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NFTs

Non-Fungible Tokens (NFTs) are unique digital tokens that provide proof of ownership and authenticity for an asset

What is an NFT?

NFT is an acronym for Non-Fungible Token, a digital token that is highly unique that is commonly used to prove ownership and authenticity for an underlying asset, digital or physical. NFTs are a form of digital signature that is publicly verifiable because it is stored on a distributed digital ledger, called a blockchain.

You can liken a NFT to a digital certificate of authenticity that could confer the holder to license to use, copy, share or display the underlying asset – except no one can modify the record of ownership or copy and paste a new NFT into existence.

Key Highlights

  • NFT stands for “Non-Fungible Token”, a digital token that is highly unique that is commonly used to prove ownership and authenticity for an underlying digital or physical asset, a liability or credential.
  • An NFT is non-fungible – each of those tokens is highly unique – so no two NFTs are the same.
  • While an NFT can represent proof of ownership over a digital asset, for instance, the actual asset is not contained on the blockchain, residing somewhere else on the internet or a hard drive.

Understanding NFTs

NFTs are digital cryptographic assets that are stored on a blockchain to record an online proof of ownership and authenticity for an underlying asset.  Creating this token is also called minting.

Non-fungible tokens are created when blockchains run records of cryptographic hash on top of previous records, therefore, creating a chain of immutable data blocks.

The owner of the NFT would have the private key from the public/private key pair stored on their digital wallet that proves ownership of the blockchain address which the NFT resides.

While this sounds like a cryptocurrency asset such as Bitcoin (BTC) or Ether (ETH), the difference is that an NFT is non-fungible – each of those tokens is highly unique – so no two NFTs are the same.  While other digital tokens, stablecoins or CBDCs are interchangeable with another token of the same crypto asset since one token is indistinguishable from the next, NFTs are highly unique, therefore not interchangeable.

While an NFT can represent proof of ownership over a digital asset, for instance, the actual asset is not contained on the blockchain, residing somewhere else on the internet or a hard drive.

If an NFT is sold or transferred, once it is verified by the network consensus protocol of whichever blockchain it is built on, the ownership of the asset is indisputable proof and this public record is easy for anyone to verify.

Speaking of blockchains, there are many different blockchains that support NFTs now but they started on the Ethereum blockchain.

Rights and privileges of owning an NFT

Buying an NFT does not automatically grant the new owner copyrights or intellectual property rights to the asset unless it is explicitly laid out – those reside with the original creator of the asset.

As a matter of fact, the original creator may also set up the NFT so that they receive a portion of any future resale of the NFT automatically forever.  The creator is also allowed to create more non-fungible tokens of similar work.

Uses of NFTs

NFTs originally started as a way of owning an unique digital asset.  As a matter of fact, one of the original online collectible NFTs was CryptoKitties, a digital trading game where users could collect, breed and trade unique virtual cats stored on the Ethereum blockchain platform. The popularity of CryptoKitties in the early days of the Ethereum network famously caused the entire network to bog down.

However, the use case for NFTs has evolved into a tamper-resistant digital certificate of authenticity and ownership for many different assets and purposes.

Which assets that can be tokenized?

While new use cases for NFTs are being proposed and implemented daily, here are some of the more commonly-seen uses:

1. Physical Assets

Offline collectibles use NFTs to prove ownership and authenticity of physical assets, such as valuable art, watches, jewelry, sneakers and even fine wine. Other use cases might represent fractional owner of real-estate or other real-world asset.

2. Digital Assets

Digital assets commonly associated with NFTs include videos, photos & audio files.  NFTs can also be used to prove ownership and authenticity for Online digital collectibles, such as a skin or weapon in an on-line game or an asset in a metaverse, where only your avatar has exclusive use of that object.

3. Negative Assets

NFTs can also be “negative value” assets such as loans, burdens and other responsibilities.

4. Credentials

NFTs can also be issued as ticket to an event or credentials, such as a degree.  As a matter of fact, CFI uses NFTs to prove that learners have completed a course, specialization or accreditation.

Where to find NFTs?

NFTs can be traded on several specialized online marketplaces, such as OpenSea, Rarible, SuperRare, and Foundation, among others.

Why buy NFTs?

While detractors of NFTs will argue that the value of NFT is limited when it comes to digital assets like a digital image.  They argue that the image can be copied, or screenshotted and unlimited copies can be transferred without the approval of the NFT owner

However, for ardent collectors, owning a specific and unique asset has a value for them, sometimes way more than the next collector so ultimately owning the real thing is as valuable as the individual values it.

For example, collectors of baseball cards or rare stamps prize limited, unique and nuanced items, with single cards or stamps trading hands for millions of dollars.  In a similar way, you might reason that on-line trading card or art NFTs would have the same appeal.

Famous NFTs

Bored Ape Yacht Club

Bored Ape Yacht Club is a famous series of 10,000 unique digital artworks depicting apes wearing different clothing, in different backgrounds and facial expressions.

Source: OpenSea

These NFTs are currently on sale starting around 80 Ether each, which is over $100k USD at the time of this article.  Some examples of these NFTs, however, have changed hands for 1024 ETH, which worth over $1.25mm USD at that time.  An auction of 101 Bored Apes was sold for $24 million.

Beeple

Source: Beeple

So it can be said that the value of an asset is what the market is willing to pay for it. Leading auction houses such as Christie’s have jumped into the game, with art changing hands for millions, such as Everdays, by digital artist Beeple which sold for $69 million in 2021.

Jack Dorsey’s First Tweet

Source: Twitter

There have also been spectacular flops in NFTs investing.  Perhaps the most famous is blockchain entrepreneur Sina Estavi’s acquisition of the NFT for Jack Dorsey, the founder of Twitter’s, first tweet in 2006.  The simple phrase of “just setting up my twttr” sold for the equivalent of $2.9mm dollars in March of 2021 but a year later, when Estavi tried to flip the Jack Dorsey NFT in an auction for $48 million, the NFT managed to only garner a high bid of $277.

It is not automatic that anyone can make money selling non-fungible tokens. Most NFTs made by ordinary individuals rarely sell and, if they do, can sell at a very low price. The value of an NFT is usually driven by the reputation of the artist and the historical significance of the media.

Nonetheless, many artists, musicians, influencers, and celebrities have jumped onto the NFT bandwagon by making their own non-fungible tokens and selling them on numerous digital marketplaces. These NFTs have generally met with less than ideal results.

How to create and sell an NFT

So if this article has inspired you to create your own NFT, the process is pretty straight-forward.  Users do not need to have prior blockchain experience or be conversant with how to make non-fungible ERC-721 tokens.

1. Determine what asset you want to tokenize

The easiest way to create an NFT is to tie it to a digital asset, such as an image, video, song or audio clip.  Obviously, it has to be something unique or original that you created or own the rights to.

2. Choose which blockchain to use

There are several blockchains that can store your NFT, such as Ethereum, Solana or Cardano.  It is important to choose the right blockchain as your NFT only stays verifiable for as long as the underlying blockchain exists.

3. Set up a digital wallet

Once you have decided which blockchain to use, you need to set up a digital wallet that supports that blockchain.  See our article here for the various types of cryptocurrency wallets and which may be the best for you.

4. Pick your NFT platform and create the NFT

NFT Platforms, which are sites or crypto exchanges, offer a one-stop shop marketplace to create, list and sell NFTs.  Some of the most popular include OpenSea, Solanart, CNFT and Binance NFT.  Once you have chosen your NFT platform, you will need to link your digital wallet to your account and upload the digital media asset, as well as details such as a description, link to website, the contract details, as well as which blockchain to mint the NFT.

The creator of the NFT can also specify what percentage of future sales they receive, ensuring that the creator is properly compensated. These range anywhere from 10% to as much as 25%.

There are also NFTs that are completely private and confidential between the creator and the buyer, with the NFT only revealed to a specific buyer and upon purchase. These settings are enabled on the NFT platform before listing.

5. List the NFT for sale

After the NFT has been created, you can then list it for sale.  You may choose to sell it for a fixed price or a timed auction, as well as the duration of the sale or auction.  Additionally, you specify which cryptocurrency you want to list the NFT for.

While some platforms will allow you to list the NFT for free, there is a cost when the actual NFT is sold and depends on the platform on whether the buyer or seller (or both) bear the cost. Many platforms will charge a service fee in addition to the gas costs.  For example, OpenSea charges a service fee of 2.5% and creator fee of 3%, for a total of 5.5%.

How to Buy NFTs

Most NFT purchases are also carried out in a dedicated digital marketplace such as OpenSea or Rarible. Here’s how:

1. Set up a crypto wallet

Just like how you would need a wallet to store the NFT when creating one, you will also need to have a digital wallet set up to store an NFT after you purchase it.  Additionally, you will also need a digital wallet to hold the cryptocurrency that you will use to purchase the NFT.

2. Buy Crypto

Since all NFTs are denominated for sale in a cryptocurrency, you must first onramp into crypto.  Most NFT marketplaces use the Ethereum blockchain network to power their transactions. Hence, to buy non-fungible tokens on those platforms for example, one would need Ether, the Ethereum native token, to make payment.

3. Choose a marketplace

The next step is to choose a marketplace when you want to buy the NFT. There are several marketplaces to choose from where you will be able to purchase different types of collectibles and art.

Top marketplaces include OpenSea, SuperRare, Rarible, NBA Top Shot, Foundation, and Nifty Gateway. NBA Top Shot is a marketplace for licensed NBA digital collectibles such as digital cards with in-game highlights of some featured players.

Additionally, there are centralized cryptoexchanges that also offer NFTs, such as Binance NFT, Solanart and CNFT.

Buyers should also familiarize themselves with fees charged by their preferred marketplace. Some marketplaces charge a “gas fee,” which is essentially the energy required to complete a transaction on the blockchain.

4. Register an account with a marketplace and bid away

The last step is to register an account with a marketplace of the buyer’s choice, fund the crypto wallet, and start buying non-fungible tokens. After that, you’re on your way to your first NFT purchase.

Most marketplaces operate in an auction format, so the buyer would need to submit a bid for the particular NFT they want to purchase. Some marketplaces, however, operate like an exchange where the highest bid and the lowest ask are paired off.

Purchases are made through Ether, but it can also be done through ERC-20 tokens such as Tether USD (USDT), USD Coin (USDC), Binance USD (BUSD), BNB or DAI Stablecoin (DAI).

Benefits of NFTs

  • NFTs benefit the artists who produce digital media by making it easier to verify the authenticity of their artwork, as well as maintain intellectual property rights.
  • NFT tokens use blockchain technology which makes it easy to verify authentic artwork and digital ownership.
  • NFTs make it convenient to buy and sell digital media online.
  • NFTs also enable collectibles such as digital trading cards to be more interactive and fascinating.

Criticisms of NFTs

  • Because of the media frenzy and popularity, some NFT collectibles increased in value tremendously. Questions have been raised if they will be able to sustain their value in the long term.
  • Just as there is a remote chance of your cryptocurrency getting hacked, there is also a risk of your NFT getting hacked if not stored safely on a digital wallet.
  • If the blockchain that the NFT resides upon fails or goes unders then the NFT may never be verifiable. The digital asset may be safe as it is stored off the blockchain, but the ability to prove that you own the unique original may be lost forever.

The Future of NFTs

The applicability of NFTs has barely scratched the surface. At present, NFTs are used to sell digital art, music, and collectibles. However, in the future, we expect that they will be able to tokenize real-world assets. This will make asset ownership transparent and irrefutable.

However, NFTs can work to represent ownership of intellectual property rights, real estate through title deeds, and even business ownership. The application of NFTs is still in infancy, but its potential is huge, untapped, and immeasurable.

Additional Resources

Thank you for reading CFI’s guide to NFTs. To keep advancing your career, the additional CFI resources below will be useful:

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