When the Collins Dictionary announced that the word of the year for 2021 was “NFT”, many began to wonder what NFTs actually were. Here’s everything you need to know about the new phenomenon that shows no signs of abating.
What is an NFT?
An NFT – non-fungible token – is a digital asset that represents a real-world object, such as the Charlie Bit My Finger video that sold for $760,999 back in May. NFTs are bought and sold online, often with cryptocurrency, and are generally encoded with the same underlying software as many cryptocurrencies.
Although they have been around since 2014, NFTs are gaining popularity now because they are becoming an increasingly popular way to buy and sell digital artwork. According to new research from blockchain data platform Chainalysis, around $37 billion has already been sent to NFT marketplaces between January and May 2022.
NFTs are also generally unique, or at least one of a very limited number, and have unique identifying codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and CEO of Yellow Umbrella Ventures.
This is in stark contrast to most digital creations, which are almost always endless in supply. Hypothetically speaking, cutting supply should increase the value of a given asset, assuming it is in demand.
But many NFTs, at least in these early days, have been digital creations that already exist in some form elsewhere — like the viral “Charlie Bit My Finger” clip, or secured versions of digital art already floating around around on Instagram.
For example, the famous digital artist Mike Winklemann, better known as “Beeple”, made a composite of 5000 daily drawings to create perhaps the most famous NFT of the moment, “EVERYDAYS: The First 5000 Days”, which sold at Christie’s for $89 million .
Anyone can view the individual photos – or even the entire collage of photos online for free. So why are people willing to spend millions on something they can easily screenshot or download?
Because an NFT allows the buyer to own the original item. Not only that, it includes built-in authentication, which acts as proof of ownership. Collectors value these “digital bragging rights” almost more than the item itself.
How is an NFT different from cryptocurrency?
NFT stands for non-fungible token. It’s generally built using the same type of programming as cryptocurrency, such as Bitcoin or Ethereum, but that’s where the similarity ends.
Physical money and cryptocurrencies are “fungible”, meaning they can be traded or exchanged for each other. They are also equal in value – one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a reliable means of transacting on the blockchain.
NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or similar to each other (hence non-fungible). Charlie Bit My Finger, for example, is not equal to EVERYDAYS just because they are both NFTs.
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How does an NFT work?
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 cryptocurrency possible.
Specifically, NFTs are usually held on the Ethereum blockchain, although other blockchains also support them.
An NFT is created, or “minted”, from digital objects that represent both tangible and intangible items, including:
• Videos and sports highlights
• Virtual avatars and video game skins
• Designer sneakers
Even tweets count. Twitter co-founder Jack Dorsey sold his first ever tweet as an NFT for $2.9 million.
Essentially, NFTs are like physical collectibles, only digital. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead.
They also get exclusive property rights. NFTs can only have one owner at a time. NFT’s unique data makes it easy to verify ownership and transfer tokens between owners. The owner or creator may also store specific information in them. For example, artists can sign their artwork by including their signature in an NFT’s metadata.
What are NFTs used for?
Blockchain technology and NFTs offer artists and content creators a unique opportunity to monetize their work.
For example, artists no longer have to rely 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 more of the profit.
Additionally, artists can program royalties so that they will receive a percentage of the sale each time their art is sold to a new owner. This is an attractive feature since artists generally do not receive future income after their art is first sold.
Art is not the only way to make money with NFTs. Toilet paper manufacturer Charmin auctioned off NFT art as a theme to raise money for charity. Charmin called its offering “NFTP” (non-fungible toilet paper).
Even celebrities like Snoop Dogg and Lindsay Lohan are jumping on the NFT bandwagon, releasing unique memorabilia, artwork and moments that secured NFTs.
How to buy NFTs
If you want to start your own NFT collection, you need to get some key items:
First, you need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You will likely need to purchase some cryptocurrency, such as Ether, depending on which currencies your NFT provider accepts. You will then be able to move it from the exchange to your selected wallet.
You should keep fees in mind when researching options. Most exchanges take at least a percentage of the transaction when you buy cryptocurrency.
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Popular NFT Marketplaces
Once you have your wallet set up and funded, there is no shortage of NFT sites to trade. Currently, the largest NFT marketplaces are:
• OpenSea.io: This peer-to-peer platform bills itself as a provider of “rare digital items and collectibles.” To get started, all you need to do is create an account to browse NFT collections. You can also sort pieces by sales volume to discover new artists.
• Rarible.com: Like OpenSea, Rarible is a democratic, open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform allow holders to weigh in on features such as fees and community rules.
• Foundation.app: Here artists must receive “upvotes” or an invitation from other creators to post their art. The community’s exclusivity and cost of entry – artists also have to buy “gas” to create NFTs – means it boasts higher caliber artwork. For example, Nyan Cat creator Chris Torres sold NFT on the Foundation platform.
It could also mean higher prices — not necessarily a bad thing for artists and collectors looking to capitalize, assuming demand for NFTs remains at current levels, or even increases over time.
Although these platforms and others host thousands of NFT creators and collectors, make sure you do your research carefully before buying. Some artists have fallen victim to copycats who have listed and sold their work without their permission.
Additionally, the verification processes for creators and NFT listings are not consistent across platforms – some are stricter than others. OpenSea and Rarible, for example, do not require owner verification for NFT listings. Buyer protection appears to be sparse at best, so when trading NFTs it may be best to keep the old adage “caveat emptor” in mind.
Should you buy NFTs?
Just because you can buy NFTs, does that mean you should? It depends, says Yu.
“NFTs are risky because their future is uncertain and we don’t yet have much history to judge their performance,” she notes. “Since NFTs are so new, it might be worth investing small amounts to try it out for now.”
In other words, investing in NFTs is a largely personal decision. If you have cash to spare, it may be worth considering, especially if a chip is important to you.
But remember that an NFT’s value is based solely on what someone else is willing to pay for it. Therefore, demand will drive price rather than fundamental, technical or economic indicators, which typically influence stock prices and at least generally form the basis of investor demand.
All of this means that an NFT can sell for less than you paid for it. Or you might not be able to resell it at all if no one wants it. Do your research, understand the risks – including that you could lose your entire investment – and if you decide to take the plunge, proceed with a healthy dose of caution.