What are NFTs (non-fungible tokens)?
You’ve probably heard that the hot new ticket in town is the hard to pin down ‘NFT’ or non fungible token. If you’re confused about what NFTs are and why you should care, you’re not alone.
So, let’s shed some light on the blockchain’s newest spawn – the non-fungible token!
Are they art? Are they a new mode of ownership? Are they a type of cryptocurrency? Are they a platform or a new technology? Should I buy one?
What in the world is an NFT?
All excellent questions. Let’s cut through the fog and demystify the NFT.
What are non-fungible tokens?
An NFT is essentially a unique digital asset, such as digital art, that lives on the blockchain. In this way, they are somewhat like cryptocurrency, but that’s where the similarity ends.
‘Fungible’ means that something can be swapped for equal assets (such as swapping one bitcoin or one dollar for another). However, an NFT is a unique digital asset, with an exclusive digital signature, which makes it impossible to be swapped for a ‘like’ asset – not unlike an original artwork. Thus. they are ‘non-fungible’.
They are one of a kind digital asset that you can buy and possess and can only have one owner.
Many NFTs represent real world or digital objects such as artworks, music, videos and games. Represent is the key word. Curiously, even though you might purchase the NFT of a painting – you don’t own the painting. You don’t have any copyrights, legal rights, or physical rights to the real world items, just the digital asset.
How do NFTs work?
The vast majority of NFTs live on the same blockchain that the cryptocurrency Ethereum lives on. Although in theory, they could live on any blockchain, such as bitcoin.
As mentioned, many, if not the majority of NFTs are representative of a digital artwork, image, video, or similar. When you buy an NFT, you own a unique digital version of that asset.
The idea of value in an NFT revolves around the scarcity and sole ownership of that NFT. As with many commodities, scarcity is the driver of selling and purchasing NFTs.
As an example of NFTs, ‘Nyan Cat’ is a well-loved video meme from around 2010. In 2020, its creator turned the digital art into an NFT and auctioned it. It sold for 300 ETH, which equates to 866,371.03 AUD at the time of writing.
Digital artist ‘beeple’ continued the trend and made ludicrous amounts of money with his NFT exclusive collage called “Everydays – The First 5000 Days“. It recently sold through famed auction house, Christies, for 100,455,416 AUD. Yes, over $100 million.
So yeah, it’s hot property.
Tell me the purpose of an NFT?
The purpose of an NFT, for the buyer, is to own a one off ‘collector’s item’ in digital form as opposed to a physical asset. Therein lies its appeal and value to many purchasers.
Many buyers hold hope that their NFT will increase in value, to serve as an investment. The seller of the NFT shares this aspiration.
As for the seller, many NFTs start life from the ambition of an artist to monetise their work. Artists can usually only sell their physical artwork online as copies or as an original. Now, artists can instead sell their work directly to consumers as NFTs, which also allows for their profits to increase.
Artists can also make remittances for the sale of their artwork if the work sells. The attractiveness of these features is that the artist generally receives no future revenue from the sale of artwork. The NFT offers artist many different ways to earn a living.
Tell me the difference between NFT and cryptocurrency?
NTFs are generally written in similar ways that Bitcoin or Ethereum do, onto a blockchain, but the similarity ends there.
Physical money and cryptocurrency have a “fungible” status that entails the possibility to exchange them equally. A dollar is worth a dollar and a bitcoin equals a different bitcoin. Crypto’s fungibility has made this the most reliable way to make transactions with blockchain.
An NFT is different. While NFTs exists on a blockchain to catalogue ownership and lay out a secure database framework for selling and buying, they are not exchangeable and they are not a currency.
Why are non-fungible tokens important?
Modern Finance Systems consist of sophisticated trading and lending systems based on various asset types. Providing digitised representations of physical assets is a step forward in evolving the digital economy infrastructure and philosophy, much like crypto.
We are essentially witnessing the birth and negotiation of new ways to trade, record, create and store value, in a digital, blockchain environment. It could be conceived of as an experiment in the emerging global economy.
The concept of physical assets being digitally represented isn’t new, nor does it require unique identification. But when such concepts are combined, in conjunction with the security and decentralisation of blockchain technology, then it becomes a powerful force to influence change.
How can I buy NFTs?
To create an online NFT collection, you will have to buy a digital wallet that stores NFT or crypto currencies. It’ll be necessary to get a bit of cryptocurrencies such as Ethereum, depending how the service provider accepts the currency.
Cryptocurrencies can be obtained by paying by credit card on sites such as Coinbase, Kraken, eTORO and PayPal. Then, you can send them back in your preferred wallet. You must consider fees while looking at possible options. Generally, exchanges pay you 5% or more of all purchases in cryptocurrency.
You then find an NFT marketplace or auction to make a purchase or undertake NFT transactions.