What is an NFT? Guide to NFTs and How They Work
What is an NFT? If you are following anything in the finance world these days, there is no doubt you have heard about NFTs or non-fungible tokens. Stories about things like digital monkeys and rocks selling for thousands if not millions of dollars. So, what the heck is going on? What are NFTs? Here’s a quick guide to NFTs to better understand how they work.
What is an NFT?
NFT stands for non-fungible token which, let’s be honest, doesn’t really clarify anything. So what is a non-fungible token? Essentially this term means that your item is unique and cannot be replaced by something else.
NFTs are digital but they do represent real-world objects. One of the most common NFTs we have seen so far is art (although, I’d use that term rather loosely in some cases). NFTs are bought and sold online and are generally encoded with the same type of software that we see with cryptocurrency. While you may not have heard of NFTs until recently, they have actually been around since 2014.
Is an NFT the same as cryptocurrency?
No, NFTs and cryptocurrency are very different. Cryptocurrency would be seen as ‘fungible’ as in they can be replaced; one bitcoin is the same as the next. NFTs are one of a kind and the thrill behind this type of investment is based on its uniqueness and scarcity.
However, this also means that while one bitcoin is equal to another but the same cannot be said for NFTs. Each NFT will have its own value even if they are similar because they all have their own unique digital signature.
What are examples of NFTs?
There are all kinds of things that can be considered an NFT. Some of the most common NFTs we have seen so far include the following:
- Art
- GIFs
- Digital video clips (mostly of sports highlights)
- collectables
- Virtual avatars and video game skins
- Music
But really, an NFT can be anything. Heck, the co-founder of Twitter even sold his first-ever tweet (which, by the way, got him over $2.9 million).
Some of the most well-known NFTs that people talk about regularly are Bored Apes, Pudgy Penguins, and even pet rocks. Yes, that’s right. Digital pet rocks. People are really into some of these NFTs and build up entire communities around supporting a specific type, mainly so they can show off and complement each other’s purchases.
How Do NFTs work?
So, how do NFTs work? After all, everyone can copy and download a digital file, right? Well, technically yes, but downloading a bored ape doesn’t equate to ownership.
Each NFT is ‘tokenized’ which means it has a unique certificate of ownership. It’s this certificate that is bought and sold. Records of the ownership are stored on the blockchain and, therefore, cannot be forged because the blockchain is maintained by thousands of computers around the world (the blockchain is also used to power cryptocurrencies).
There is an argument about the future of digital art. After all, a lot could potentially go wrong over time leaving people wondering if it’s worth investing thousands of dollars into a jpeg of a cartoon rock. However, those big in the NFT world also remind us that physical art, even when held in museums, is also incredibly fragile and struggles to stand the test of time.
How to buy NFTs
There are three main things to consider when trying to buy an NFT.
The first is what marketplace you want to buy from as there are multiple. Some of the most popular NFT marketplaces are OpenSea, Mintable, Nifty Gateway, Rarible, and Foundation. Some allow anyone to join while some are invite-only. It’s also common for marketplaces to have fees such as ‘gas’ fees for the energy required to complete the transaction on the blockchain (fun fact, NFTs are actually pretty terrible for the environment).
You then need to make sure that you have the right digital wallet to store your NFT. After all, this isn’t the type of artwork you can hang on your office wall. Finally, you’ll need to figure out what kind of cryptocurrency you will need to make the purchase (most marketplaces use Ether).
Word of caution for those who do decide to get into buying NFTs; do your research. Buyer protection seems to be lacking across many platforms as owner verification for listings isn’t always required. There are multiple stories of people who have fallen for scams because scammers will impersonate artists.
How to sell NFTs
If you would like to sell an NFT then you can use the same platforms listed above. You’ll upload your item to the marketplace and follow the set instructions which will turn it into an NFT. You can include details and a description as well as suggested pricing.
Can I make NFTs?
Yes, technically anyone can make an NFT. All you need is a digital wallet, a connection to an NFT marketplace such as those listed above, and a purchase of Ethereum. Then just follow the instructions as set out by the marketplace and, boom, you have an NFT.
Of course, you then need to convince someone that it has value so they buy it, but that’s a whole different story.
Should I invest in NFTs?
NFTs are all the rage right now and when you see these silly-looking pieces of digital art going for tens of thousands of dollars (or more!) it’s hard not to be interested. However, NFTs are also still very new which means that the future of this type of investment is risky. We don’t yet have a history of NFTs to be able to see how they will perform over time.
In the end, it’s a personal decision as to whether it’s something or not you want to try. I do suggest doing your research. Again, there are many stories of NFT fraud circling around. Not to mention the risk in value. An NFT is only worth what someone is willing to pay for it which means it could sell for less than your original investment or, worst case, you may not be able to sell it at all. However, if the idea of NFTs interests you and you are willing to assume the risk then go for it.
