What are NFTs?

NFTs, or non-fungible tokens, are a type of cryptocurrency created on a smart contract platform such as Ethereum. They are unique digital objects that can be cool to own or even profitable to trade, in other words they are a kind of collectible digital cards. They usually start out as something only enthusiasts care about, but if you own a rare one, it can become worth a lot more one day.

What is fungible and non-fungible?

Cryptocurrencies can be  fungible  , meaning that all units of the currency (tokens) are the same and equal, such as grains of rice or dollars for example.

Non-fungible  tokens are just the opposite, each cryptocurrency unit or token is unique and cannot be counterfeited.

This “non-fungible” token can be used for many things, even certain types of currencies. But the current trend under the NFT has mostly come from digital art and collectibles. People have discovered that a unique digital object can be interesting, cool and even have significant monetary value. That is why it has grown so much in popularity lately, with thousands of projects around artwork, games and sports.

How do NFTs work?

It really depends on the platform, but since the vast majority of NFTs are created and traded on Ethereum, we’ll focus on that in this article.

NFTs are created on the  Ethereum blockchain , which are not customizable. No one can undo your ownership of an NFT or recreate the exact same NFT. They are also “permissionless”, so anyone can create, buy or sell an NFT without asking permission. Finally, each NFT is unique and can be viewed by anyone.

Only one owner

It’s like a unique collection card in an open shop window that everyone can admire, but only one person (or cryptocurrency wallet, to be exact) can own it at any given time.

An NFT is usually represented by a digital artwork, such as an image. It’s important to understand that it’s not just about that image (which can be easily copied). Existence as a digital object on the blockchain is what makes it unique.

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How do I buy or trade NFTs?

NFTs are bought and traded just like cryptocurrency based on Ethereum, only instead of buying a number of tokens, you only buy one token.

You start by downloading  MetaMask,  which is a browser extension that allows you to interact with different facets of Ethereum such as the exchanges and dApps (decentralized apps). MetaMask is also a digital wallet for Ethereum and all tokens created on Ethereum (both fungible and non-fungible).

After installing the extension, you need to buy some Ethereum (you can do it directly in MetaMask with a debit card or Apple Pay by clicking “Add Funds”). But be very careful with your funds. It is most convenient to store your MetaMask password and the private key of your wallet somewhere safe. If you visit a website that sells NFTs (such as NBA Top Shot) or an exchange where you can trade them (such as Uniswap), connect your MetaMask wallet to the site (only do so on sites that you know to be safe) , and then you can buy NFTs.

Why do NFTs have value?

Why would anyone buy an NFT and why would there ever be a buyer willing to spend even more money in the future?

The value of NFTs doesn’t just come from some sort of digital game where you buy something with the hope that you can later sell it for more. The NFT should be valuable to you because… you enjoy doing it. If you are an NBA fan, you may want an official NFT owner to represent your favorite player. Or maybe there’s a digital cat you like.

It cannot be copied

In fact, many NFTs are simply digital images that you can easily right-click and save to your computer, but NFTs are also located on the blockchain. This is what makes it extremely difficult to copy them in their entirety. The blockchain entry also tells you transparently who created the NFT. If a famous musician says, “Yes, that’s my Ethereum address that created this digital image”, then it can be verified on the blockchain.

Larva Labs' CryptoPunks are among the most coveted (and pricey) NFTs around.


Image:  larvalabs

Some NFTs can be valuable in other ways. For example, say you buy an NFT related to an online game. Maybe that NFT will one day give you a special prize in-game, or it could be the basis for getting another hard-to-get object; something that only you can have because each NFT is unique. Now, with NFTs, no one can take it from you, not even the owners of the game.

A digital cat and mouse game

Let’s go back to the digital cat and mouse game for a moment. NFTs are an emerging market, and there is a lot of hysteria and scams going on. You may see that a particular NFT is selling for millions, and you may think that you too can buy something for a few dollars and get rich later by selling it to someone else. This can certainly happen, but it is quite rare. This can be manipulated, among other things.

For example, a cryptocurrency whale (one who owns huge amounts of cryptocurrency) can buy many NFTs and then “sell” them to himself (his other cryptocurrency address) for millions, artificially shooting the price up. So be careful: just because a particular NFT has been traded for a lot of money, it doesn’t mean that all other similar NFTs are also valuable.

What are the most expensive NFTs?

In the early days, we saw a  blockchain game like CryptoKitties selling virtual cats  for tens of thousands or even hundreds of thousands of dollars. Recently, music producer 3LAU sold a collection of 33 limited edition NFTs for over $11 million. The musician Grimes  (the mother of X Æ A-Xii) even sold her digital art collection for $7,500 each, totaling $6 million in sales.

Are NFTs a good investment?

Buying an NFT because you like it or maybe even to make (or lose) some money quickly is one thing, but really investing in NFTs is another. Again, it’s only just new. Even a painting by Van Gogh or a rare baseball card by Babe Ruth took some time to become valuable.

Given the digital nature of NFTs, it is difficult to compare them to precious physical works of art, such as statues and paintings. On the other hand, we live in a world where one Bitcoin is worth more than $50,000 at the time of writing, so things from the digital world can certainly become very valuable and even keep that value over longer periods of time.

A complex world

However, if you are planning to invest in NFTs, you will have to dive deep into this complex world as every NFT market is slightly different. Trading on Ethereum can be quite pricey, as the recent exchange of data on the network is driving costs up. Finally, you need to think strategically and follow the often rapidly changing cryptocurrency trends.

In short, it is certainly possible to make money investing in NFTs, but you will have to do your homework.

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