By clicking to read this post, you are likely curious to know what exactly NFTs are; you may have read or heard about how several people are selling NFTs for thousands or even millions of dollars. Who wouldn’t want that? However, like most things on the blockchain, no one really explains what it is in-depth and simple enough for beginners to understand.
So, we wrote this post to guide you through understanding what an NFT is and what you can do with NFTs.
What is an NFT?
NFT stands for Non Fungible Tokens, but that doesn’t explain much. Here’s a better explanation:
Non-fungible tokens are digital assets that are not interchangeable with other digital assets. Each NFT is unique, like a snowflake.
Fungible means that two things are identical and can be exchanged for each other – think of fiat currency. For example, if I have $20 in my pocket and you have $20 in your pocket, we can exchange those $20 bills, and both of us still have $20 each. They are identical and interchangeable.
With NFTs, because each one is unique, they cannot be exchanged with each other like fiat currency. Let’s say you own a digital art piece that is an NFT. I cannot simply trade my NFT for your NFT because each NFT is different – yours may be worth more or less than mine. No two NFTs are the same.
How do NFTs Work?
NFTs can be anything, but the most common type of NFT is digital art. Artists can create digital art pieces like digital drawings/paintings and photographs and mint them as an NFT, meaning they are creating a unique token representing their artwork. When someone buys the NFT, they essentially buy the digital artwork itself.
NFTs can also be used to represent other things like land or property ownership, memberships, or even gaming items, especially on the metaverse.
NFTs live on the blockchain and are stored in what’s called a wallet. Your wallet is like your bank account but for cryptocurrency. You can store many different types of cryptocurrency in your wallet, including NFTs.
When you purchase an NFT, you are actually buying a token that is stored on the blockchain. The ownership of this token gives you the ability to say that you own the NFT. It is like physical art collecting; though the artist can still have the copyright and reproduction rights as they would with any physical art, you have the “original”.
Why is NFT Important?
Well, it depends on if you are looking to buy or sell an original.
Creator
If you are an artist or content creator, an NFT can give you a way to sell digital art or any other item for much more than you probably would have ordinarily.
If you designed something like a digital sticker, there’s not much market for that, but if you put it on the blockchain and try selling it as an NFT, you may make a much bigger bang for it. Plus, if you put certain things in place, you may be able to get a percentage from future resells/exchanges of your NFT.
Also, you wouldn’t have to rely on galleries or auction houses to sell any art or only create artwork that can sell in galleries. Plus, you can keep more of your profits and make even more (percentage on further sales) without giving a massive cut to the gallery or some other platform and even making proceeds from future sales, which isn’t possible with regular artwork.
Remember that NFTs are not only artwork; they can be other things though digital art is the most popular. So, there are many other benefits depending on the type of NFTs you want to create.
Buyer
As someone who wants to buy NFT tokens, there are several things you can do with NFTs. NFTs are not cryptocurrencies, but some platforms allow you to enjoy similar benefits that come with crypto, such as being able to stake it (more on this later) or even hold it like any other speculative asset in hopes that its value will go up one day and you sell for a profit.
There is also the general benefit of buying a digital asset which is supporting the creator.
Lastly, users of NFTs can use it as per its terms and can brag that they own it.
There is more, of course, looking at the possibilities in the future, which we will look at later in this article.
NFTs: the big Numbers
There are huge numbers when it comes to the NFT market. In February 2021 alone, NFTs generated over $25million in the music industry from artists selling both artwork and music as NFT tokens.
The most expensive non-fungible token ever sold that we currently know of was $91.8million. It took almost 30,000 collectors to put together the money to purchase it in December 2021. The fragmented artwork titled The Merge was created by the AN artist who goes by the pseudonym Pak.
Another really expensive one is the digital artwork by Mike Winkelmann (known as Beeple) titled ‘Everydays: The First 5000 Days’, and it was sold for $69,346,250. This was one of the sales that brought in much interest in NFTs.
Things that you may even see as not worth anything or much have sold for a lot.
Nyan Cat, a GIF of a cat with a pop-tart body, sold for almost $600,000.
NBA Top Shot, a website that creates and sells NFTs around NBA players, teams, and moments, has generated over $500million in sales.
Cryptokitties is another popular site for huge NFT sales. It is a blockchain online game where players adopt, breed, and sell virtual cats. Some cats on the platform sell for over $300,000, with total sales said to be over $40million.
Of course, there have been smaller sales and NFTs that have still not been bought despite being listed for a while. Nevertheless, the numbers in NFT sales show us that NFTs are growing even more popular, and we may not have reached the ceiling in terms of how expensive an NFT can sell.
How do you Buy and Sell Non Fungible Tokens?
Like any other blockchain-based asset that is bought and sold, you will need some kind of exchange or marketplace. With NFTs, they are called marketplaces. Some of the most popular ones include;
These platforms allow you to buy, sell or auction off your NFTs. They may also take a small percentage from each transaction that happens on their platform or take transaction fees in the form of a crypto utility token or another cryptocurrency.
When creating an account on any of these platforms, you will need to connect your wallet as this is where your NFTs will be stored. The most popular and trusted crypto wallets are MetaMask and Trust Wallet, but there are others.
Step by Step Guide to Buying Your First NFT
Assuming you have already set up a wallet (if not, do that first), the next thing you need to do is choose which marketplace you want to use. For this guide, we will be using OpenSea.
Go to OpenSea and connect your wallet. Choose MetaMask or whichever wallet you are using and follow the instructions on-screen to connect it.
After your wallet has been connected, you can browse the NFTs available for sale. When you find an NFT that you want to purchase, click on it and click ‘Buy Now’. You can then review and agree to the marketplace terms before confirming your purchase.
Once the transaction has been processed, the NFT will be transferred to your wallet, and you will be the new owner!
Apart from just buying straight up, OpenSea allows negotiations. So you can make an offer or bid on an NFT, and if the creator or seller agrees, you get the NFT at the price you suggested.
Selling Your NFT
If you want to sell your NFT, the process is pretty similar to buying one. We will use OpenSea again for this example. First, connect your wallet if you haven’t already, then head to your profile and find the NFT you want to sell. If you already have an NFT in your wallet, you should see it there. You can then click on the “sell” button to list it on OpenSea.
How to Create NFTs
Some people don’t just want to buy other people’s NFT to resell or keep; they may want to create their own. How do you do that? It is actually not as complicated as you may think.
Creating an NFT requires two things; a smart contract and an asset. The smart contract will define the rules and characteristics of your NFT, while the asset can be anything digital like a photo, video, sound file, or even an in-game item.
You will need to use a platform that allows you to create NFTs like Mintable and Opensea. For this guide, we will use Mintable.
If you are not signed in at this point, do so first. After you have signed up, verified your account, and logged in, you will be prompted to connect your wallet.
After you are in and connected, navigate to “mint” in the menu section.
You will then need to select the blockchain you want to mint on and how you want the minting to go.
Then you can fill in the details of your NFT and upload the preview and any downloadable files that will only become visible after a transfer of ownership (i.e., selling or gifting your NFT). After that, click on “List Item” and confirm the transaction in your Metamask.
NFT Investment Opportunities
When it comes to the NFT market, it is more than just buying an NFT; you can also look into investing NFTs. Investing your NFT may help you grow your finance and portfolio of crypto, NFT, and blockchain-based tokens/items.
The strategies are similar to crypto investment strategies. We will discuss them below.
NFT Staking
NFT staking is when you buy an NFT and “lock it up” for a while, similar to how you stake cryptocurrency. The advantage of doing this is that you may receive rewards in the form of other NFTs, interest, or another token.
In general, NFT staking can help attract more NFT and crypto investors, which will, in turn, boost much-needed NFT liquidity and speed up the development of the NFT ecosystem.
Staking your NFT allows you to earn on them while still maintaining ownership. To stake, you need an NFT staking platform. There are several NFT staking platforms, including NFTx and Zookeeper. We have covered NFT staking in-depth in another article.
NFT Lending
You can also lend cryptocurrency and fiat money to someone else who has an NFT as collateral. You can then earn interest on your loan during the loan period. In the best-case scenario, you get a juicy APR, and in the worst case, where the borrower defaults, you get an NFT that may be worth a lot or become worth a lot in the future, thus getting an NFT at a highly discounted rate.
Borrowers get the opportunity to obtain a cryptocurrency without selling their NFT. They can use that money for whatever they need to and get their NFT back as long as they can pay their loan before the closing date.
There are a few platforms that offer NFT lending and borrowing services. One of them is NFTfi.
Metaverse and NFTs
If you’re looking for investment opportunities with NFTs, a good place to start is the Metaverse. The metaverse is a network of virtual worlds. In the Metaverse, you can create and trade assets like you would in the real world, including real estate, gaming, and much else in NFT form.
NFTs are used in the metaverse a lot. For example, if you were to purchase land in the metaverse, since it isn’t real life, you can’t get documents and physical land, which is where NFTs come in the metaverse. Apart from properties in the metaverse, it has been said that physical real estate can be converted into NFTs to smoothen the process and documentation.
How to Store and Protect Your Non Fungible Tokens
Storing your NFTs is exactly like storing your cryptocurrencies. First, NFTs are stored on the blockchain, so you are not really “storing” them. What you are to do is secure access to your NFTs. For that, NFT or crypto wallets are what you use.
A wallet will store your private keys and help you connect your public addresses to your encrypted private key stored in it so your NFT on the blockchain is accessible for use or transfer.
It is crucial you choose a good wallet for your NFT and keep that wallet safe because if anyone gets access to your wallet or private keys, they can transfer your NFT to another wallet, and you may lose it forever.
There are several wallets and wallet types, including hardware wallets and software wallets. A hardware wallet like Ledger Nano S or Trezor Model T is usually more secure than software wallets. If you use a software wallet, you should use one with a good reputation, such as Metamask. Also, consider one that connects to most of the reputable NFT platforms.
Also, make sure to keep your wallet in a secure place. If you are using a paper wallet, a safe is best—the same thing with most other wallets.
In addition, use only a secure internet network. Do not connect to your wallet on public Wi-Fi, and even when using private Wi-Fi, ensure it is secure. Use a VPN where possible and secure your device against viruses and malware.
Another way to protect your NFTs is by using a reputable NFT platform. When buying NFTs, ensure you buy from platforms like Opensea to ensure your transaction details are kept safe.
Criticisms and Issues with NFTs
We will look at the issues and criticisms and what could possibly be done to tackle them.
Storage Off-chain
Although NFTs are stored on the blockchain, some NFT components aren’t stored on the blockchain. One is an artwork. For NFT art, the token functions, including the certificate of ownership, are stored on the blockchain, but the art itself is not because their sizes are usually large.
As a result, anyone can easily store a copy of the art away from the NFT. They can even swap out the image file for another if they have access to the server where the image is stored or replace the image link on the website where the NFT is listed.
Although many NFT supporters may say buying an NFT is for the bragging rights more than anything else, others can also say that those who can access and use the art without paying such huge fees can also brag that they were able to capture the NFT backed art with ease.
Some would say using image storage platforms that are highly secure and limit access can mitigate this, but it doesn’t to the extent of the security of cryptocurrencies. Nevertheless, with time, more solutions should come up around this.
Environmental Impact
NFT minting, purchasing, and sales use a lot of energy because they use the proof of work protocol in some instances. Some NFTs are on networks that use proof of stake, which uses far less energy than proof of work but several others are on networks that use proof of work protocol. The impact of that is a high carbon footprint from just one NFT transaction.
Some NFT creators have ended up not selling their NFTs due to realizing the contributions to carbon emissions. One of them was Joanie Lemercier, a french digital artist who canceled the sale of six NFTs after realizing their sale will, in ten seconds, use as much energy as what is needed to power their entire studio for two years.
To get a clearer picture of how much energy we are discussing, let’s look at how much energy proof of work uses in a year compared to some countries. Ethereum (ETH) on proof of work uses around 31 terawatt-hours of electricity in a year, and that is what some countries use to power their entire country.
This is generally one concern with blockchain and crypto transactions. One way to mitigate it at the moment is sticking to proof of stake protocols and sidechains.
Gas Fees
Gas fees on some blockchains, including Ethereum, are so high that it makes selling, buying, or creating NFTs not worth it.
Most NFTs sell for around $100-$200. However, gas fees are required for any transaction, including when minting, listing, and claiming the proceeds, and as such you may pay a token that is equivalent to $100 or more on your NFT creation and sale transaction.
It would then only be worth it if you are selling your NFTs at a very high price with figures in thousands or millions like some of the very popular NFTs that have been sold.
Fraud
Because of the anonymity that the blockchain provides, anyone can masquerade as a popular artist or seller and use their reputation to sell an NFT at a high price. One such instance was when a seller posing as Banksy sold an NFT for $336,000. When the case drew media attention, the actual Banksy ended up refunding the buyer despite not being the one who sold the NFT supposedly made by the artist in the first place.
If you get caught in such a situation, it will be very difficult to pursue legal action because anyone minting NFTs can do so anonymously. After all, the blockchain enables anonymity.
Plagiarism and impersonation are issues as well. There is something called sleep mining which allows a fraudster to mint an NFT on a creator’s account and transfer it to the fraudster’s wallet without the creator being aware. This is explained in this article.
To mitigate plagiarism and fraud, some NFT marketplaces have rules and takedown mechanisms to respond to fakes and plagiarism, but there have been criticisms of this as well.
The future of NFTs
There are many possibilities for NFTs, especially with Web 3.0 and the metaverse having taken off.
First, by enabling the digital representation of physical assets, such as real estate, in the tamper-resistant blockchain and smart contracts, NFTs are a step forward in reinventing modern financial and investment systems. This streamlines financial and investment processes, removing middlemen, agents, excess paperwork, and unnecessary expenses and allowing creators (especially artists) to connect directly with their audiences.
Second, NFTs can be used to share investments. It is easy to fractionalize assets like lands, but it isn’t easy to do the same with artwork. NFTs can easily fractionalize physical assets that aren’t usually easy to fractionalize. A painting would not need to be owned or bought by only one person or entity, and the fractionalization will be protected by a smart contract and the blockchain, allowing each party to sell their stake or invest as they wish.
Third, NFTs can create new markets and forms of investments not already considered before. It may even be used in business to streamline processes and even more.
Have you Invested in NFTs?
NFTs are a new and exciting way to own digital assets. They have a lot of potential and some issues that need to be addressed. Hopefully, these issues will be resolved with time, and we will see wider adoption of Non Fungible Tokens or NFTs. Nevertheless, there are still many possibilities with this technology.
Have you already invested in an NFT? Have you had any experience with using NFTs? What are your thoughts concerning NFTs? Let us know in the comments.
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