?
NFTs allow artists to directly monetize their art without relying on centralized platforms like physical auction houses or art galleries.
Music
Musicians have also keyed into the trend by sharing their songs directly with their consumers while eliminating third-party platforms like Spotify and Shazam. This feature brings in more revenue and allows them to interact with their audience directly.
NFTs also support subsequent resales where the content creator can earn royalties on them. Several NFT marketplaces like OpenSea afford this option and is a major source of passive income for many artists and digital content creators.
Gaming
NFTs have grown in popularity in the gaming sector.
NFTs are used to create non-duplicable in-game items that enable gamers to easily verify the authentic owner of the collectible. These in-game unique items can then be sold for far more value in the marketplace.
This is where play-to-earn (P2E) games like Axie Infinity are gaining major traction. Players buy and upgrade NFTs called Axies which can be later sold on the Axie Marketplace at higher prices.
![](https://academy.education.investing.com/wp-content/uploads/2022/08/nft-gaming-axie-infinity.jpg)
Identity Management
NFTs can be hard-coded to digitally store and protect important documents like degrees, medical history, and licenses. This way, the owner’s vital info is immutably stored on the blockchain. This addresses the issue of copyright infringements and theft as users’ details are kept on the blockchain.
Real estate
Real estate is another area where non-fungible tokens shine. Virtual plots of lands can be sold as NFTs. Blockchain platforms like Decentraland and The Sandbox are popular examples in this space. Virtual properties like the digital “Mars House” sold for $500K as the first NFT home. NFTs are also being tested to represent ownership of physical real estate.
How to make an NFT
Although the technology behind NFTs may be complex for most people, many platforms make it easy for anyone to create an NFT of anything you want.
NFT marketplaces like OpenSea don’t just cater to sales of the unique tokens, but also enable users to mint NFTs directly on the platform.
All you have to do is create an account and click on ‘Create’ to select the digital work you want to turn into an NFT. Once you have selected your chosen work, input the necessary details about the project and set your royalty figure.
Choose the blockchain you want to mint your NFT on. As an example, OpenSea supports Ethereum and layer-two protocol Polygon. Choose the number of NFTs you want to mint and click on ‘Create’ to conclude the steps.
How is an NFT Different from Cryptocurrency?
At the most basic level, NFTs are cryptocurrencies, but their utility is vastly different. Bitcoin and other altcoins are “fungible”.
Fungibility means that one BTC can be exchanged for another. As a result, no matter who sends or receives them, cryptocurrencies and much of the fiat currency we currently use have equal value.
This is not true of NFTs. One NFT cannot be directly interchanged with another. This is because NFTs are programmed with specific traits, order, and qualities.
An instance would be the recently released digital collectibles celebrating the life of now-deceased National Basketball Association (NBA) superstar Kobe Bryant.
Split across eight different collectibles; these NFTs highlight different parts of his once-promising career before his sudden demise in 2021. Each collectible is unique and shows a different aspect of the famous Mamba NBA star’s illustrious career on the basketball court.
Given these collectibles’ cultural significance, they sell for between $30 to over $20,000. This is expected to become more valuable as more collectors look to add the NFT to their lineup.
This is where NFTs distinguish themselves from their other blockchain-based assets. Aside from the fungibility narrative, the supply is another significant difference between NFTs and other digital assets.
A limited collection of an NBA Top Shot in-moment video of a dunk means that only a few users will own that video. This increases their value due to their unique qualities and traits and the exclusivity they provide. On the other hand, cryptocurrencies like Ethereum do not have a limit on their total amount.
The most common ceiling for NFTs is 10,000, meaning only about 10,000 wallet addresses would ever hold a specific NFT project. Because supply is limited, demand is bound to outnumber supply, resulting in the high value that popular NFT projects command.
EVERYDAYS: THE FIRST 5000 DAYS, a piece by a digital artist popularly known as Beeple, is a classic and recent NFT success story. The NFT, which depicted a 5000-day journey over a half-decade, sold for $69.3 million, making it the third most-valuable work of art created by a living artist.
Another area of distinction is in their use cases.
While cryptocurrencies are primarily concerned with the financial aspects of blockchain technology, NFTs go a step further.
For example, it demonstrates digital asset ownership. Making it simple for people to mint personal assets as NFTs and store them on the blockchain. Unless they transfer it to another individual, the asset becomes immutable and linked to their wallet address and identity. They can also be used to represent in-game items like wearables and to represent ownership of physical assets.
NFTs are seeing even more use cases than other cryptocurrencies, as they are used in the educational sector to confirm certificate ownership, in real estate to do the same thing, in healthcare for seamless patient record keeping, and a variety of other spaces.
Should You Buy NFTs?
NFTs have gained utility and have evolved into a form of identity and a cultural statement. Celebrities purchase NFTs to represent their personality and belief system. Top personalities include Eminem, Steph Curry, and others posting display pictures of indifferent-looking Ape NFTs, also known as Bored Ape or BAYC.
Despite their popularity, the success of an NFT is largely subjective. To begin with, NFTs are community-oriented.
This means if no strong community engagement is pushing it, the digital collectible could become worthless in no time. NFTs are also based on how much a buyer perceives their value to be. By this, a high-valued NFT artwork can go for a lesser value if the seller believes it is no longer worth the initial purchase price. While crypto assets like Bitcoin have intrinsic value storage capabilities, NFTs are only valuable if they appeal to the right audience.
Another detail to consider is its relative novelty. Unlike crypto stalwarts like Bitcoin, NFTs are still in their infancy as they only broke into the spotlight in 2021, even though the first NFT (CryptoKitties) launched in 2017. This makes it difficult to track its long-term performance. This makes it a risky investment option for users who do not have a strong financial base.
There have also been cases of stolen NFTs. Customers have lost over $90m to online NFT scams. One investor lost 16 high-end collectibles in 2021 worth $2.1m, according to data from blockchain analytics firm Elliptic. Since crypto is not regulated in several regions, recovering lost NFTs is nearly impossible.
The sector is also battling copyright infringements. There have been claims by real-world artists that their works were tokenized without their consent. This is debatable and hard to verify, given that the individual that mints the NFT first is deemed as the creator on the blockchain network. This has enabled thieves to tokenize and claim ownership of other people’s works.
Nonetheless, NFTs are regarded as a disruptive force, reshaping the worlds of art, gaming, music, and entertainment in general. If you are looking to buy one, we recommend conducting the necessary research on the creators and whether it fits your belief system.
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What is the future for NFTs?
NFTs started 2021 at a paltry sales figure of only $10 million. However, by the end of the year, the nascent sub-sector had grown 10x that figure with over $10 billion in NFT sales recorded.
Advocates who have pointed out that NFTs have the potential to transform the creative industry may be right in saying so, given the number of public figures that own NFTs or are in the NFT business now.
The influx of deep-pocketed investors has seen a lot of retail investors ostracized from the NFT ecosystem. However, the tide is expected to shift as more industries embrace the unique tokens.
Given this, NFTs are expected to become a new way of expression and a more digitized way of connecting with the world around us. Advocates have pointed out that NFTs are still in their infancy. This gives room for more growth as adoption picks up.