What is NFT? Non-Fungible Tokens Explained
Non-fungible tokens, or NFTs, are the latest cryptocurrency phenomenon to go mainstream. But what are NFTs and why do you need to pay attention? That’s what we are going to cover below.
In recent months, the acronym NFT has been appearing in the news more and more often, and usually next to it they write fabulous amounts of money in dollars. The first tweet published on Twitter was sold for $2.9 million. The NBA sells game highlights for hundreds of thousands of dollars. And digital artist Mike Winkelmann, with the nickname Beeple, sold a collage of 5,000 of his works for $69 million. For example, just the other day they auctioned off a famous shot from the black-and-white film The Alien Autopsy as NFT – and the starting bid was an incredible $1.2 million.
Modern Art Expressed in Digital NFT
Basic things to know, in plain language
NFT – non-fungible token, which can also be understood as “non-interchangeable token”. It is a new type of digital token, distinguished by the uniqueness of each issued copy. Uniqueness is the main difference between an NFT token and cryptocurrency or fiat money. To understand the point, let’s look at an example: you borrowed 50 euro from a friend and after a while, you can pay him back the same amount in several or one banknotes. The value of the money will not change. This means that the 50 euro is a substitutable object, but with NFT token things are very different. Suppose you have a basketball signed by a famous player. You can’t exchange it for another one since every autographed ball has its own unique value. NFT has the same uniqueness – just expressed in a digital format. Another important difference is the indivisibility of the token. For example, the currency euro and ruble can be divided into cents and kopecks. Bitcoin is also possible to divide into parts and own 0.000001 bitcoin. However, the NFT token is only stored and transferred in its entirety, in 100% volume. Public figures and top investors are actively debating whether this is just another bubble. In order to understand how things work and why pictures of kittens are worth hundreds of thousands of dollars, it is first necessary to understand how blockchain works, since it is this system that allowed NFT to gain value.
So first, let’s have a look at what blockchain really is.
Blockchain and Cryptocurrency
The amount of money in a person’s account is increasingly becoming just a number on a smartphone screen. Every year less and less cash is used. Therefore, the emergence of cryptocurrency has become for many an acceptable alternative to fiat currency. The security and reliability of cryptocurrency are provided by the blockchain system. Blockchain is a linked chain of inseparable blocks of information, in which each cryptocurrency owner has a copy of a file, a kind of ledger, in which all transactions from the beginning of the cryptocurrency’s emergence are recorded. With each new transaction, this file is updated for all users when they connect to the Internet. And in case one of the users has a file with information that differs from that of the other users, the system will notice an error and the transaction will not be possible.
Why do we need NFT now?
With the help of cryptography, any set of data, be it video, picture, sound or a computer game character, can be turned into an NFT token, i.e. a unique source file. A record of the uniqueness and ownership of the file is stored in a blockchain system and is available to all users, just like cryptocurrency. This feature ensures that the loss or alteration of an NFT token is impossible.This is what happened with the artwork of the famous street artist Banksy, for example. A company promoting blockchain bought the painting from a New York gallery for $95,000 and turned it into an NFT-format digital asset. In doing so, the physical piece was burned live so that no one would have ownership rights to it. Similarly, book authors, film companies, artists, musicians, and other artists can turn their works into NFT to sell them in their entirety or in the form of tokens for the right to use them.
Why do we buy NFT, when we can see the digitalized art for free?
You may have a reasonable question: what does owning a piece of digital art (or rather, the copyright to it, but without the right to modify it) give you if anyone can download it to their computer or smartphone and watch it whenever they want? It’s not that simple: technically, such a person can only do what you let them do, since only you have the right to use it. In addition to the ability to dispose of the digital asset as you see fit, the value of an NFT is also added by the exclusivity and the fact of owning the digital asset itself. The owner of a work of art in the form of an NFT can resell it profitably. The ability to resell is inherent in the NFT smart contract, and from this point of view, tokens can be considered a fairly profitable investment.
Related to the possibility of resale, however, is the most painful issue about NFT. Digital artworks are bought with Ethereum cryptocurrency tokens. Will they be worth that much as time passes? How much will their value increase (or decrease) if the exchange rate of ether changes drastically due to the situation of the exchange? Would the value of the artwork be based on its real value, or would it depend on the price of the cryptocurrency?
No one has given an answer yet. For authors: artists, developers, musicians – NFT is valuable because it initially fixes their copyrights with a secure blockchain: nobody will be able to change it. NFT is most of all valuable for collectors and art lovers, as well as for gamers – for an average person NFT can be interesting as a technology, but hardly as an object of investment.
The best platforms for buying and selling NFT tokens
- Nifty Gateway– operates on the Etherium blockchain, but conducts transactions in the dollar equivalent. It’s not easy for a novice artist to get into this marketplace. The bar for exhibiting work is very high – you either need to already be a popular artist or do really cool work.
- OpenSea – the largest marketplace, particularly for crypto-art. Mostly secondary sales are made there. But it also has all the tools to tokenize your work.
- Rarible is the most democratic marketplace. Anyone can tokenize their work. The marketplace is a semi-exclusive marketplace for any NFT.
- Foundation – To publish your work there, you must get an invitation from another user to enter. Because of the rush for invitations, works on it are put up for a higher price.
How to make money on NFT?
In addition to creating your own NFT-token, there are several ways to make a profit from this phenomenon. It is not necessary to have skills as an artist or musician, the main thing – understanding and competent approach.
4 ways to make a profit on NFT
- Direct investing. Buying any token for resale in the future. It is necessary to understand that the value of NFT-assets is absolutely subjective and there is no guarantee that a certain asset will increase in value, but not lose its value. Using this method, you should buy only those NFTs that are cool and valuable to you. For example, a work with an interesting author’s idea, revealing some social problems that will become even more relevant in the future. Or videos of historical events that left no one indifferent, such as the best moments of legendary sports matches.
- Purchasing NFT. Dependent Erc-20 tokens. This is the purchase of service, share, control tokens. They give the holder the ability to manage and share ownership of NFT projects.
- Lending cryptocurrency. If you have cryptocurrency, you can exchange it for the NFT token you are interested in as collateral. If you don’t repay the debt, you can also sell it on the marketplace.
- Investing in NFT index funds. Such funds track the average value of tokens on a particular topic. For example, Zombie CryptoPunks or CryptoKitties token indexes. Funds allow you to invest in NFTs without buying a whole token. The prospects for NFT tokens. NFT technology is just beginning to gain momentum and has enormous potential. It can fundamentally change the way humanity thinks about ownership and trade of goods not intended for direct consumption.
Here are some areas where NFT tokens can be used
Licensing of movies, books, music, and other intellectual assets. For example, a movie company has made a movie and sells tokens to cinemas to reproduce it as the equivalent of physically distributing the material. Selling artists’ paintings at auction, if the work exists only in digital form. Blockchain security guarantees the legitimacy of the transaction. Trading items in the video game world, such as skins, textures, and weapons. Registering title to real estate, cars, and jewelry in the physical world. Instead of complicated bureaucratic procedures, it will be possible to simply create a unique token that confirms ownership. Selling tickets for any event, be it a theater production or a sporting event. They can also be issued digitally on the blockchain, as each ticket is unique and has a limited circulation. Counterfeiting or speculation will be impossible. Getting personal documents. People will be able to receive a non-saleable, unique NFT token as a birth certificate, passport, or driver’s license, which will simplify the system of interaction with the relevant authorities. It will also be possible to share this information with employers, doctors, banks – all the structures that need your personal information. The security of this technology is much higher than that of existing documents, because, thanks to blockchain, the information cannot be falsified.
Disadvantages of NFT
As with all phenomena, NFT has its disadvantages. Some of them are tangible when interacting with existing tokens, for example, High prices and commissions. Buying an NFT token from any collection will cost at least $200, and the placement fee will be $80 – $100. The need to study and monitor a large amount of information daily to know which NFTs are relevant at the moment. And another disadvantage is reflected in the real material world. The fact is that it takes an unimaginable amount of electricity to keep the blockchain running steadily online. Such energy consumption only accelerates global warming and can lead to ecological disasters.
What will happen to the NFT next?
There is no clarity yet. The most important advantage of NFT is the possibility to tokenize absolutely any tangible or intangible asset due to its non-interchangeability and at the same time the security provided by a blockchain. It is blockchain technology that enables collectors and gamers to provide themselves with a secure digital right of ownership of unique assets, including their sale for real dollars.
In addition, you can create your own NFT, securely linking it to a unique item. Tokens are also protected against identity theft, so you can digitize any important information in them. The copyright of the creator lasts forever.
The disadvantages include the need for at least a basic understanding of how blockchain and tokens work and the dependence of manageability on the scalability of the blockchain on which the token is hosted. And the main disadvantage is the dependence of NFT on the rate of cryptocurrencies, which is characterized by extremely high volatility.
Perhaps today we can speak with a certain degree of confidence about the widespread of NFT only in the gaming industry: gaming items and lack of advertising were sold and bought long before the appearance of NFT for quite real money, and the transition to tokens in this sphere is quite easy.
Social networks are also interested in this technology: it has been reported that Instagram is looking at the NFT market as a way to monetize content. Since artists, photographers, musicians, and other creative professions often use social media to create and promote their digital products, it makes sense.
But the spread of NFT in the rest of the field is still in question. One potentially winning application for NFT in the future is digital documents, and that’s an area that could very well come to NFT in the near future. Recording unique and valuable documents (for example, diplomas, contracts, certificates) in the blockchain would eliminate the risk of forgery. If you add an electronic signature to them, the risk of forgery will be even lower.
NFT is actively developing and it is impossible to make any predictions with absolute certainty.
We just have to wait and see.
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