Quick Start Guide to NFTs
Curious about those little pixelated animal images you’re seeing all over the Internet, and wondering how on earth they are related to sophisticated technologies that help reduce counterfeiting in fashion, track license usage in music, and exchange digital items in games? The thing that links all this together is the ‘non-fungible token’, or ‘NFT’ for short. In this quick guide, we take you through what an NFT is and answer important questions related to buying, owning, and investing in NFTs.
What is an NFT?
A non-fungible token (NFT) is a unique and irreplaceable unit of data that is stored on a digital ledger (in most cases, the Ethereum blockchain).
In essence, NFTs are tokens that prove ownership of a particular asset, which can be a physical asset or a digital one. In this regard, they work similarly to a set of deeds on a house. The key difference, though, is that because the data is encrypted on a decentralized ledger, there is literally only one version of the asset in existence (unlike house deeds, which could easily be forged). NFTs provide a robust means of having and proving ownership, which is precisely why they are used so extensively by digital creators who, for years, have had to battle forgeries, theft, and otherwise unlawful uses of their products and other creations.
Despite existing since 2014, NFTs have become famous in the past year or so because of several high profile NFT transactions making their way into the mainstream news. Beeple’s $69 million sale of ‘Everydays — The First 5000 Days’ as an NFT, for example, was covered everywhere from the New York Times to obscure crypto blogs in every corner of the Internet.
It’s not only in the digital creator realm that NFTs have their uses, though. There are several more use cases for NFTs, as the below examples show.
What is an example of an NFT?
Digital artwork like Beeple’s is just one example of an NFT, but there are countless other applications for NFT technology. Some other examples include:
- Certificates of authenticity (like the certificates you get with Rolex watches)
- Collectibles (like the Cryptoadz by Gremplin)
- Event tickets (like for music concerts or film premieres)
- Limited edition fashion (like this AI-created one-of-a-kind sneaker from the RTFKT team)
- Original writing (like novels, poetry collections, or essays)
- Domain names (like the increasingly popular .eth domains)
NFTs can also be used in much more traditional settings, like legal practice. Legal documents (for example, contracts) can be issued as NFTs. Similarly, you could also hold NFTs as a more secure way of proving your ownership of assets like houses, vehicles, jewellery, and weapons.
The possibilities for NFTs are endless, so expect to see numerous new applications of NFT technologies in the coming years.
NFTs versus regular digital files
Getting to grips with NFTs can be tough at first, but comparing them to regular digital files that we use every day (like an .mp3 copy of a song, for example) can illustrate their differences:
No two NFTs are the same — they are digitally unique
A copy of a file is exactly the same as the original file
Every NFT has an owner by default, and anyone can verify that ownership record as everything is kept in the public domain
Ownership records of files are kept on servers, which are owned by institutions that can control who accesses data and change what that data says
NFTs can be used on anything that’s built with Ethereum, which gives endless opportunities for NFT creation, storage, and transfer
Companies must build their own infrastructure to create, store, and transfer their digital files (like a ticket exchange, for example)
Creators can access global markets and sell to anyone
Creators must adhere to platform limitations and geographical regulations on digital files (for example, some written works are banned in certain countries)
Creators keep ownership of their work indefinitely and can claim royalties directly from anyone reselling their work
Creators struggle to track who is selling authorized or unauthorized copies of their work, and rarely secure all royalties (platforms take commissions, for example)
NFTs have intrinsic value that can be used as collateral or consideration in other transactions (digital art can be used as security for a loan of USD, for example)
No widespread meaningful use of files as collateral or compensation due to originality and value concerns
Why would anyone buy an NFT?
If you’re wondering why someone would pay millions for a .jpg file that someone else could still copy and use as they see fit, you’re not alone. Much of the pushback against NFTs has revolved around the question, ‘What’s the point?’
The answer to this question can get quite technical, but for now, let’s try to keep it as simple as possible.
One way to think about why there is value in holding NFTs is to think about a piece of famous artwork. Take da Vinci’s ‘Mona Lisa’ (the piece that has the highest ever insurance value for a painting) as an example. If someone came along and offered you the original ‘Mona Lisa’, you wouldn’t turn that down simply because someone else could own a print of it and hang it on their wall too. You’d want that thing for bragging rights as well as the fact that it is valued somewhere close to one billion USD.
The same applies in the digital realm. There is intrinsic value in having the original version of a thing, whether that thing is a song, deeds to a car, or a cartoon lion with a pipe in its mouth. Sure, a .jpg or .mp3 file can be copied, but when created as an NFT, the original version of the thing can never be sold or transferred by anyone other than the owner. This means the owner’s rights are protected and can be verified at any point by checking the public records on the digital ledger.
Are NFTs good investments?
As with any other asset, only you can decide whether a particular NFT makes a good investment given your financial circumstances, and you should do proper research using reliable data and tools before you put your resources on the line to acquire it.
In theory, NFTs make better investments than investments into most physical goods because of their inherent transparency and traceability. The NFT for ownership of a piece of artwork, for example, can only ever be created once. It is impossible to mint multiple NFTs for the same piece of data because by their very nature, the NFTs are ‘non-fungible’ (i.e. they cannot be exchanged in a like-for-like manner). This is not the case with non-NFT forms of ownership. If someone is trying to sell a designer watch, for example, they may even have the original certificate of authenticity, and nothing can really tell you whether that watch is rightfully the seller’s or whether it was stolen from someone else.
As for individual NFTs and how good of an investment they make, only the market can decide one way or another. Some of the most profitable NFT transactions so far have come off the back of huge publicity campaigns, often involving celebrities, and so in that regard their marketing is no different from a new celebrity-sponsored designer clothing line. If there’s hype around a certain creator, people are likely to buy from them (note that Beeple, as just one example, had an audience of millions of people already).
How to buy an NFT
If you have decided that you want to buy an NFT, there are a number of ways that you can go about it.
You will need a couple of things before you can do so, though.
Firstly, you’ll need a crypto wallet, and secondly, you’ll need some way of funding your purchase, which in most cases will look like some form of cryptocurrency that is accepted on the NFT marketplace (this is likely to be Ether tokens for marketplaces based on the Ethereum blockchain). NFT marketplaces are just like other marketplaces (like Amazon or eBay) in that people can buy and sell a range of assets there.
Some popular marketplaces include:
- Axie Marketplace
- Larva Labs (for CryptoPunks)
- NBA Top Shot Marketplace (for NBA Top Shot trading cards)
Once you’ve selected a marketplace to trade on, you will need to link your crypto wallet to the marketplace to enable payment for the NFT you want to buy. Once you’ve bought your NFT, it will be stored in a collection in your crypto wallet, and you can either keep the asset, transfer it to someone else, or resell it.
Where to find out more about NFTs
The Internet is awash with different resources on NFTs (some of them more reliable than others), but if you’re looking to find other NFT enthusiasts and share ideas and opportunities, take a look at Traderverse. We have created a one-of-a-kind social ecosystem for discovering and discussing NFTs. For more information, sign up at Traderverse.io or join us on our Discord or Telegram group.