Non-fungible tokens (NFTs) are cryptographic digital assets that each have uniquely identifiable metadata and codes. Their data is stored on the blockchain, ensuring that they can’t be replicated or forged.
The tokens act as a representation, like an IOU, for either digital or tangible items. For instance, one could create NFTs that stand for digital artwork, virtual real estate in a game, collectible Pokemon cards, or even someone’s personal identification information. Currently, most of the NFT market is focused on collectibles like sports cards and digital art. But there are other highly priced NFTs on the market tool, such as a tokenized version of the first-ever tweet, created by Twitter CEO Jack Dorsey.
Let’s dive into the details about how NFTs work, why they’re important, and what makes them valuable.
How Do NFTs Work?
As an asset, an NFT works in the same way as trading any other asset: stocks, bonds, real estate, gold, and exchange traded funds (ETFs). You buy and sell NFTs for a profit or a loss, similar to other types of assets: NFTs are not cryptocurrencies, but you may use crypto to buy and sell non-fungible tokens. The purpose of NFTs is to monetize and tokenize ownership of all types of items, be they virtual or tangible.
If you’re interested in trading NFTs, you’ll need to find an NFT marketplace or platform on which to trade, a crypto wallet, and cryptocurrencies. There are many NFT marketplaces — like Rarible and others, cited below — so you’ll also need to do your due diligence when choosing one.
One way to make money from NFTs might be to purchase collectibles that you believe are undervalued, wait for them to appreciate, and then sell them in the marketplace.
What Are NFTs Used For?
The concept of digital representations of material items is not new. But the addition of blockchain technology makes NFTs important. As part of a blockchain, NFTs are easily verifiable and unique, each one able to be traced back to the original issuer.
NFTs are revolutionizing gaming, art, and the collectibles market. They also have the potential to transform real estate, travel, and identity management. Millions of dollars have been spent on NFTs over the past few years, and their popularity is increasing amongst both collectors and crypto traders.
NFTs and Gaming
For the first time, immutable ownership and efficient sale of collectible and in-game items is possible. This opens up many opportunities for online gaming and world creation. For instance, within virtual worlds like The Sandbox, players can create pretty much any business one might create offline — design and sell hats, create avatars, or sell theme park tickets. Players can even create in-game currencies to sell to other users.
NFTs and Art
NFTs are revolutionizing the art world. Using an NFT exchange, artists can sell digital art directly to buyers, removing the need for a gallery or auction house. Typically, middle men can take a large percentage of sale profits, which means artists may be able to increase their profits using NFTs. It’s even possible for artists to earn royalties each time their artwork or music is sold. The most expensive digital art sold so far was a group of NFTs created by Beeple which sold for over $69 million.
NFTs and Identity Management
There are also use cases for NFTs in identity management. Currently people around the world travel with physical passports, which can easily be lost or stolen, and even replicated or forged. Storing identity information on the blockchain has the potential to eliminate these risks and may one day make travel processing more efficient.
NFTs and Real Estate
Another use case for NFTs is in real estate. Dividing up a property is difficult, but dividing digital real estate is easy. Multiple people can invest in and exchange property if it has been digitized. This principle can also be applied to other material assets.
NFTs and Supply Chain
NFTs can also help improve and validate supply chains. For instance, a coffee company could prove that their beans are fair trade. A wine company could create an NFT for each bottle of wine to keep track of every step of its production.
NFT Standards
Most NFT tokens are currently created using one of two Ethereum token protocols, ERC-721 or ERC-1155. These are essentially blueprints for tokens that were created by the Ethereum team. The blueprint creates a template for certain information — such as security and ownership information — that must be included when creating any new NFT. By standardizing this information, NFTs are easily distributed and exchanged.
Starting with a blueprint, software developers can create NFTs that are compatible with large public exchanges and NFT wallets such as MyEtherWallet and MetaMask. This ensures that people can buy and sell the NFT and hold it in their own personal wallet.
Other blockchain networks such as Tron, Neo, and Eos are also building out NFT token standards. Each of these platforms has different token functionality, so software developers can choose which platform is best for the token they are creating.
What Makes NFTs Valuable?
As with any type of asset, supply and demand drives the price of NFTs. Because there is a limited amount of NFT collections or individual non-fungible tokens, demand for them can be very high.
One might wonder what the value would be in owning a representation of a limited edition item as opposed to the real thing. NFTs are both easily verifiable and completely unique. This makes them easily tradable online. Their code is also useful because each NFT can be traced, including past transactions of that token. This provides security, transparency, and prevents fraudulent items from being sold.
Gamers, investors, and collectors have been flocking to the NFT market because they see the potential for market growth and significant profits.
Within certain online games, for example, real estate is a prized possession. Say you buy a plot of land on a main road in a virtual world, where it’s possible to build a casino. Because a casino has the potential to make a lot of money, so also is your plot of land on its own very valuable.
Resale Value and the Market For NFTs
The resale value for works of art and other collectibles in the secondary market is typically much higher than their original cost in the primary market. And this is true for the traditional art world as well as the digital art world.
Although NFTs have been around since 2014, the year they really took off was 2021, in what some think was a kind of NFT bubble. The resale market for NFTs did well in that year. But it was and continues to be dominated primarily by the flashy, big-ticket creators — like Beeple, CryptoPunks, FEWOCiOUS, WhIsBe, and Xcopy — whom the media has helped make popular. Their work sells for millions of dollars. Most NFTs, however, do not sell for those figures.
As with stocks, the value of NFTs goes up and down; the NFT marketplace is just as volatile as the market for crypto. For an asset to be profitable for the long term, it needs to have a robust secondary market, and it remains to be seen whether that can happen with NFTs. Because it is volatile, new, and unproven, you might not want to park your nest egg in the NFT market today. Though profit in the secondary market might be high for a few names at the top, most collectors and content creators do not reap large profits from reselling NFTs. Moreover, the current market is highly saturated. As with cryptocurrencies, it’s important to remember that there is never a guarantee of making money from NFTs.
Royalties
The value of art and collectibles is often hard to discern because it’s based so much on a consumer’s personal taste. For many, an NFT might appeal to factors other than money only. In this way, NFTs are unique in more ways than just being one of a kind.
Perhaps an NFT reminds the buyer of something soothing and familiar from their childhood; or it could act as a visual escape, a mini-vacation that takes the holder to far-off places. An NFT collectible also could serve as a status symbol in some circles. And, if the buyer of an NFT is wealthy, purchasing the item could invoke their philanthropic nature; they’d be helping the artists and creators directly.
Royalties are a huge help to content creators of NFTs. Each time an NFT is resold in the secondary market, the artist gets a percentage of the sales price. This is usually between 5% and 10%, and is paid out automatically to the artist upon resale. These royalties are perpetual; they continue indefinitely for the creator’s lifetime. Artists and creators set the percentage of royalties at the time they mint the NFT.
Cryptocurrencies vs NFTs?
You can buy NFTs with cryptocurrencies. But crypto and NFTs are not the same thing.
Because NFTs and crypto are both created with the same technology, blockchain, some might think that they’re the same, or at least more connected. But a better way to think of them is as a subset of the cryptocurrency culture; they can attract the same players.
Cryptocurrencies, like fiat currency, are fungible assets, which can be exchanged and used for financial transactions because they are identical to one another. For example, one U.S. dollar (USD) is always equal in value to another USD. Think of an NFT like a passport or a ticket to an event. Each one is unique.
An NFT that represents a baseball card can’t be directly exchanged for one that represents a piece of digital art. And even an NFT that represents one baseball card can’t be exchanged for one that represents a different baseball card. The reason for this is that each NFT is unique and contains specific identification information.
However, NFTs are similar to cryptocurrencies in that they have attributes and metadata that makes them easily transferable and identifiable.
💡 Recommended: A Beginner’s Guide to Cryptocurrency
Differences Between Crypto and NFTs
| Cryptocurrencies | Non-Fungible Tokens (NFTs) |
|---|---|
| Identical to one another other | Unique; no two alike |
| Digital assets that can be exchanged for goods and services | Digital representations of a specific item; conferring ownership |
| Like currency; its only value is economic; exchangeable; one USD = one USD | Value goes beyond economics; varies based on demand, interest, popular culture, and often personal taste |
| Can be bought and sold in fractional shares | Can be bought and sold in their entirety only; can’t be divided into smaller portions |
NFTs and Energy Consumption
Essentially, NFTs and cryptocurrencies are made of code, on very high speed computers, with blockchain technology as their base. Not only is developing code for these end products labor-intensive, it’s also energy-intensive, and leaves a large carbon footprint on the earth.
The major NFT marketplaces use Ethereum (ETH) to keep a secure record of all transactions on the blockchain. This is done via a mining process that verifies whether crypto transactions are valid. Mining Bitcoin, or any crypto, involves a complex network of computers that use advanced cryptography — and in doing so uses energy on the scale of a small country.
Joanie Lemercier is a French artist who’s known for his intense digital sculptures that gyrate into complicated patterns of light, color, and form.
When he learned that this process of making art was so energy-intensive. Lemercier began to look closely at his own energy use. In Lemercier’s calculations were a huge heating bill for his studio in Brussels, electric bills for the high-end computers to compose his creations, and dozens of plane flights per year to attend his exhibits around the world. After this exercise, this artist vowed to reduce his annual energy expenditures by 10%. He met his goal successfully and went on to become a climate activist.
As artists, content creators, and investors become more aware of just how large a carbon footprint these activities leave, they’ve begun to turn their attention to exploring other forms of sustainable energy; and even have joined groups to protest mining coal and projecting, projecting lasers onto excavation sites and government buildings.
💡 Recommended: Exploring NFTs and Their Environmental Impact in 2022
Key Characteristics of NFTs
NFTs have traits that make them different from other types of assets:
• Indivisible: Unlike Bitcoin or other forms of cryptocurrency, NFTs can only be bought and sold in their entirety. They can’t be divided into smaller portions.
• Non-interoperable: Just as NFTs can’t be exchanged for one another, one type of NFT can’t be used in another NFT system or collection. NFTs used in online games, for instance, are like a playing card or game piece. Just as a Monopoly piece can’t be used in the game of Life, the owner of a CryptoKitties NFT can’t use that NFT in the Gods Unchained game.
• Direct Ownership: One important characteristic of NFTs is that the person who buys one actually does own it. They can sell it or hold it. It’s not held by a company the way iTunes holds music and licenses it out for users to listen to.
• Extensible: Two NFTs can be combined to create a new, unique NFT.
• Can Store Metadata: NFT creators and owners can add metadata to NFTs. An artist can sign their artwork digitally, for instance.
Where to Buy and Sell NFTs
When NFTs first emerged, the way to buy and sell them was via creators of NFTs, themselves. Creators of NFTs can include artists, musicians, public companies, trade groups, and universities. NFTs’ popularity, however, has spawned dozens of independent online platforms known as NFT marketplaces, where you may buy and sell these assets.
Many of these NFT marketplaces have a specific focus or niche. We may classify the marketplaces according to style, format, and subject to appeal to a wide assortment of audiences, such as artists, musicians, sports fans, gaming enthusiasts, and collectors.
Types of NFT Marketplaces
• Open marketplaces: A broad array of NFTs created by various sources
• Curated marketplaces: NFTs come from more specific or specialized sources
• Collectibles marketplace: Focus on items like sports or movie collectibles
• Games marketplaces: NFTs that are specific to online gaming
Some popular NFT marketplaces
• Foundation: Foundation.app is a simple, no-frills way to bid on digital art, using Ethereum. Since the marketplace’s launch in early 2021, Foundation has sold more than $100 million of NFTs.
• Nifty Gateway: Nifty Gateway has spearheaded the sale of some of the most popular digital artists, such as Beeple and singer/musician Grimes. It’s an art curation platform powered by the crypto exchange Gemini.
• OpenSea: Currently the leader in NFT sales, OpenSea offers all kinds of digital assets, which are free to browse. It also offers artists and creators an easy-to-use process to mint their own NFTs.
• Rarible: Similar to OpenSea, all kinds of art, videos, collectibles, and music may be bought, sold, or created on the Rarible platform. However, unlike OpenSea, Rarible has its own token (RARI), which you’ll need to use to buy and sell on the Rarible marketplace.
• SuperRare: The SuperRare marketplace, like Rarible, is building a marketplace for digital creators. The site includes art, videos, and 3D images, but collectors can purchase artwork using Ethereum.
Investing in Cryptocurrencies Today
The NFT market is still new and full of potential for creators and investors. However, before investing in cryptocurrencies, NFTs, or any other digital assets, it’s important to research and understand the market.
FAQ
What makes NFTs so expensive?
One thing that makes NFTs so expensive is that right now, non-fungible tokens are still new. So the NFTs that are coming to market are literally the first of their kind. A “first” of anything collectible is more valuable than an item that has been produced for many years. Moreover, we are in the midst of a blockchain craze in which makes NFTs’ value whatever will pay for them. These inflated prices will become lower the longer NFTs have been around and the easier they are to come by.
What type of investment are NFTs?
NFTs are digital assets that are created using blockchain technology. Usually, when you purchase an NFT, you are investing in the ownership of something.
What are NFTs used for typically?
Typically, NFTs are used by artists to create one-of-a-kind works of art, though literally anything that’s created on the blockchain and stores metadata may become an NFT, including passports and real estate transactions.
Are NFTs cryptocurrencies?
No, NFTs are not cryptocurrencies. You may purchase NFTs with crypto, but NFTs themselves are not used as an exchange of value. However, because they are created using blockchain technology, NFTs have become a sort of subset of crypto.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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