Learn What is a Non-Fungible Token (NFT), How NFTs Works, Its Uses, & How To Buy The Popular NFTs
Currently, NFTs are taking the world of digital art and collectables by storm. Just as we believed Bitcoin was the digital answer to currency, NFTs are pitched as the digital answer to collectables. Do bear in mind that although NFTs use the same blockchain technology, which powers cryptocurrencies, they're not a currency. A Non-Fungible Token (NFT) is a non-interchangeable token/unit of data stored on a blockchain, a form of digital ledger, that can be traded and sold. Although NFTs are generally held on the Ethereum blockchain, other blockchains do support NFTs as well. The types of NFT data units can be associated with digital files such as videos, photos, and audio. Since each token is identifiable uniquely, NFTs differ from blockchain cryptocurrencies, such as Bitcoin.
Although NFT ledgers proclaim to furnish a public certificate of authenticity or proof of ownership, the legal rights given by an NFT can be uncertain. This is so because NFTs don't restrict the copying or sharing of the underlying digital files, they don’t convey the copyright of the digital files, and/or they also don’t stop the creation of NFTs with similar associated files.
Nowadays, we all keep hearing about NFTs in the news, on various social media platforms, from independent artists and established brands. With each passing day, even more people are joining the world of NFT. In this article, Fintra aims to dive into Non-Fungible Tokens (NFT) and be your guide to enhance your knowledge about this unique blockchain application. The topics we will dive into are as follows:
- What's a Non-Fungible Token (NFT)?
- Ethereum and Non-Fungible Token (NFT)- The Assets of the Internet
- How Does a Non-Fungible Token (NFT) Function?
- What And How Are Non-Fungible Tokens (NFTs) Used?
- The Risks Associated With Non-Fungible Token (NFT)
- What's The Difference Between Non-Fungible Tokens (NFTs) and Cryptocurrency
- How to Buy Non-Fungible Tokens (NFTs)?
All this began in 2017 when the first-ever non-fungible token was released on the American Studio Larva Lab’s Ethereum Blockchain, it was named Crypto Punks. The two-person team who did this was John Watkinson and Matt Hall. Later on, during the same year, another project was released and it was named Crypto Kitties, this one immediately went viral after its arrival.
What's a Non-Fungible Token (NFT)?
The Non-Fungible Token (NFT), also known as a digital asset, is a token that can be used to represent digital ownership of unique items. They enable us to tokenise things like digital artworks, collectables, real estate, music, in-game items, videos, infographics, a computer, a song file, furniture, a unique sneaker in a limited-run fashion line, an essay, a digital collectable, a domain name, a ticket giving access to an event or a coupon, sports cards, and rarities. Usually, such things are bought and sold online with cryptocurrency and are encoded with the same underlying software as various cryptos. These things are termed NFT because they’re not interchangeable with other items because they have unique properties. Moreover, they can have only one official owner at a time. NFTs are secured by the Ethereum blockchain, where no one can modify or tamper with the record of ownership or copy/paste a new NFT into existence.
Furthermore, NFTs are cryptographic assets on a blockchain that have unique metadata and identification codes that distinguishes them from one another. Unlike cryptocurrencies that are fungible, NFTs cannot be exchanged or traded at equivalency. In contrast to this, fungible tokens are like cryptocurrencies, they're identical to each other, and for this reason, they are used as a medium for commercial transactions. In fact, due to their distinct construction, each NFT does bear the potential for several cases. For example, NFTs are thought to be an ideal way to digitally represent physical assets such as real estate and various other things as mentioned earlier. This is so because they are based on blockchains. NFTs also attempt to remove intermediaries and enable the artists to connect with audiences or for identity management. Along with removing intermediaries, NFTs can simplify transactions, and create new markets. Just like Bitcoin, also NFTs retain ownership details for easy transfer and/or identification between token holders. An owner can even add attributes or metadata pertaining to the asset in NFTs. For example, those tokens that represent coffee beans could be classified as fair trade, or an artist can sign its digital artwork with its signature in the metadata.
Although NFTs have been around for quite some time, they are now gaining fame because they are becoming a popular way to buy and sell digital artworks. Thus, for all these reasons NFTs are considered modern-day collectables, and to get to know how to tackle NFTs, it's vital helpful to first get familiar with the economic concept of fungibility:
- Fungible items can be traded with one another with ease because their value isn't tied to their uniqueness. For example, one can exchange an Rs. 10 note for another Rs. 10 note and still have Rs. 10 even though the new note has a different serial number.
- Non-Fungible items aren't interchangeable. Each token of NFT has unique properties and is not worth the same amount as other similar tokens.
You must be pondering why people are shelling out so many funds for NFTs? Well, the answer is that creating an NFT, enables the creators to verify scarcity and authenticity to just about anything digital. As an example, compared to traditional art collecting, we are aware there are infinite copies of the Mona Lisa in circulation, but there is only one original piece. Thus, the invention of NFT technology has enabled to assign the ownership of the original piece. In fact, it's been observed that it's a lucrative business selling NFTs in the art world.
Fintra cautions that although the NFTs are becoming headlines now, it also has attracted scammers and fraudsters. Thus, as an investor always beware as some might attempt to sell you something and say it's an NFT when actually it's not. Others may also claim they have the ownership to sell an NFT of a piece of work that in reality they don't own and/or didn't create.
Ethereum and Non-Fungible Token (NFT)- The Assets of the Internet
Technically speaking, one valid fact is NFTs and Ethereum have solved some of the problems existing on the Internet today. With each passing day as the world around us is becoming more digitalized, the need to replicate the properties of physical items such as uniqueness, scarcity, and proof of ownership has increased. We generally see that digital items often work only in the context of their products. For example, one can't re-sell an iTunes mp3 that it has purchased, and at times it can’t even exchange one company's loyalty points for another platform's credit when there's a market for it.
The following chart describes how the Internet of NFTs compares to the Internet most of us use today appears:
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An NFT Internet |
The Internet today |
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NFTs are digitally unique and no two NFTs are the same. |
A copy of a file, such as a .mp3 or .jpg is the same as the original. |
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Every NFT has to have an owner and this is for public record and it will make it easier for anyone to verify. |
The records of ownership for digital items are stored on servers that are controlled by institutions – one has to take their word for it. |
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NFTs are compatible with anything that has been built using Ethereum. For example, an NFT ticket for an event could be traded on every Ethereum marketplace for an entirely different NFT. One can trade a piece of art for a ticket! |
Firms with digital items have to build their own infrastructure. For example, an app issuing digital tickets for events will have to create its own ticket exchange. |
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Content creators can sell their works anywhere and can access the global market. |
Creators depend on the infrastructure and distribution of the platforms that they use. These are subject to terms of use and geographical restrictions. |
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Creators can preserve ownership rights over their work and directly claim resale royalties. |
Platforms like music streaming services generally retain the majority of profits from sales. |
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Items can be used in unique and surprising ways. For example, one may use digital artwork as collateral in a decentralised loan. |
How Does a Non-Fungible Token (NFT) Function?
As described above, a Non-Fungible Token (NFT) is a unique crypto token that exists and is managed on a blockchain. Thus, the blockchain acts as a decentralized public ledger, which can trace the ownership and transaction history of each NFT. For this reason, NFTs give the ability to claim and assign the ownership of any unique piece of digital data which is trackable by using Ethereum's blockchain as a public ledger.
Minted from digital objects as a representation of digital or non-digital assets, an NFT could represent the following:
Digital Art:
- GIFs
- Art
- Collectables
- Music
- Videos and sports highlights
Real-World Items:
- Deeds to a car
- Tickets to a real-world event
- Tokenized invoices
- Legal documents
- Signatures
- There are lots more options to get innovative with
At a time, an NFT can only have one owner, and the ownership is managed through a unique ID and metadata which no other token can imitate. NFTs are minted via smart contracts which assign ownership and manage the transferability of these tokens. When you create or mint an NFT, you execute code that's stored in smart contracts which conform to various standards, such as ERC-721. This information is then added to the blockchain where NFTs are being managed. From a high level, the minting process has the following steps that it goes through:
- Building a new block
- Validating information
- Recording the information into the blockchain
NFTs have some unique properties:
- Each token minted consists of a unique identifier that is directly linked to one Ethereum address.
- NFTs are not interchangeable with other tokens 1:1. For example, 1 ETH is the same as another ETH, but this isn't the same case with NFTs.
- Every token has an owner and the information is verifiable easily.
- These tokens live on Ethereum and they may be bought and sold on any Ethereum-based NFT market.
In other words, if someone owns an NFT:
a. The person can easily prove that he/she owns it.
- Proving that one owns an NFT is similar to proving that it has ETH in its account.
- For example, when purchasing an NFT, the ownership of the unique token is transmitted to the individual's wallet via their public address.
- The token ascertains that the individual's copy of the digital file is original.
- The person's private key is proof of ownership of the original.
- For that particular digital artefact, the public key acts as a certificate of authenticity.
b. The creator's public key is a permanent component of the token's history. It demonstrates that the token the person holds was created by a particular individual, thus contributing to its market value vs a counterfeit. One another way to prove the ownership of the NFT is by signing messages as it'll prove that the individual does own the private key behind the address.
c. Since the private key is proof of ownership of the original, it reveals that the private keys behind that address are controlling the NFT.
d. Once owned no one in any way can manipulate it.
e. The person can sell it, and by doing so, sometimes this can enable one to earn the original creator resale royalties.
f. Or, one can hold the token forever and have mental peace that its asset is secured by its wallet on Ethereum.
And if someone creates an NFT:
- It can easily prove they’re the creator.
- It can determine the scarcity.
- Earn royalties every time it's sold.
- Can sell it on any NFT market or peer-to-peer as you are not confined to any platform and don't need anyone to intermediate.
Scarcity
Talking about scarcity, the owner/creator of an NFT gets to decide their asset's scarcity. For example, assume a ticket to any sporting event or a concert. Just as any organizer of an event is given the authority to choose how many tickets to sell, the same applies in NFT token market- the creator of an NFT gets to decide how many replicas should exist. Occasionally these replicas are exact. Moreover, sometimes many are minted, which are very similar, but each one is slightly different. In another case, the owner may desire to create an NFT where only one can be minted as a special rare collectable. In these cases, every NFT would still bear a unique identifier with only one owner. The NFT's intended scarcity matters, and it is up to the owner/creator. The creator may desire to create each NFT entirely unique to create its scarcity and/or it may have reasons to make several thousand replicas. Do bear in mind that all this information is public.
Royalties
Sometimes when they're sold, automatically, some NFTs will pay out royalties to their creators. Although this concept is still developing, it's claimed to be one of the most powerful. Since this is entirely automatic the creators just can sit back, relax, and earn royalties as their work gets sold from person to person. In fact, at the moment, when it comes to figuring out royalties, it is done very manually and lacks accuracy, at times most of the creators don't get paid for what they deserve. Nevertheless, If an individual's NFT has a royalty programmed into it, it'll never miss out.
What And How Are Non-Fungible Tokens (NFTs) Used?
Below is some more insight on how NFTs are used on Ethereum.
- Digital content
One of the greatest use of NFTs in today’s world is seen in the digital content realm. This is so because today this industry is broken; the content creators view their profits and earnings being potentially swallowed by platforms. Artists who publish their works on a social network ultimately generate money for the platforms, which later on sell ads to the artist's followers. In return, they gain exposure, which doesn’t do any good to them, at least not monetary wise. Thus, the invention of NFTs has powered a new creator economy wherein the creators don't have to hand over ownership of their content to the platforms they use for publicising it. The ownership is baked into the content itself. Therefore, as they sell their content, funds get directly transferred to them. When a new owner then sells the NFT, the original creator automatically receives royalties. This is guaranteed every time whenever it's sold because the address of the creator is part of the token's metadata, which can't be modified.
- Gaming items
A lot of interest in NFTs has been observed from gaming developers. This is so because NFTs provide records of ownership for the in-game items, fuel in-game economies, and bring lots of various benefits to the players.
In most regular games, one can purchase items to use in their game, however. If that item is an NFT, the individual can recoup its money by selling it when it’s done with the game. The person can even make profits if that same item becomes more desirable.
As issuers of the NFT, the game developers can earn a royalty each time when an item is re-sold in the open marketplace. This forms a more mutually-beneficial business model where players and developers earn from the secondary NFT market. besides this advantage, this also means that if the developers are no longer maintaining a game, the items an individual has collected remain theirs and will always be under their control. Later on, the in-game items become digital memorabilia and tend to have some value outside of the game.
- Domain names
NFTs provide an individual's domain with an easier-to-remember name. It works similarly to a website domain name, making its IP address more valuable and memorable, and usually it’s based on length and relevance.
- Physical items
Although tokenisation of physical items hasn’t still developed as their digital counterparts, plenty of projects are exploring the tokenisation of real estate, unique fashion items, and more. In fact, since NFTs are seen essentially as deeds, one day we could purchase a home or car using ETH and in return (in the same transaction) receive the deed as an NFT. As things are increasingly becoming high-tech, one can easily imagine a world where its Ethereum wallet becomes the key to its home or car, its door getting unlocked by the cryptographic proof of ownership! Moreover, with valuable assets such as property and cars being representable on Ethereum, a person could use NFTs as collateral in decentralized loans. This is especially helpful if one isn’t having much cash or isn’t crypto-rich, but owns physical items of value.
- Investments and collateral
In today's world technology has evolved so much that now the NFT world along with the decentralized finance (DeFi) world are beginning to work together in numerous interesting ways because NFT and DeFi (Decentralized Finance) use the same infrastructure. Experts have developed various DeFi applications that enable us to borrow funds by using NFTs as collateral.
The Risks Associated With Non-Fungible Token (NFT)
Valuations
Before planning to purchase an NFT, do bear in mind that similar to any collectable, purchasing an NFT is a risky bet as its value keeps on changing, it is an up-and-coming market hence there is no assurance that there will be a similar kind of demand on digital assets. If the NFT that you brought has no demand, it could land you up paying a massive sum for something which is decreasing in value or is un-sellable. Anyone can make their own NFT, however, do note there is no assurance a buyer would purchase it, and this could lead to a waste of time and money.
Storage
Through blockchain technology, sales in NFT are recorded, this demonstrates ownership. Since the real NFTs are created and stored through some marketplaces and platforms, by any chance if such platforms shut down, there won’t be any assurance that you will have access to the work. Thus, if such happens it makes it less secure than owning a physical art that’s hanging on a wall, gaming tickets, or trading cards, which won’t simply just vanish.
Regulation
Since there are no regulations of NFTs, one has to have lots of trust in them. It has to believe that the NFT being purchased is a unique piece of work or art and has not been replicated from somewhere else, thus, no copyright issues will pop up. Furthermore, if administrators and regulators begin to get more interested in this thriving business, it can eventually cause crackdowns on platforms and limitations could occur on how much collectors can contribute. This will in turn lead to a decrease in the NFT token market value.
Hot Potato Effect
NFT games sometimes can have a ”hot potato” effect. It means when the players desire to purchase an asset to sell it and gain profits, and if by chance the market collapses, it can lead to a huge loss.
What's The Difference Between Non-Fungible Tokens (NFTs) and Cryptocurrency
NFTs and cryptocurrencies depend on the same underlying blockchain technology, and that’s where their similarity ends. Cryptocurrencies are termed “fungible,” because they can be exchanged and traded for one another. Moreover, they’re equal in value, for example, one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility causes it to be a trusted means for conducting transactions on the blockchain.
On the other hand, NFTs are different. Each of their tokens has a digital signature, making it impossible for NFTs to be exchanged for or equal to one another. For this reason, it's known as non-fungible. Moreover, the NFT marketplaces at times also require individuals to purchase NFTs with a cryptocurrency. However, NFTs and cryptocurrencies are developed and used for different purposes. For example, cryptocurrencies strive to serve as currencies by storing value and/or letting people buy or sell goods. Similar to fiat currencies, cryptocurrencies tokens are fungible tokens. In contrast to cryptocurrencies, NFTs create one-of-a-kind tokens- they indicate ownership and convey rights over digital goods.
How to Buy Non-Fungible Tokens (NFTs)?
Desiring to get started with NFTs? Then, to do so you'll have to visit the NFT marketplaces in which they’re sold. NFT marketplaces get built on a blockchain, thus, they differ from other online marketplaces. NFT marketplaces are decentralized applications, which enables them to be secure and run by the community. One may buy, sell, trade, and create NFTs from online marketplaces or exchanges. The owner of NFT may choose a specific price for it or there might be an auction where one has to bid on the NFT.
To purchase NFTs, first, get a digital wallet where you can store NFTs and cryptocurrencies. Most likely you will be required to purchase some cryptocurrency, like Ether, depending on what currencies the NFT provider accepts. Purchasing crypto can be done using a credit card on platforms such as Coinbase, Kraken, eToro, PayPal, and now even on Robinhood. Finally, after doing this, one can transfer the cryptos from the exchange to the wallet of your choice. As you research for options, do keep the fees part in mind as most exchanges may charge a percentage of the transaction when buying crypto.
Conclusion
If you are seeking to purchase NFTs as an investment then do bear in mind that there's no guarantee its value will increase. Although some sell for thousands or millions of Rupees, others may remain or become worthless.
Moreover, just because you can afford to buy NFTs, does it mean you should have them? To be honest, investing in NFTs is a very personal decision. If money is plenty to spare, it might be worth considering purchasing them, especially if a piece means a lot to you. However, keep in mind that NFT’s value is entirely based on what someone else is willing to pay for it. Therefore, it's the demand that will drive the price rather than technical, fundamental, or economic indicators, which typically impact stock prices and generally form the basis for investor demand.
Fintra experts claim that NFTs are risky because their future is uncertain. Still, none has a lot of history to judge their performance. However, since they’re so new and you strongly feel the urge to dive into them, it might be wise to invest in small amounts for trial and see the results. We also advise approaching NFTs just like any other investment: Do thorough research, and understand the risks, including the fact you might lose all of your invested funds. Moreover, even if you are deciding to take the plunge, then proceed with caution.
