An NFT is a non-fungible token stored on a blockchain. A token, in crypto terms, refers to an asset. “Non-fungible” means unique. Where a fungible token—like Bitcoin—is non-unique, an NFT can only be assigned to a single owner at any one time. Any one Bitcoin equals any one other Bitcoin. But there’s only one NFT. It’s irreplaceable. The internet makes information abundant. The cost of replicating a digital asset, like an image file, text document or PDF is effectively zero. NFTs introduce scarcity to digital assets.
With NFTs, we can now see who owns what. No matter how many copies are created, everyone knows who holds the original. When the creator of an asset assigns a unique token to it, ownership is provable in perpetuity. From the initial creation of the NFT to every transfer of ownership thereafter. The blockchain stores this information and it can’t be tampered with.
What Are NFTs Used For?
The most common use of NFT technology, right now, is art. Artists are tokenising 1 of 1 pieces and teams are building profile picture projects at great pace.
The former use case is similar to how the traditional art world operates. One original piece of art work, bought by one person, who can then sell the piece on at their leisure. The difference is, the transaction is settled in cryptocurrency and ownership is transferred on the blockchain. Possession is no longer physical, but digital. NFTs are a huge boost to the intersection of creativity and code, though not all crytpo art is computer generated. A drawing completed on an iPad or a scan of work created with paint, pencil or pen can be NFT’d too.
Digital art is traded in public and private marketplaces. Owners who truly believe in a project, or want to hold a piece for the long term to maximize returns, may not want to entertain listing their assets at all. As with any market, rarity affects value, and thus price.
The transition to digital art can provide creators with greater discoverability. Being digital native unlocks wider network effects. Artists are no longer displaying their pieces in small galleries, but the largest gallery in the world—the internet.
NFTs give artists a better chance of getting paid in line with the value they’re creating, too. Artists can add royalties to their pieces that last forever; paid upon each transaction, not just the first.
Let’s say an artist sells something for 1 ETH, with a 2.5% commission fee coded in. If the art sells for 2 ETH next time, the owner makes a 1 ETH profit and the artist gets 2.5% of the sale total (0.05 ETH) deposited into their Ethereum wallet automatically.
There’s upside for collectors, too. NFTs make art more accessible. Those who appreciate art, but wouldn’t go to an art show, have found an entry point into the ecosystem.
On the investment side, the incentives of creator and owner are aligned. As the popularity of an artist, team or project rises, oftentimes, so does the value of the owner’s NFT. And how do creators become more popular? By having the owners of their art promote it. The internet unlocks owner participation possibilities that weren’t available before. Backing an NFT project with your capital and attention gives you a chance to participate in the upside of its future success. NFT technology is being used to build win-win landscapes across the creative space.
NFTs aren’t just for art. The technology can be used in other ways and will change the way we do many day-to-day things in the future. Anywhere that provable ownership records and automated financial transactions are important, is up for grabs.
Here a few examples and predictions:
- Music. Artists use NFTs to raise funds to release albums. As a fan, you own a portion of your favorite artists’ music and can benefit from the upside created by them.
- Ticketing. That football game you’re attending, your ticket’s in your wallet for entry to the stadium. You have a piece of memorabilia that can’t be lost and doesn’t take up physical space. Your club can see that you turned up and can reward you with merchandise for this in the future.
- Charity. Make donations by buying NFTs. Show your affiliation to a cause by holding the token in your public wallet. Increase funds raised through social proof of purchase.
- Property. The house that you own. Instead of the deeds being stored in a solicitor’s filing cabinet, your wallet holds your deed token. No middle-man is required to buy or sell the house, saving both sides of the deal money.
- Accounting. Your services and products are NFTs. Your business transactions are done on the blockchain and the records are public. Tax is less complicated because it becomes automated.
- Education. Enrolment is done with NFTs. Your certifications are NFTs. Leaders of decentralised schools learn and build at the same time. Schools provide ownership to students who contribute beyond the modules they take. Built-in job prospects are available to alumni via DAO projects.
How Do NFTs Work?
NFTs are a part of the progression of the web from version 2 to version 3. As the name insinuates, there was a prior transition from web1 to web2, too.
Listed below are the characteristics of each version of the web:
- Web1. The first iteration of the web. Information focused. HTML based.
- Web2. The state of play now. Centralised. Interactive. Social interaction. Ad revenue driven.
- Web3. Where we’re going. Decentralised. On chain records. Stateful. Native payments. Fewer middle men. Value driven.
Ethereum is a blockchain co-founded by Vitalik Buterin. Unlike Bitcoin (or “BTC”), Ethereum’s capabilities go beyond value exchange. Decentralised applications, of all kinds, can be built on Ethereum using smart contracts.The native cryptocurrency of Ethereum is ETH (or “Ether”), symbolised as “Ξ”. ETH is only second to BTC in market capitalisation at the time of writing.
Most NFT projects are built on top of Ethereum and are priced for sale in ETH.
NFT ownership is provable because records are held on a blockchain. A blockchain is a series of computers (referred to as nodes) around the world. This is what makes crypto technology decentralized . Records aren’t stored in one central place, like a fileserver in a cabinet, records are stored everywhere, by everyone.
A blockchain is a distributed ledger of transactions, and it’s accuracy is assessed by consensus. Records of token ownership and exchange are stored on these blockchains. On Ethereum, nodes in the blockchain use a consensus protocol called proof-of-work (or “PoW”) to agree on the correct current state of information, however, this algorithm will be phased out soon in favor of the more scalable proof-of-stake (or “PoS”).
An NFT is created when it’s minted by a smart contract. A smart contract is a piece of code that self-executes a transaction, or transactions, on a decentralized blockchain. Assets of the buyer and seller are swapped irreversibly by code, without the need for 3rd party involvement. Imagine a computer program exchanging your house deeds for the buyers funds, instead of a solicitor.
Minting an NFT means creating it for the very first time and becoming its original owner. In Ethereum terms, smart contracts are written in the programming language Solidity. Solidity developers are in high demand due to the increasing interest in NFTs.
The ERC721 standard is a boilerplate Solidity smart contract for the minting and management of NFTs within a collection. It provides functionalities to create a token, transfer a token from one account to another and to get the current balance of tokens available.
Most developers take this template and build additional functionality on top of it depending on the specific needs of their NFT project. There are three primary benefits to this approach:
- Developers can get an NFT project off the ground quicker because they don’t have to reinvent the wheel.
- Using a standard firms up the way developers should be building things. This ensures familiarity when a new developer enters a project at a later date.
- The longer a standard template is used in the wild, the greater confidence people can have that it won’t be exploited.
All smart contracts used by NFT projects are open source and immutable. You can view the code of any project you’re interested in minting, or learning from on Etherscan. Once deployed, the code can’t be changed.
Each time you transact with a blockchain, you use its energy. When minting, buying and selling NFTs on Ethereum, nodes on the blockchain compete to be the first to solve the PoW algorithm to gain the right to process your transaction. Because doing so comes with a financial reward. Ethereum miners (the nodes that run the PoW algorithm) receive 2 ETH per completed block at the time of writing.
Why are transaction fees necessary? To prevent misuse of the blockchain. If it were free to transact, the system would become jammed with infinite requests. No one could buy NFTs. So to solve this problem, gas is charged on each transaction that involves writing to a smart contract. This includes the minting and trading of NFTs. Reading data from the blockchain costs no gas. For example, viewing all of the NFTs owned by someone on OpenSea.
This means that each time you buy or list an NFT for sale on a marketplace, you will need to pay a gas fee. For example, an NFT that you purchase for 1 ETH, may require 0.1 in additional ETH to cover gas.
How To Buy NFTs
Starting A Digital Wallet
Many NFT transactions are completed using cryptocurrency. And that requires a digital wallet. For example, people use ether (from Ethereum) on the popular platform OpenSea. There are various digital wallets available, so let’s just look at the process to use one of them, MetaMask, which is available as a plug-in for the web browser Chrome:
- Go to the OpenSea website, and create an OpenSea account.
- Click on the Profile icon in the upper-right, and click on My Profile.
- On the page that opens, click “Get MetaMask.”
- Follow the instructions to install the plug-in to Chrome or on your mobile device.
- A Welcome page should appear; click “Get Started.”
- If this is your first wallet, click “Create a Wallet.”
- If asked to share feedback, you can click “No thanks.”
- Make a password.
- Record the secret phrase you are given (very carefully and securely so that you won’t lose it).
- Click on “Next,” and verify your secret phrase.
- Click on “Next,” and you’ll connect your MetaMask wallet with your OpenSea account.
- Click “Connect.”
Finally, you will buy ether or another cryptocurrency and place it in your digital wallet. You could use Robinhood or Coinbase to do this, but you can also just stick with MetaMask.
To buy ether, you can click on your MetaMask extension in your browser, then click on “Buy,” click “Continue to Wire,” select an amount of ether to purchase, and follow the instructions to buy ether. Transaction fees apply to each purchase, so you might want to buy in bulk.
Using an Existing Digital Wallet
Not interested in signing up for something new? PayPal existed as a digital wallet for years before the popular rise of cryptocurrency, and PayPal users are easily able to buy popular currency like ether and bitcoin.
Buying NFTs Through Auctions
Once you have cryptocurrency in your digital wallet and have associated your wallet with an online marketplace for NFTs, you can start buying—or at least bidding.
Many NFT purchases are made through auction, so you may have to bid against other buyers to win the piece you want, although you can buy some items immediately. If you’ve ever bought items on eBay, you’ll basically know how to buy NFTs.
On OpenSea, for example, click on “Explore” to see a list of current auctions. The prices listed on each are in ether, so they are often in fractions or decimals, since each ether token is worth many times more than a dollar.
Click on a piece that catches your eye. On its description page, it may have a:
- “Buy Now” button, which you can use to purchase it immediately at the listed price
- “Make Offer” button, if you want to offer a different amount, based on what you think it’s worth or are willing to spend
- “Place Bid” button, if the piece is being auctioned
If you click on “Buy Now,” for example, you will then click on “Checkout” and “Submit,” after which you’ll agree to the transaction fees required to complete the purchase.
The Next Step Is Yours
Now that you understand how to buy NFT tokens, the rest is up to you and your collecting and/or investing strategy. None of this is official investment advice, of course, but we think it’s smart to learn as much as possible about any investment you get into. If you have fun becoming an expert about your collectibles, you’ll have a better chance of buying very valuable art you can enjoy for the long term.