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What are NFTs? A Beginners Guide to Non-Fungible Token

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Cryptocurrencies and blockchain have been around for a while now. However, if you are still green in the realm or just getting started, you’re probably among the millions marveling at the much-hyped NFT space. There is a thriving NFT community on Discord already, known among the lovers of crypto-related fads. But more importantly for you, understanding ‘what are NFTs’ or ‘what does NFT stands for’ makes more sense for now. Before you click on an invite link, it’s good to know at least what NFT means.

It all started when a digital piece of art from a renowned artist, Mike Winklemann, popularly known as ‘Beeple,’ sold for a whopping $69 million at Christie’s auction. It is not the most expensive NFT, but since then, NFTs have become a staple, especially in the creative industry, and for now, it’s NFT art for the future in the art world.

So, what are NFTs and how do they work? What are NFTs used for? Are they worth the money? This article will answer all these NFT beginner questions and more.


What is an NFT?

what are NFTs?

NFT are the initials for ‘non-fungible token’—and they are typically digital representations of real-world assets tradable by a holder on an NFT marketplace. While NFTs created from art are pretty famous, NFTs do not necessarily represent physical objects. They can be made from a range of items, and as Jack Dorsey proved, even tweets count. The Twitter co-founder minted an NFT from his first-ever tweet and sold it for $2.9 million. Other objects minted include artworks, music, virtual fashion, videos, event tickets, sports moments, and in-game items.

NFTs reside on a blockchain like cryptocurrencies, although they are much different from crypto coins in nature. Cryptocurrencies are fungible tokens, which means holders can swap one crypto coin for another because they are indistinguishable. For instance, you can swap one BTC for another and remain with the same value. However, for NFTs, each token is unique, with special identification codes and data that differentiate it from others. That way, a holder cannot exchange an NFT for another at equivalence, hence the name non-fungible.

Who Introduced NFTs?

While NFTs only gained notoriety in 2021, the concept dates back to 2014, when Kevin McCoy minted the first NFT dubbed ‘Quantum.’ The NFT depicts an image of different shapes, including circles and arcs of different colors, originating from a common center and spreading towards their enclosing octagon.

However, nothing much surfaced after McCoy’s creation until CryptoPunks and CryptoKitties emerged in 2017. CryptoPunks became the first non-fungible tokens minted on the Ethereum blockchain and the inspiration behind the present-day NFT standard ERC-721. They represented some 10,000 unique digital collectibles quickly claimed by those with an Ethereum wallet.

Later that year, CryptoKitties emerged and marked the turning point in digital collectibles. The virtual cat’s collection unlocked the possibilities of NFTs, and investors began pouring wealth into digital collectibles. By 2019, anyone could create NFTs using NFT marketplaces like Rarible and OpenSea, but the industry came to explode in 2021.

How Do NFTs Work?

As noted earlier, NFTs are built on blockchain, originally as ERC-721 tokens on the Ethereum blockchain. However, with advancements in other blockchains, creating the tokens on other blockchains is possible with improvements in other blockchains like TRON, Solana, and NEO.

Given the nature of NFTs, it’s easy to think of them as worthless assets. Anyone can replicate an image and claim to own the same image or artwork as another high-priced asset on the NFT marketplace. That makes the whole NFT concept appear a little awkward, and yes, it’s possible to copy the digital asset and make as many copies. But then, the real NFT gives you exclusive ownership rights to the file that only you can own at a particular time.

Blockchain technology uses complex algorithms that allow creators to assign each NFT the uniqueness and immutability that makes them impossible to alter or forge. Each token is assigned a unique digital signature using the blockchain’s cryptographic algorithms. Once assigned to an object, the information is recorded on a smart contract and cannot be altered or replicated.

These unique attributes are encrypted on a blockchain and are what holders use to prove digital asset ownership.  Once a holder sells an NFT, distributed ledger network records the transaction across the network of nodes and updates the new ownership details.

How Can You Own an NFT?

Now that you know what an NFT is and the potential for huge returns that come with the tokens, you might want to join the space and cash in on some collectibles. If you own some mintable files, you can start creating NFT and place them on marketplaces. Alternatively, you can still profit from buying and selling NFT on marketplaces. However, you need to stay keen on market prices to avoid buying during peak seasons when NFTs can be unnecessarily pricey.

Here is a step-by-step guide on how you can mint your NFT.

Step 1: Choose your item

You know a couple of items that now qualify for minting into an NFT. Whether it’s a music file, piece of art, or any other object, make sure you have the property rights. Also, your object needs to be unique and rare to have value.

Step 2: Select the blockchain to use

Ethereum was the first blockchain to support NFTs minting. It’s still the most popular among creators and investors and has the highest sales record. However, several other blockchains began to support NFTs when Ethereum gas fees skyrocketed between 20202 and 2021, so you will have a couple of options, including Binance, TRON, NEO, and Tezos.

Step 3: Create a digital wallet

You probably don’t have a digital wallet if you are new to crypto. You will need one and load it with some cryptocurrency to start minting NFTs. You will have several wallet options, including MetaMask, Trust Wallet, Coinbase Wallet, WalletLink, WalletConnect, and AlphaWallet. MetaMask is one of the most popular among the NFT community, but you can still look up other options and create the wallet.

Once you’ve set up your wallet, fund it with crypto coins for gas fees and the marketplace. If you are using the Ethereum blockchain, make sure your wallet has ETH or an acceptable cryptocurrency if using another blockchain.

Step 4: Choose your NFT marketplace

The exploded NFT industry comes with many NFT marketplaces to serve the growing interests. For now, OpenSea, Axie Marketplace, SupeRare, and Rarible are the most popular, so you may want to consider any of them.

In any case, ensure the NFT marketplace you choose is a good fit for your item. Axie Marketplace, for instance, is the most appropriate for Axie Infinity in-game items, while NBA Top Shot is good for basketball-themed NFTs. OpenSea is an excellent place to start for beginners, and the platform also tops in NFT sales.

Once you decide on the marketplace to use, proceed to link your digital wallet. You will be ready to pay for all the necessary costs and create your NFT.

Step 5: Upload your item/file and set it up for sale

Finally, upload the object you want to mint on the platform to turn it into your new digital asset. The process may differ from one platform to another, but typically, it’s a straightforward process. The marketplace may guide you on how to go about it, or you can simply choose to upload a file and follow the prompts.

Once the file gets uploaded, you now have your NFT. So, what is minted NFT used for? Minting one is an investment, so the next thing you want to do is to monetize it. You can set a fixed price on the NFT and leave it in the marketplace for the first bidder to purchase. Alternatively, set it up to auction either through a timed auction or an unlimited one.

 For the timed auction, interested NFT buyers will place their bids within the time limit, and then you can close the deal with the highest bidder. For the unlimited auction, potential buyers can keep placing their bids, and you will close with the highest bidder at any time you wish.

When setting the price, ensure you set it above the costs incurred in the NFT creation process to avoid making the entire investment a loss. Also, you can impose royalties on your token so that you will still earn when the NFT sells in secondary markets.

What is NFT Used For?

Non-fungible tokens are a hot topic, but what does NFT mean? Do they have practical industry applications? Limitless applications may come in the future, but for now, NFTs are particularly useful in the digital art world.

First, NFTs provide a means for artists in the creative industry to sell digital representations of their works that might otherwise not find many markets. Creators no longer need to depend on conventional auction houses and galleries to showcase and sell their work. They can create NFTs, set them up in auctions, and sell their art effortlessly.

Additionally, they can program their digital art for royalties and earn from subsequent art sales.

Second, startups can use NFTs to raise capital for their business. The business can create an NFT and then sell it in the marketplace to raise the money it needs. Such enterprises can further use NFTs to earn revenue by, for instance, minting tickets to holiday parties and selling them to customers. Service companies could also create NFTs and give holders priority or discounts whenever they have an issue.

Proceeds from NFTs can also go to charity. Jack Dorsey, for example, donated the proceeds from his first tweet’s NFT to GiveDirectly.

Finally, NFT holders can use them as collateral for loans in the cryptocurrency space. They have a high monetary value, are easily exchangeable, and highly liquid, and their fair value is easy to estimate on marketplaces. If a holder wants to borrow against an NFT, the asset gets locked in a smart contract to transfer the NFT back after repaying the loan. If the borrower defaults, the lender acquires the NFT and its underlying rights.

What are the Pros and Cons of Investing in NFTs?

NFTs are a pretty attractive class of digital assets, and investors have enough reasons to want to join in the craze. If you are considering pouring some wealth into NFTs, here are some of their upsides.

The Pros

  • NFTs are open for everyone. There are no restrictions for joining NFT marketplaces and buying or minting your tokens.
  • NFT marketplaces are decentralized. If you want to buy or sell a non-fungible token, you can interact with customers and sellers directly without an intermediary.
  • The NFT network commands security. The non-fungible tokens reside on the blockchain, with their data held securely on the distributed ledger. Ownership of the assets is safe on the blockchain.
  • NFTs are unique and rare. The tokens are unique, which makes them rare and non-fungible, and thus can be held with the prospect of making profits without worrying about supply.
  • NFTs allow anyone to own copyrights to an item they own and earn infinite revenue when the items trade on NFT marketplaces.

The Cons

  • NFTs lack an economic value. Generally, the price of an NFT is what potential buyers are willing to pay rather than fundamental economic indicators.
  • NFTs have had security concerns. Although NFTs pose as safe assets under blockchain, recent cases of NFT hacks are proving otherwise. The Bored Ape Yacht NFT collector is one of the recent cases where $2.2 million worth of the NFT collections disappeared with hackers.
  • NFTs may have adverse environmental impacts. Most NFTs are on the Ethereum blockchain, which uses an energy-intensive consensus algorithm.
  • NFTs cannot provide the satisfaction of owning a physical piece of art.

The Bottom Line

NFTs are a fun and hot topic right now. However, the million-dollar question for investors is whether NFTs will last. Undeniably, they are highly speculative and risky investments, but investors know it’s where the profits lay.

Their future is also highly uncertain, although blockchain’s value and potential for the future make trying NFTs worthwhile. There is a possibility that NFTs will retain their value for the long term, and at the same time, it could be a short-term bubble that will soon pop.

If you want to invest in NFTs, it’s good to approach the industry with an ‘involvement mindset’ rather than cashing in bags of profit. Also, start with low-cost NFTs, and like cryptocurrency investors agree, invest what you can afford to lose.

Frequently Asked Questions

What is NFT crypto?

An NFT is not a cryptocurrency, but it uses the same technology as crypto coins. It is a digital representation of a real-world object like a piece of art, an image, a music file, an in-game item, or a video.

What is an NFT art, and what does NFT stand for?

NFT stands for non-fungible token. An NFT art is a work of art minted into a token.

What are NFT stocks? Are they a good investment?

NFTs are different from stocks. They are unique, high-risk, and rare digital assets, which makes them have the potential for huge returns.

How do you buy NFTs?

Anyone can purchase NFTs on marketplaces like OpenSea, Rarible, NBA Top Shot, and Axie using cryptocurrency like ETH.

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