What are NFTs? What do you need to know about non-fungible tokens?

As the metaverse gets more hyped up with every passing day, you’re finding yourself wondering what NFTs are.

They’re everywhere. And if CryptoPunks aren’t hip enough for you, or the Apes are too boring, you could even try to get your hands on an NFT trading card with an X-ray of William Shatner’s teeth. (Will he be saying, “X-Ray my teeth, Scotty”, now?)‍

What are NFTs?

Let’s hit you with the full form — it’s a non-fungible token. They are essentially tokens that can be used to represent ownership of unique items. NFTs can be used to tokenize things like art, collectibles, and even real estate.

Okay… just remembered that I got to explain ‘non-fungible’… my bad. I’ll get to it right away.

Non-fungible — what does that mean?

In the simplest sense, non-fungible means that you can’t replace it with something identical. It is unique.

You can replace a dollar bill with another dollar bill or a bitcoin with another bitcoin, those are fungible things. But let’s say you got your hands on a rare, one-of-a-kind Pokemon card…. That’s non-fungible. If you traded it, you’d get something else in exchange.

Even assets like diamonds and land are non-fungible due to the fact that every unit has unique qualities of its own that increase or decrease its value.

Now, back to NFTs.

How do NFTs work?

NFTs are basically part of blockchain networks. Most of them are part of the Ethereum blockchain network. Yep, before you ask, Ethereum is a cryptocurrency, but the blockchain network that supports these ETH coins is known as the Ehtereum blockchain network.

In addition to Ethereum, other blockchains like Flow and Tezos also support NFTs. NFTs make it possible to assign or claim ownership of any unique piece of digital data and anyone can review the blockchain which acts as a public ledger to track and verify the ownership of the NFT. In spite of this, it is possible for the person or entity that owns the NFT to remain pseudonymous.

There are a lot of things that could get tokenized into NFTs. An NFT could represent digital art in the form of images, gifs, music, videos, and other collectibles. It could also represent real-world items like legal documents, signatures, invoices, tickets to real-world events, or even the deeds to a car. Even articles from the New York Times could be sold as NFTs (surprised much?).

Any NFT can only have a single owner at a time. These Non-fungible tokens are minted through smart contracts that assign the ownership of the NFT. They even manage the transfer of ownership for the NFTs.

NFT special properties (wait…. they sound weirdly like trading cards now)

  • Every NFT has a unique identifier. If the NFT is minted on the Ethereum blockchain, the unique identifier is directly linked to one Ethereum address.
  • An NFT will not be directly interchangeable with other tokens 1:1. As an example, 1 bitcoin is exactly the same as another bitcoin. That’s not true with NFTs. That’s where the whole concept of non-fungibility comes in.
  • Every NFT has an owner. The ownership of the NFT can be traced and verified rather easily.

What’s the point of NFTs anyways?

RIght now, let’s talk about the way they’re used most right now — digital art.

NFTs make it possible for artists and creators to sell their work and actually earn a living (instead of having their art become priceless only after they die). With NFTs, digital artists can now focus on actually making art, not just working as graphic designers for a corporation and following their rules, which holds them back from their true potential.

There’s also the added benefit of the fact that NFT contracts can allow the creator to earn a percentage of the resale value every time the NFT is sold, which means that even if the NFT is initially sold for a reasonable price and later goes up to ridiculous valuation, the artist gets some share of that profit.

As a buyer or collector, you first get to show your support for artists and there are other ways in which you can use your NFT (more than just using your Bored Ape as your Twitter profile picture). There’s also the fact that your NFT’s value could go through the roof, which could get you some pretty high returns.

What can you do with your NFTs?

Different NFTs offer you different usage rights. Other than selling it and making a tidy profit, the biggest thing you could do with your NFT is probably brag about owning it (a very reasonable usecase, if you ask me). Some NFTs also act as tickets to online social clubs.

In a lot of cases, the NFT token is distinguished from the actual art associated with the NFT. You’d want to look closely when you’re buying your NFTs to see what right you actually get.

In the mean time, take a look at how Tyrese Haliburton got his Bored Ape on his sneakers for an NBA game.‍

Buying NFTs

If you want to buy, sell, trade, or create an NFT (or a whole bunch of them), you can do that on online marketplaces or exchanges. The creator or owner of the NFT could either pick a specific price that they want to sell the NFT for, or they could put it up for auction and you can bid on it.

Here are some of the largest NFT marketplaces:

  • OpenSeaThis is the first NFT marketplace to have ever opened up and is the largest NFT marketplace today.
  • Nifty GatewayThis marketplace focuses on making NFTs accessible to everyone. Their mission is to have 1 billion people collecting NFTs. It’s a USD based marketplace to buy and sell NFTs.
  • FoundationThis marketplace requires creators to be invited by other creators who are already part of the marketplace.
  • RaribleThis focuses on digital art and has its own RARI token to reward members.
  • SuperrareThis marketplace is heavy on curating and offering digital art.

Most marketplaces accept payments for NFTs in cryptocurrencies, but some even accept fiat currencies like US Dollars.

How is the scarcity of an NFT determined?

Just like some trading cards like the Pikachu Illustrator are extremely rare and expensive, some NFTs are rather scarce and valuable as well.

The Pikachu Illustrator card — one of the rarest and most valuable Pokemon cards‍

The creator of an NFT gets to decide how scarce it is. Sometimes the creator might mint multiple NFTs with slight differences or they might mint a single NFT that is a rare collectible. Even if the creator is minting multiple NFTs with minor differences, they can decide to make certain features more scarce in the NFT collection, thus making them more valuable and sought-after.

For example, there are 10,000 Bored Apes in the Bored Ape Yacht Club collection, but only 46 of them have the Solid Gold Fur trait, making those 46 Bored Apes extremely rare and valuable.

Are NFTs a good investment?

NFTs are essentially speculative investments. Maybe your NFT’s value will go up phenomenally and you could bag a really sweet profit, but there’s always the chance that it could go to nothing and become worthless. Basically, there’s no guarantee that you’ll ever see any returns from your NFT purchase. You might make thousands, even millions of dollars selling it, but its also possible that all you’ll be left with is bragging rights, saying that you own an NFT, even if it really isn’t worth much.

You might also be wondering if your NFTs will last long and become an asset that gets passed on for generations (like physical art). Well, you might be worried about bit rot, the fact that image quality could go down, or even that the file format might not be able to be opened at some point in the future. Heck, you might even be worried about losing your wallet’s password. But you got to remember that even physical art might not be particularly robust (why else would museums bother so much about even controlling temperatures to protect their art?).

This article is about “What are NFTs? What do you need to know about non-fungible tokens?” was originally published in Engati blogs.

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