An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.
Although they’ve been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. A staggering $174 million has been spent on NFTs since November.
Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another. They’re also equal in value—one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain.
NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible). One NBA Top Shot clip, for example, is not equal to EVERYDAYS simply because they’re both NFTs. (One NBA Top Shot clip isn’t even necessarily equal to another NBA Top Shot clip, for that matter.)
An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including:
• Videos and sports highlights
• Virtual avatars and video game skins
• Designer sneakers
Even tweets count. Twitter co-founder Jack Dorsey sold his first ever tweet as an NFT for more than $2.9 million.
Essentially, NFTs are like physical collector’s items, only digital. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead.
They also get exclusive ownership rights. That’s right: NFTs can have only one owner at a time. NFTs’ unique data makes it easy to verify their ownership and transfer tokens between owners. The owner or creator can also store specific information inside them. For instance, artists can sign their artwork by including their signature in an NFT’s metadata.
( Source: (https://www.forbes.com/advisor/investing/nft-non-fungible-token/Robyn Conti, John Schmidt)
|An NFT internet||The internet today|
|NFTs are digitally unique, no two NFTs are the same.||A copy of a file, like an .mp3 or .jpg, is the same as the original.|
|Every NFT must have an owner and this is of public record and easy for anyone to verify.||Ownership records of digital items are stored on servers controlled by institutions – you must take their word for it.|
|NFTs are compatible with anything built using Ethereum. An NFT ticket for an event can be traded on every Ethereum marketplace, for an entirely different NFT. You could trade a piece of art for a ticket!||Companies with digital items must build their own infrastructure. For example an app that issues digital tickets for events would have to build their own ticket exchange.|
|Creators can retain ownership rights over their own work, and claim resale royalties directly.||Platforms, such as music streaming services, retain the majority of profits from sales.|
|Items can be used in surprising ways. For example, you can use digital artwork as collateral in a decentralised loan.|
How do NFTs work?
NFTs have some special properties:
- Each token minted has a unique identifier.
- They’re not directly interchangeable with other tokens 1:1. For example 1 ETH is exactly the same as another ETH. This isn’t the case with NFTs.
- Each token has an owner and this information is easily verifiable.
- They live on Ethereum and can be bought and sold on any Ethereum-based NFT market.
In other words, if you own an NFT:
- You can easily prove you own it.
- No one can manipulate it in any way.
- You can sell it, and in some cases this will earn the original creator resale royalties.
- Or, you can hold it forever, resting comfortably knowing your asset is secured by your wallet on Ethereum.
And if you create an NFT:
- You can easily prove you’re the creator.
- You determine the scarcity.
- You can earn royalties every time it’s sold.
- You can sell it on any NFT market or peer-to-peer. You’re not locked in to any platform and you don’t need anyone to intermediate.
The creator of an NFT gets to decide the scarcity of their asset.
For example, consider a ticket to a sporting event. Just as an organizer of an event can choose how many tickets to sell, the creator of an NFT can decide how many replicas exist. Sometimes these are exact replicas, such as 5000 General Admission tickets. Sometimes several are minted that are very similar, but each slightly different, such as a ticket with an assigned seat. In another case, the creator may want to create an NFT where only one is minted as a special rare collectible.
In these cases, each NFT would still have a unique identifier (like a bar code on a traditional “ticket”), with only one owner. The intended scarcity of the NFT matters, and is up to the creator. A creator may intend to make each NFT completely unique to create scarcity, or have reasons to produce several thousand replicas. Remember, this information is all public.
Some NFTs will automatically pay out royalties to their creators when they’re sold. This is still a developing concept but it’s one of the most powerful. Original owners of EulerBeats Originals earn an 8% royalty every time the NFT is sold on. And some platforms, like Foundation and Zora, support royalties for their artists.
This is completely automatic so creators can just sit back and earn royalties as their work is sold from person to person. At the moment, figuring out royalties is very manual and lacks accuracy – a lot of creators don’t get paid what they deserve. If your NFT has a royalty programmed into it, you’ll never miss out.
Maximising earnings for creators
The biggest use of NFTs today is in the digital content realm. That’s because that industry today is broken. Content creators see their profits and earning potential swallowed by platforms.
An artist publishing work on a social network makes money for the platform who sell ads to the artists followers. They get exposure in return, but exposure doesn’t pay the bills.
NFTs power a new creator economy where creators don’t hand ownership of their content over to the platforms they use to publicise it. Ownership is baked into the content itself.
When they sell their content, funds go directly to them. If the new owner then sells the NFT, the original creator can even automatically receive royalties. This is guaranteed every time it’s sold because the creator’s address is part of the token’s metadata – metadata which can’t be modified.(https://ethereum.org/en/nft/#nft-use-cases)
How to Buy NFTs
If you’re keen to start your own NFT collection, you’ll need to acquire some key items:
First, you’ll need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You’ll likely need to purchase some cryptocurrency, like Ether, depending on what currencies your NFT provider accepts. You can buy crypto using a credit card on platforms like Coinbase, Kraken, eToro and even PayPal and Robinhood now. You’ll then be able to move it from the exchange to your wallet of choice.
You’ll want to keep fees in mind as you research options. Most exchanges charge at least a percentage of your transaction when you buy crypto.
Popular NFT Marketplaces
Once you’ve got your wallet set up and funded, there’s no shortage of NFT sites to shop. Currently, the largest NFT marketplaces are:
• OpenSea.io: This peer-to-peer platform bills itself a purveyor of “rare digital items and collectibles.” To get started, all you need to do is create an account to browse NFT collections. You can also sort pieces by sales volume to discover new artists.
• Rarible: Similar to OpenSea, Rarible is a democratic, open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform enable holders to weigh in on features like fees and community rules.
• Foundation: Here, artists must receive “upvotes” or an invitation from fellow creators to post their art. The community’s exclusivity and cost of entry—artists must also purchase “gas” to mint NFTs—means it may boast higher-caliber artwork. For instance, Nyan Cat creator Chris Torres sold the NFT on the Foundation platform. It may also mean higher prices — not necessarily a bad thing for artists and collectors seeking to capitalize, assuming the demand for NFTs remains at current levels, or even increases over time.
Although these platforms and others are host to thousands of NFT creators and collectors, be sure you do your research carefully before buying. Some artists have fallen victim to impersonators who have listed and sold their work without their permission.
In addition, the verification processes for creators and NFT listings aren’t consistent across platforms — some are more stringent than others. OpenSea and Rarible, for example, do not require owner verification for NFT listings. Buyer protections appear to be sparse at best, so when shopping for NFTs, it may be best to keep the old adage “caveat emptor” (let the buyer beware) in mind.( Source: (https://www.forbes.com/advisor/investing/nft-non-fungible-token/Robyn Conti, John Schmidt)
Non-fungible tokens have helped solve long-standing problems with scarcity in digital art. How do you keep virtual artwork rare when you can digitally copy it? While there’s fake art in the real world too, we’re usually able to authenticate them.Crypto art gets most of its value from verifying its authenticity and ownership digitally. While anyone can look at a CryptoPunk on the Ethereum blockchain and download or save the image, we can’t prove we own the original.For example, the anonymous digital artist Pak created a series of NFTs, each identical apart from the name. With names like The Cheap, The Expensive, and The Unsold, Pak gave each piece a different value based on the title. The collection makes us think about what gives value to an artwork.
When it comes to NFTs, the value isn’t necessarily about the attached artwork. Sometimes, what is more important is proving ownership of that particular asset. This aspect is what makes crypto art one of the most popular NFT use cases out there.
Whether it’s a PancakeSwap Bunny or a Binance Anniversary NFT, there’s a massive demand for digital collectibles. This use case has even hit the mainstream with the NBA NFT collectible trading cards NBA Top Shot.Along with digital NFT art, these non-fungible tokens make up a significant proportion of sales on NFT marketplaces like Opensea, BakerySwap, and Treasureland.There’s a lot of crossover with crypto art, and sometimes an NFT can be both a collectible and an art piece. These two use cases are the most developed we currently have.
Jack Dorsey’s first tweet is an excellent example of an NFT collectible. While a CryptoPunk is collectible and visually artistic, Dorsey’s NFT has value purely for its collectibility.
Dorsey sold the NFT using Valuables, a platform that tokenizes tweets. You can place an offer on any tweet. Anyone can swoop in with a counter-offer and outbid you. Then, it’s up to the tweet author to accept or reject an offer. If they accept, the tweet will be minted on the blockchain, creating a 1-of-1 NFT with their autograph.Each NFT is signed by its verified creator’s Twitter @handle, meaning that only the original creator can mint their tweets as NFTs. This process creates a digital, rare collectible to trade or keep. The concept of selling a tweet can be a bit tricky to grasp, but it’s a great example of how NFTs create collectibility. It’s essentially the digital version of a signed autograph.
It’s easy to forget that not every NFT derives value from a song, picture, or collectible item. In decentralized finance (DeFi), NFTs also provide unique financial benefits. Most will have some artwork too, but their value comes from their utility.For example, JustLiquidity offers an NFT staking model. A user can stake a pair of tokens in a pool for a certain period and receive an NFT to access the next pool. The NFT acts like an entrance ticket and is destroyed once you participate in the new pool. This model creates a secondary market for these NFTs based on the access they provide.
Another example is BakerySwap’s NFT food combos that provide increased staking rewards for holders. By contributing BAKE, you will receive an NFT combo that provides a variable amount of staking power. Users speculate on these combos, sell them on the secondary market, or use them for staking. This combination of NFTs with gamification and DeFi creates another interesting use case for non-fungible tokens.
Gaming has a huge demand for unique items that are tradable and purchasable. Their rarity directly affects their price, and gamers are already familiar with the idea of valuable, digital items. Micro-transactions and in-game purchases have created a multi-billion dollar gaming industry that could tap into NFTs and blockchain technology.
It’s also an exciting area in terms of what an NFT represents. Tokens for video games combine aspects of art, collectibility, and utility for players. However, when it comes to big-budget video games, NFT implementation is a long way off.In the meantime, other projects have actively built blockchain technology into their games. Axie Infinity and Battle Pets are both Pokémon style games with tradable pets and items. You can also purchase and sell these tokens on external marketplaces (peer-to-peer sales).
Gaming NFTs can be cosmetic, but many have utility too. Each Axie pet has a set of abilities for battling. These abilities also affect the pet’s value when traded. A CryptoKitty can be extremely valuable just for its desirable breeding attributes. Determining the value of each pet depends on a combination of rare looks, features, and utility. In the example below, we don’t see just one desired, rare aspect but multiple.
Like an image file or video, you can also attach audio to an NFT to create a collectible piece of music. Think of it as a digital “first edition” of a record. Attaching a song to an NFT is similar to our art example, but there are other use cases.
A big issue for musicians is getting a fair share of royalties. But there are at least two possible ways to achieve a balanced outcome: blockchain-based streaming platforms and blockchain royalty tracking. Competing with Amazon Music or Youtube for streaming services is difficult for small blockchain projects. Even when a giant like Spotify purchased a blockchain royalties solution called MediaChain in 2017, there were no real benefits for artists.
In the meantime, smaller projects have ended up working mainly with independent artists. Rocki on Binance Smart Chain gives independents a platform to sell royalties and stream their music. Their first royalty NFT sale on the platform raised 40 ETH for 50% royalties using the ERC721 token standard.
Whether this model will become more popular or not will depend on its adoption by larger streaming services. Combining music with NFTs is an excellent idea for a use case, but it might struggle to reach success without the support of music labels.
Real-world asset NFTs
Linking real-world assets with NFTs can digitize the way we prove ownership. For example, in real estate, we typically deal with physical property deeds. Creating tokenized digital assets of these deeds can move highly illiquid items (like a house or land) onto the blockchain. When it comes to this application, we haven’t seen regulators provide much support so far. It’s still very much in development but is one to look out for in the future.
In April 2021, Shane Dulgeroff created an NFT representing a property for sale in California. It also has a piece of crypto art attached to the token. Anyone who wins the auction will receive the NFT and ownership of the house. However, the exact legal situation of the sale and the rights of the buyer or seller are uncertain.
When it comes to smaller items, like jewelry, an NFT can help prove legitimate ownership when reselling. For example, a genuine, ethical diamond usually comes with a certificate of authenticity. This certificate is also a way of proving you have ownership rights. Anyone trying to resell the item without the certificate cannot confirm its authenticity and may have problems convincing buyers they are the rightful owner.The same concept is possible with NFTs. By having an NFT associated with an item, owning the NFT can become just as important as owning the asset. You can even embed the NFT into an item with a physical cold storage wallet. As we see the Internet of Things develop, we will likely see more NFTs being used to represent real-world assets.
Blockchain technology can be useful in the logistics industry as well, particularly because of its immutability and transparency. These aspects ensure that supply chain data remains authentic and reliable. With food, commodities, and other perishable goods, it’s important to know where they have been and for how long.
An NFT also has the added benefit of representing unique items. We can use an NFT to track a product that contains meta-data on its origins, journey, and warehouse location. For example:
- A high-end pair of luxury shoes are created at a factory in Italy. It’s assigned an NFT you can quickly scan on its packaging.
- Timestamped metadata is included of when and where the shoes were created.
- As the product goes through the supply chain, the NFT is scanned, and new timestamped metadata is added. The data could include its warehouse location and time of arrival or departure.
- Once the shoes arrive at their final destination, a store can scan them and mark them as received. An exact detailed history is available to view and confirm the shoes’ authenticity and logistic journey.
There are a lot of hypothetical ways to implement NFTs into the supply chain. All of them, however, require each stage of the chain to use the same infrastructure. With so many different players and stakeholders involved globally, it can be challenging to implement these systems in real life. This factor has led to only a minimal number of real-life use cases.
Currently, MAERSK’s TradeLens system and IBM’s Foot Trust are two examples of large blockchain logistics solutions. Both use Hyperledger Fabric, an IBM blockchain that supports the use of NFTs. However, it’s unclear if NFTs play a role in their operations.