What are NFTs anyway? We go behind the hype and investigate the technology that powers these tokens. Read more to understand how NFTs work, why people are excited, and if they’re right for you.
If it can be digitized, it can be turned into a non-fungible token.
These days, everyone seems to be talking about non-fungible tokens, or NFTs. As with any new technology, there’s a lot of misconceptions that need to be cleared up. It’s important to separate the facts from the hype.
What are NFTs? How do you buy them? And perhaps, more importantly, are they right for you? This article explains what they are and how they work so you can consider whether they are right for you.
What Are NFTs?
Non-fungible tokens are a type of digital asset or unit of data that takes its name from a key characteristic: An NFT can’t be easily replaced by a similar asset. It contains a non-alterable record of its authenticity and ownership.
In this, NFTs differ from regular cryptocurrencies, which are fungible, meaning they can be easily exchanged.
One Bitcoin has the same value as another. Not so with NFTs. Each is unique and will have its own unique value.
NFTs can be traded, but their value is more akin to a rare, highly valued bottle of wine than cash — you can’t use that bottle of wine to pay for groceries. Still, NFT sales topped $2.5 billion in the first six months of 2021.
NFTs are attracting this kind of attention because they have the potential for functionality. Since they contain digital files, they can function as a program and even contain smart contracts.
The most common file associations for NFT are digital art and gaming assets. Some art NFTs have grabbed headlines by selling for tens of millions of dollars.
NFTs can also link to digital files of music or film. Because they are new, NFT experimenting abounds, from monetizing rare memorabilia to political protests to sneaker authentication and virtualization.
How Do NFTs Work?
NFTs share many similarities with cryptocurrencies. They can be bought and received, sold and sent, and stored in a crypto wallet that supports NFTs.
Details confirming their authenticity, ownership, and any transactions related to them are permanently recorded in blockchain blocks. While NFTs can technically live on any blockchain, Ethereum remains the most popular blockchain network, along with BNB Smart Chain and Solana.
NFTs can spawn communities passionate about a shared interest — music, art, or fashion, for example. Many NFT communities are centered around their blockchain network of choice, like Ethereum, BNB Smart Chain, Solana, among others.
But the key to understanding how NFTs work is remembering the digital file an NFT is associated with. If it can be digitized, it can be turned into an NFT.
In the language of NFTs, this process is called minting an NFT. And it’s a wide-open space right now.
While NFTs generally attract users from the typical crypto space because you need a cryptocurrency, like Ether, to buy an NFT, even those outside of the crypto realm are jumping on the bandwagon.
Consider the case for music NFTs. A huge concern for musicians is getting paid for their work. Some experimental NFT platforms allow a musician to embed unique and original works in an NFT, get paid for them, and set terms for profiting from any resale.
But what exactly gives a particular NFT its value?
How Do NFTs Generate and Keep Value?
The NFT space is still new. For the most part, NFTs have derived value from the same characteristics as traditional collectibles: scarcity and appeal.
Think of an original Leonardo Da Vinci, like his Salvador Mundi. There’s only one in existence, and collectors love Da Vinci. That’s why it sold for $450 million in 2017.
We’ve become accustomed to art not needing to have intrinsic value. This same thinking is carrying over into the world of NFTs. But can’t digital files easily be copied?
Just like original works of physical art, it is possible to copy a digital file. And NFTs do not necessarily give the buyer copyright of the digital file or even control of it. In some cases, it may be viewed by others for free.
But any copies will not be identical to the NFT itself, which also contains a record of all transactions and, most importantly, proof of who owns the NFT.
There are thousands of copies of the Mona Lisa in the world, but only one original hanging in the Louvre. For many collectors, NFTs hold a similar appeal. But as more communities of interest spawn around NFTs, value based on utility may increase.
For example, business assets could be tokenized as NFTs to provide verifiable purchase orders, invoices, or receipts. Or, like the winery mentioned earlier, selling an NFT as a type of future to increase cash flow while the wine ferments in barrels.
NFTs may provide a way for access to blockchain capability in the background while providing a more user-friendly, useful experience as the front end. Communities are mobilizing on platforms like Ethereum to try and accomplish just that.
So how might you use an NFT?
4 Ways to Use NFTs
Collectors and Buyers
Perhaps the most obvious use of an NFT is to buy them. This could be to support a cause or artist selling the NFT. But there are many in the NFT space speculating on assets that will increase in value, much the same way an investment portfolio might include art.
Of course, there is one important difference in buying an NFT.
As mentioned earlier, the purchaser of an NFT may not be acquiring rights to the actual digital file. In this case, the level of speculation is heightened, since others may have free access to the underlying digital file.
Artists and Creators
NFTs hold great appeal for anyone who creates art, music, videos — anything that may hold appeal and that they’d appreciate being paid for. They can avoid having to establish a market for their work, or breaking into an existing market where major players call all the shots.
Instead, NFTs enable the creator to set the terms of the initial sale, as well as a percentage to reap from any future sales of the NFT.
Event organizers are beginning to explore how NFTs might revolutionize the industry. NFTs offer a secure way to mint and sell tickets since authenticity and transactions are verifiable and immutable on a blockchain.
Ticket holders will be able to buy and store tickets they can’t lose but can easily resell if they can’t use them. Also, they can be stored indefinitely for future memorabilia resale potential.
Perhaps the greatest potential, though, is that NFTs are programmable and can contain smart contracts. This can afford a new way for event organizers to interact with clients and offer enhanced experiences, offering rewards and access to other merchandise sales.
NFTs are bringing new possibilities to the world of gaming.
Like a character? Buy it — it’s yours, provably. Training and adding powers and customizations to your character all become part of the indelible blockchain record, potentially increasing the value of your NFT.
But there’s also income potential inherent in NFT gaming. Thanks to smarter contracts, creators of NFT assets can continue to collect royalties as characters, for example, are traded. Players could potentially earn income as they play, unlock items, upgrade, and trade their NFTs.
The Pros and Cons of NFT ownership
You’ve probably gleaned a few of the overall advantages and disadvantages of NFTs. But here are some of the more important things you should keep in mind.
Value appreciation. As with other collectibles, an NFT can increase in value — sometimes amazingly. Some NFTs originally costing thousands of dollars have subsequently sold for millions.
Incontrovertible ownership. You can prove it’s yours, and, if you decide to sell it, the buyer then enjoys that same provable ownership.
Unique and collectible. Just as with ownership, an NFT you purchase is provably unique. As such, it may be collectible, either because of widespread demand or because it holds special meaning to you.
Immutable. Since it is based on blockchain technology, once transactions have been recorded, they cannot be altered or tampered with.
Smart contracts and programming. An NFT can embed real utility, such as automation of future sales proceeds, when to trigger certain events, or agreed-upon rights granted to the owner of the NFT in the future.
Highly Speculative Market. For every NFT rags-to-riches story, there are many more mundane examples of little to no value increase.
Copies. Digital files can be exactly replicated. Buying an NFT, as previously noted, doesn’t necessarily mean you hold the only copy of a digital file — or even own its copyright. So, while the NFT itself is unique, the associated digital file may not be.
Environmental concerns. Because of the way some blockchains operate, any block added may require significant computing resources, meaning lots of energy is required. Choosing NFTs on high-performance and low-cost blockchains can potentially mitigate some of the potential environmental costs of minting and transferring NFTs.
How to Buy NFTs
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