NFT is an acronym for “Non-Fungible Token,” which is a non-interchangeable and unique unit of data stored on a secure digital ledger called a blockchain. It is a form of a digital signature that is publicly verifiable.
Non-fungible tokens are associated with distinctive digital or physical assets and can be traded on several specialized online marketplaces, such as OpenSea, Rarible, SuperRare, and Foundation, among others. Digital files commonly associated with NFTs include videos, photos, audio files, and artwork.
NFTs provide public proof of ownership or, in other words, a certificate of authenticity that confers the holder the license to use, copy, share or display the underlying asset. Even though NFTs and cryptocurrencies use blockchain technology, their main difference is that NFTs are non-fungible and crypto is fungible, just like money.
The distinctiveness of an NFT makes its value different from other NFTs since it represents a different underlying asset that is not interchangeable. Non-fungible tokens are created when blockchains run records of cryptographic hash on top of previous records, therefore, creating a chain of identifiable data blocks.
A hash is a string of characters identifying a set of data, and hashing is the passing of some data through a formula that produces a result. Therefore, this cryptographic transaction process guarantees the authentication of each digital file through the provision of a digital signature used to track NFT ownership.
An NFT represents proof of ownership of a physical or digital asset. However, the actual asset is not contained on the blockchain, residing somewhere else. The asset location is usually in the form of a data link, which can be affected by link rot over time.
The owner of a non-fungible token is not necessarily granted the copyright or intellectual property rights to the underlying asset. Therefore, when an NFT is traded, the buyer will not receive copyright privileges. They remain with the original creator of the asset.
The creator is thus allowed to create more non-fungible tokens of similar work. Therefore, unless there is an explicit transfer of the copyright, the NFT purchaser remains with proof of asset ownership but not the copyright of the underlying asset.
The first NFT, Terra Nullius, was minted on the Ethereum blockchain on August 7, 2015. As a result, the most popular NFT marketplaces run mostly on the Ethereum blockchain. It uses the most energy-intensive “proof of work” technology, which is decentralized and secure, making the NFT ecosystem work seamlessly. However, other blockchains have started implementing their own NFT versions.
Non-fungible tokens caught the world’s attention when Christie’s Auctions sold the very first NFT artwork. It was a collage of images by the digital artist Michael Joseph Winkelmann, professionally known as Beeple. The artwork sold for an astronomical $69.3 million. Many artists and musicians have enjoyed huge payoffs by selling NFTs of their digital images and shows to wealthy investors.
A notable non-fungible token that captured headlines was by Jack Dorsey, the co-founder and former CEO of Twitter, who sold the first-ever tweet for $2.9 million. Other NFTs sold include a decade-old “Nyan Cat” GIF for $600,000 and a video clip of NBA’s LeBron James’ slam dunk for $208,000.
One of the original NFTs is CryptoKitties, a digital trading game that allows the trading of unique virtual cats stored on the Ethereum blockchain platform.
However, the most expensive non-fungible token is CryptoPunks, which is a set of 10,000 original NFT collections. The transaction involved a transfer of a CryptoPunk from wallet to wallet and was purchased for $532 million but was immediately transferred back to the original wallet. The individual involved was both the buyer and the seller. The transaction was financed by a “flash loan.”
CryptoPunks have been considered an original NFT collection since 2017, and the highest legitimate sale for a CryptoPunk was $11.7 million.
There are largely two types of non-fungible tokens; one is where an artist creates a piece of digital art and sells it. The other one is where artists and developers create multiple NFTs with the same template but different features. The Bored Ape Yacht Club features 10,000 apes wearing different clothing, in different backgrounds and facial expressions.
The floor price for a Bored Ape at a recent auction was $190,000, but rare ones have been known to cost millions of dollars. An auction of 101 Bored Apes was recently done for $24 million.
NFTs are largely used to buy and sell digital artwork. However, they can be used for other items such as video game skins, video clips, GIFs, tweets, virtual trading cards, images, exclusive tickets, virtual real estate, and many others.
Consequently, 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. They have been selling digital artwork, music, memes, sports memorabilia, and much more stuff.
NFTs enable artists to release their work digitally without fear of it being counterfeited. It is essential to have a cryptocurrency wallet to buy them.
Non-fungible tokens also provide holders special access to events, e.g., the Bored Ape Yacht Club throws private concerts for token holders. Its members include celebrities and sports stars such as Stephen Curry, Post Mallone, Lil Baby, Eminem, among others.
Most NFT transactions are carried out in a dedicated digital marketplace. A guide on how to buy non-fungible tokens from one is illustrated in the steps below.
Most NFT marketplaces use the Ethereum blockchain network to power their transactions. Hence, to buy non-fungible tokens, one would need Ether, the Ethereum native token, to make payment. However, if one does not have Ether, they can open an account with WazirX or Binance and buy tokens from there. Interested parties can also use Coinbase or eToro as alternatives.
One would need to set up a cryptocurrency wallet that is compatible with Ethereum. Platforms such as Metamask can be used for the process. When the wallet is open, you will need to send an Ether purchased from an exchange to your crypto wallet address.
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.
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. 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.
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.
Other fees include closing expenses and costs of converting dollars to Ethereum. Buyers need to be aware of the fees charged so as not to be surprised during the buying process.
Non-fungible tokens can be created by just about anyone with a digital wallet loaded with sufficient Ethereum cryptocurrency deposits and an account with a marketplace such as OpenSea or Rarible, where content can be uploaded and turned into an NFT or crypto art. Users do not need to have prior blockchain experience or be conversant with how to make non-fungible ERC-721 tokens.
As with buying, NFTs are sold on marketplaces indicated in the sections above. To sell an NFT, the seller must upload the content to a marketplace and follow the instructions on the marketplace website to convert it to an NFT.
They must include a description of the work or product and the indicative price they are prepared to sell the NFT. Purchase is made through Ether, but it can also be done through ERC-20 tokens such as Chainlink, Tether, OmiseGO, and Shina Inu.
However, 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.
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.
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