What is an NFT in Crypto (Non-fungible token)?

Blockchain / 8 Min Read
Milan Cutkovic / 10 Nov 2021

If you’ve been following crypto or spend any time on social media, you will have likely come across NFTs. NFTs or non-fungible tokens, are a new type of digital asset that has been making waves, with some selling for millions of dollars.

Continue reading to get a better understanding of what exactly is a non-fungible token and to learn everything you need to know about collecting, trading, minting, and selling NFTs.

Check out what you'll learn in our guide on NFTs:

What is an NFT and what does NFT stand for?

An NFT is a cryptographic token that represents a verifiably unique virtual or real-world object or asset. For example, NFTs can represent a piece of art, a music track, or an in-game object, among many other items.

In simple terms, an NFT is a digital asset that acts, feels, looks, and operates in a similar way to a physical asset that “lives” on a blockchain. Usually, NFTs are purchased and sold online using cryptocurrencies, such as ether (ETH) or a stablecoin like Tether (USDT).

NFT stands for non-fungible token. Non-fungible means - unlike a currency where one unit is the same as every other unit - each token is unique and cannot be interchanged for another while retaining the same value. 

A good example of an NFT is Beeple’s famous collaged digital artwork that was sold for $69 million at an auction at Christie’s. But Beeple’s NFT is just one example among many. 

Beeple's Everydays NFT

Source: Beeple

In fact, NFTs have been around since 2014. They have, however, only just started garnering attention in the last twelve months, with more and more celebrities jumping on the digital asset bandwagon. 

Since late 2017, about $130,000 had been spent on NFTs. Today, the NFT market is worth more than $10 billion. An article on Nasdaq estimates that the NFT market could grow by 1,000x in a couple of years. 

While most NFTs have existed online as digital creations, for many, it doesn’t make sense why someone would spend millions of dollars purchasing some artwork that they could easily download or screenshot. The simple answer is because an NFT buyer owns the original item. Furthermore, all NFTs have in-built authentication that serves as proof of ownership.

Now that we know what an NFT is and what it stands for, let’s take a look at how NFTs work.

How do NFTs work?

Most NFTs are part and parcel of the Ethereum blockchain. Ether (ETH) is the native cryptocurrency of the Ethereum blockchain and is second to Bitcoin in terms of market capitalisation. Although the Ethereum blockchain has become the go-to chain for the NFT market, NFTs can also be minted and traded on other blockchains.

NFTs are minted from digital objects that constitute both tangible and intangible objects. This could be anything from art, music, designer clothes, video highlights to GIFs. Even tweets can also be sold as an NFT. A good example is when Twitter CEO Jack Dorsey sold one of his tweets as an NFT for slightly under $3 million. So yes, tweets also count!

NFTs are created and issued using various frameworks. The ERC-721 standard is the most common. It’s a token standard used on the Ethereum blockchain for the issuance of non-fungible digital assets. The ERC-1155 standard, which is a more recent token standard, allows a single contract to have both fungible and non-fungible tokens, opening up a world of possibilities for NFTs. What the ERC-1155 standard does is that it allows for unique assets to be transferred between various applications with ease.

NFTs are like a physical collector’s object. The only difference is that NFTs are digital and so, instead of ending up with a painting that you can hang on your wall, you end up with a digital file. Or in some cases, both. 

Each NFT is cryptographically unique, making it easy to prove ownership and trade tokens between owners.

What are NFTs used for?

Similar to how the blockchain opened up a world of possibilities for different sectors with its various use cases, NFTs are also on course to achieving the same. 

For instance, NFTs can play an important role in the digital identity sector. NFTs are able to store both identification and ownership data on the blockchain. This helps boost data integrity and privacy for many people globally. 

NFTs in gaming are also fast becoming “a thing”. NFTs in gaming can be used to reward gamers and allow them to have true ownership of their in-game assets, such as cosmetic skins or weapons. Blockchain games such as Axie Infinity, Sorare, and Decentraland have incorporated in-game NFTs and are already seeing massive success in user uptake.

NFTs also allow for real-world assets to be tokenised into tradable digital assets. These NFTs can be presented as fractions of real-world assets that can be traded as a token on the blockchain. This way, many markets that would otherwise not have liquidity, such as real estate and fine art, can benefit from tokenisation.

Read more → What is tokenomics?

 

Advantages of non-fungible tokens

There is no doubt that NFTs have brought a new element to digital interactions. But, what are the advantages of NFTs?

Ownership

One of the most significant benefits of any NFT is in-built proof of ownership. NFT ownership can be linked to a single account or person as no owner can change the data once a purchase has been made. Ownership can, however, be transferred easily by the use of smart contracts should one opt to sell their NFT asset.

Authenticity

The blockchain is a decentralised immutable digital ledger. Each NFT created or minted on the blockchain has a unique trait that distinguishes it from any other. For example, even if a ticket vendor minted event tickets as NFTs, they’d each have a unique authenticator despite having the same look. As an underlying technology, the blockchain guarantees the authenticity of the NFT, making it essentially impossible to create fake versions.

Transferability

Another advantage of NFTs is that they are transferable. They can easily be bought and sold on popular NFT marketplaces such as OpenSea.io. The value of an NFT, however, depends on its uniqueness.

Creation of Economic Opportunities

The content creation field is very fragmented. Most content creators miss out on opportunities to fully maximise the gains of their content on other social platforms as the said platforms gulp down on a creator’s revenue. With NFTs, content creators have the ability to sell their content and receive all the sales revenue. They could also set up smart contracts that could allow them to earn royalties in the event a new owner sells the NFT.

Fungible vs non-fungible

How to buy NFTs?

NFT marketplaces are your go-to place when it comes to buying non-fungible tokens.

However, a marketplace is not all you need. For you to be able to buy an NFT, you will need to have a crypto wallet, such as Trust Wallet or MetaMask, that allows you to store both cryptocurrencies and NFTs.

If you don’t own crypto, the first step will be to buy some. The cryptocurrency you purchase will depend on what cryptocurrencies your NFT provider accepts. You can purchase digital currencies on various exchanges. Once this is done, you can then move the crypto to your wallet. 

The next step will be to access an NFT marketplace and link your wallet. Remember to ensure that you are on the right website. Additionally, you will need to have some extra crypto in your wallet to cover transaction fees. 

OpenSea, Foundation, and Rarible are popular NFT marketplaces that you can consider when looking to buy NFTs.

How to mint an NFT?

There are lots of platforms and NFT exchanges that can allow you to mint your own NFT. Minting simply means the process through which your digital item becomes part of the Ethereum blockchain as an NFT.

Minting straightforward non-fungible tokens is a simple process.

To start, you need to choose a blockchain network – you can choose between Ethereum, Binance Smart Chain, Solana, Stacks, and a handful of others. Remember, each blockchain is created for different purposes, and choosing the one that suits your needs is imperative. 

Besides the blockchain network, you will need to have the digital item you want to mint, a digital wallet and some crypto to pay for the minting fees.

While Ethereum has a large user base and is the network that helped make and grow NFTs to what we know them for today, its transaction fees are very costly. As a result, users end up with ridiculous costs even for small sales and purchases. 

Binance Smart Chain, on the other hand, offers faster speeds and lower fees. And while it might be relatively new in the market, its NFT markets are already experiencing significant growth. The same goes for NFTs on Solana, Cardano, and Stacks.

Can anyone make an NFT?

Yes, anyone can make an NFT. 

Minting an NFT that represents digital art or collectibles is incredibly easy and can be done on numerous NFT marketplaces. Additionally, you don’t need to have any technical crypto skills to make an NFT and sell it on an online marketplace.

But remember, unless your NFT can demonstrate value or you are famous, don’t expect to become an NFT millionaire overnight.

NFT use cases: What is an example of an NFT?

NFTs have largely been primarily associated with crypto art and blockchain gaming. But NFTs have so much more to offer beyond those two industries. 

Below are some examples of NFT use cases beyond crypto art and online gaming.

Sport collectibles

NBA Top Shot is an example of a sports NFT marketplace that was launched in 2019. There are also other sports NFT collectibles available today. NBA Top Shot is a basketball collectible NFT ecosystem that allows anyone to collect and trade officially licensed NBA and WNBA digital highlights– also known as moments. The cost for the highlights ranges anywhere between $4 to $1,000,000 depending on the moment.

Steph Curry NBA TopShot Moment

Source: NBA TopShot

Ticketing

Concert and event tickets can also be issued as non-fungible tokens because of their uniqueness and proof of ownership. A concert attendee can purchase a ticket as an NFT, store it on a digital wallet, and show it to gain entry to the event. Each ticket will have its own unique identity so that no one ticket can be counterfeited.

Clothing

Luxury brands that make designer items can also utilise NFTs. For example, brands like Gucci could have a scannable QR code on the tag that owners could scan and get a non-fungible token into their wallet that authenticates the genuineness of the bag.

Domains

Domain names are another use case for NFTs. In 2020, the domain name ‘sexy.crypto’ was sold on OpenSea for 230 ETH. Budweiser purchased the ‘beer.eth’ domain for around 30 ETH. And these are just a few examples. Domain names as NFTs have become a thing and a lot of them are being minted and sold as NFTs for individuals and brands that want verifiable ownership over their domain names.

How much are NFTs worth?

In theory, anyone can tokenise their work and sell it as a non-fungible token. But what really is the worth of an NFT? An NFTs worth is determined by three key things – its rarity, utility, and tangibility.

Rarity

Similar to traditional art, NFTs get their worth based on who the artist is, the impact it will have on the user, and the technique used in making it. An NFT’s intrinsic value is what draws people to it as it gives a sense of distinction and, therefore, helps to determine the worth of an NFT.

Utility

Some NFTs are purchased because they can be utilised in other applications. That means they are more than just collectibles as they can also be used as tokens in games. Such NFTs can help gamers have a key advantage in a virtual land such as Guild of Guardians.

Tangibility

Some NFTs are linked to real-world items. This gives such NFTs value in terms of tangibility that’s also backed by ownership immutability. While NFTs back the ownership rights, it doesn’t necessarily mean the item will be in high demand or make it unique. However, an item’s worth will be determined by the personal satisfaction the users get, practicality, and scarcity. 

While rarity, utility, and tangibility play a role in determining the value of an NFT, collectors (and to a greater extent the market) will put their own value on it, which explains why some digital art and collectibles have sold for millions.

How is the rarity and value of an NFT determined?

Determining the value of an NFT isn’t easy because it’s a relatively new asset class. 

Investors looking to invest in the NFT space might have a difficult time deciding whether a given NFT collectible or asset is worth their money. However, the rarity or scarcity of an NFT can help determine its value.

As mentioned, rarity simply refers to how rare an NFT is. For instance, rarity in the NFT world would mean that the non-fungible token is one of a kind, whether as a piece of art, game asset, etc. Additionally, the popularity of the artist also matters, especially if they have celebrity status. 

Some sold examples of unique NFTs that have had a significant impact include CryptoKitties, Glitch Girls Beeple’s Everydays – The First 5000 Days, and NBA Top Shot moments.

An NFT’s rarity can also be limited by NFT developers because they can create whatever amount of non-fungible tokens they want and then limit the collection to increase rarity.

What's the point of NFTs?

Choosing to buy, collect or sell an NFT is a decision that is fully dependent on the person. 

Are they a buyer, collector, or seller

As a buyer, the major benefit of buying an NFT item is that it lets you financially support artists that you like. In addition, you also get ‘bragging rights’ as you become the owner of the item and get a token that you can use to prove ownership.

As a collector, NFTs work like any other asset that you can buy and wait for the value to go up then sell so you can make a profit.

For sellers, NFTs provide an avenue for them to sell their work, thus providing a market that would have otherwise not been there. Moreover, sellers can also continue earning royalties every time the item they sold changes hands or gets sold to a new owner.

How is an NFT different from cryptocurrency?

NFTs are built on the blockchain, which is also the underlying technology used to create cryptocurrencies such as bitcoin and ether. And that’s pretty much the only similarity between NFTs and cryptocurrencies.

Cryptocurrencies, just like fiat currencies, are generally fungible. That means they can be exchanged or traded for another and have equal value. A dollar bill is identical to another dollar bill. Additionally, one XMR or one dollar has the same value as another XMR or dollar.

NFTs are different as each non-fungible token has a digital signature that makes it unique and non-fungible. For example, Beeple’s Everydays is not equal to Jack Dorsey’s first tweet just because they are both NFTs.

What's stopping people from copying digital art online?

Nothing stops people from copying digital art online. Most crypto art minted as NFTs are freely available online to see. 

NFT critics have argued that people can easily take pictures of NFTs and offer them for free or sell them. Beeple’s art, for instance, has been seen online, copied, and shared numerous times despite the fact that it’s sold.

So while copying digital art online is easily doable, it doesn’t make you the owner of the asset. Think of it this way: the Mona Lisa painting is one of the most popular paintings to have ever existed. Anyone can easily download a picture of it online. But does that make you the owner? No, it doesn’t.

However, anyone who buys an NFT receives the ownership rights, which proves they own the original work.

 

We hope that this guide will help you on your journey to buying, holding, and trading digital assets. You can start trading cryptocurrency CFDs with Axi today.

 

 

 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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