Key Takeaways:
- NFTs are digital assets that combine digital files with the advantages of blockchains, enabling unique ownership and proof of authenticity
- NFTs can represent various digital assets, such as artwork, music, video clips, and documents, and are commonly used in the gaming industry, virtual worlds, and digital collectibles
- NFT marketplaces serve as online platforms where users can buy, sell, and trade NFTs, leveraging the blockchain technology for secure transactions and ownership verification
What is an NFT?
Non-Fungible Tokens or NFTs are digital assets that combine digital files with the advantages of blockchains.
We can now attach cryptographic data to general files to make them unique.
This data is called a token, and it is generated by the blockchain. It includes a proof of ownership in the same way as cryptocurrencies do. With this token, we can now attach this proof of ownership to every file we want.
Now we cannot only prove that we own physical assets, but also that we own digital assets which no one else can own. This gives an NFT value and therefore people want to buy and sell them in marketplaces.
An NFT can represent any digital asset, from digital artwork over music and video clips to documents for real estate, taxes, etc. Today, they are mostly used for the gaming industry, virtual worlds and digital collectibles as NFT collections.
As they use the blockchain, people can also transfer NFTs and their ownership directly peer-to-peer without needing intermediaries in the same way as cryptocurrencies.
As this technology will evolve, more applications will be developed using NFTs as the integral part of their infrastructure.
What Does Non-Fungible Token Mean?
Non-fungible refers to the concept of uniqueness and fungibility.
It means that something is not interchangeable and cannot be replaced by something else with the same value.
It is something unique and is irreplaceable. In contrast, fungible items are identical assets and can be exchanged easily. A common example is money. One dollar is identical to another dollar and they both can be interchanged.
Both are identical and have the same value. Cars, smartphones or food items are all interchangeable with another identical product. You can interchange them without issues.
Other goods can also be non-fungible. Paintings, real estate, rare baseball cards or even documents like your birth certificate are unique.
These types of items exist only one time and cannot be exchanged for another item which could have the same value but aren’t identical. The term “token” refers to a piece of data which is created on the blockchain.
This piece of data contains unique information which enables us to prove ownership. This is the fundamental concept of blockchain technology and is also used by cryptocurrencies.
Only the owner of this token can access its information and therefore prove the ownership. No one else can access this data, which equals the concept of ownership. This token is attached to a digital item, making it a Non-Fungible Token or NFT.
How Do NFTs Work?
NFTs are created on a blockchain.
They don’t use their own blockchain but are built on top of other blockchains.
Ethereum’s blockchain is the most common one used to create NFTs. Because they exist in the same blockchain as the currency ether, you have to pay in ether to buy NFTs.
If the NFT would be created on another blockchain like Solana or Polygon, you would have to pay for the NFTs in their respective currency. Every unit in this network has unique data and only one person can access this data with a private key.
In these terms, cryptocurrencies and NFTs are exactly the same. Both get unique data from the blockchain, giving them authenticity. The difference between them is that NFTs get an additional piece of data as a digital file, like an image file or a document.
This way we can expand the advantages of the blockchain not only to data created in it but also to external data. If this external file gets tokenized, it means that the blockchain gives it unique data and attaches it to the file.
The file is not the pure image anymore but has additionally unique data stored in the blockchain. Now a user can tell that his image file has unique data and only he can access it and therefore prove that he is the owner.
Benefits of NFTs
Because the blockchain provides an NFT with its original data, there are many benefits which open new markets.
These benefits could also change many of the current markets, giving them processes and abilities which weren’t possible up to now.
Authenticity
The key benefit of one NFT is that it can be unique.
It cannot be copied and only one person can access its data. This can give it immense value because no one can multiply an NFT.
Ownership
The access to the information stored on a blockchain serves as a proof of ownership.
With these characteristics, we can now attach this proof to every digital file. We could use it for documents, tickets or music. This opens a lot of new possibilities.
Programmability
NFTs are programmed code stored in the blockchain.
This means that everyone can program custom code to NFTs. One popular and useful benefit of NFTs is that we can program royalties into its code. This means that an artist will get a royalty for every secondary sale in the future.
This opens a completely new market for artists and designers with the ability to earn money long term.
Transferability
If you want to collect paintings or rare sports cards, you will have to physically collect them which can be time consuming and you always have a risk of losing it in the shipping process if you buy it online.
With NFT transactions, you can transfer value in seconds with no issues through the internet.
How is an NFT Different From a Cryptocurrency?
The core principle of NFTs and cryptocurrencies is the same.
The use case differs because with crypto you can buy goods and services and NFTs are goods you can buy with cryptocurrencies.
NFTs are non-fungible, so you cannot change an NFT with another NFT. You technically could trade your NFT for another NFT but this wouldn’t replace it. Cryptocurrencies can be easily interchanged with itself or even other cryptocurrencies.
This works in the same way as our traditional currencies. An NFT always has an original file you want to be tokenized. This file makes the NFT stand out compared to cryptocurrencies.
With both, you can verify the ownership and prove that a person is the rightful owner of it. Both are also secured by the same blockchain technology. They also work as a store of value.
But you use NFTs to buy something you want to possess and cryptocurrencies to store your money and buy goods like NFTs, which can only be bought with crypto.
Overall, they use the same technology but they use it for different use cases. NFTs are collectibles as their physical counterparts like painting, trading cards or postage stamps.
What is an NFT Work Used For?
As great as NFTs are, people still don’t see its full potential.
The most common use case is to use NFTs for digital art in all kinds of forms, like images, photos, collectibles or avatars. Another common use case is to use it for items in games in the form of in-app purchases.
Using it for NFT art and design is the most common use case because it is one of the most important use cases NFTs can offer. The reason for this is that we now can virtually imitate the possession of art. Until now, we could only possess real physical paintings.
Now we can possess a virtually created image in the same way. This will open new markets as creators, artists and designers will gain a new way to monetize their work and gain a new market with their own community.
They are also mainly used as a store of value. If you invest in NFTs, you can act as an investor trying to find the next new hyped NFT and invest in it. The market is new and people get hyped quickly.
This could lead to fast increases in value where you could sell the NFTs to gain income through it. You could even hold them long-term to sell them in the future, hoping for an increase in value.
We also can already buy domains as NFTs, so once bought they will be ours forever instead of paying a yearly fee to get the right to use this name. Other types of content, like music, blogs, event tickets or tweets, can also be monetized with NFTs.
The more people will adapt to this technology, the more markets will evolve from it, bringing more interesting use cases.
What Does It Mean to Mint an NFT?
Minting NFTs is the term for creating them on the blockchain.
Minting is basically the same term for creating an NFT.
Compared to an image you cannot create it in a design program or somewhere else. You have to take another step to make an NFT from your image on the blockchain. This process is called minting. Within this process, a token is issued on the blockchain.
It contains the unique data which enables us to provide a proof of ownership of an NFT. It further stores the information of the digital asset you want to tokenize so it can be clearly assigned to it.
You further have the possibility to attach specific code to the token like setting up royalties so you can ensure to earn further income for secondary sales. The minted NFT is then stored on the blockchain as the created token.
The original file which was used to mint the NFT is stored separately on a cloud because of its file size it would get too big for the blockchain. Fees in the blockchain are based on the amount of data which needs to be transferred.
If we would transfer several GB of data into the blockchain, the costs would explode and no one would use this technology. Therefore, only the token is stored and the original file is saved separately.
This is no problem because the token stores all the data, not the original file itself.
Do You Actually Own NFTS?
Yes, you own the NFT and this is the entire purpose why this technology was invented.
With an NFT, you can prove your ownership and you are the only one who can access this data.
Owning the NFT means you own the token that was created in the minting process. The token is secured cryptographically and accessible only with the private key you possess. This way, no one else can access this data besides you.
This is the same principle as you would own physical goods. Only you possess it and have access to it. This access makes you the owner.
If someone would steal the goods from you, the criminal would now have the access and get the new owner, as sad as it sounds. But accessing things gives us ownership. NFTs work in the same way.
They give you access and as long as you have the access; you are the rightful owner of it. This technology allowed us to reconstruct this principle into the virtual world.
What Makes an NFT Valuable?
The ability to create unique assets with a digital proof of ownership gives NFTs their value compared to general digital assets.
The only reason that creates the value is that we can now prove ownership of digitally created assets.
They further are non-fungible, meaning you cannot exchange an NFT with something similar. An NFT is a unique asset and exists only one time.
This uniqueness is what can give an NFT even huge amounts of value if many people desire the same NFT. You trade an asset which nobody else owns. The only way to get an NFT is to buy it from another person.
If we compare this to a real painting, then only the original will have value. If you want to get the original, you cannot copy it because this is not the same. You have to buy it to possess it. With NFTs, you would have the same scenario.
On the other side you could create an NFT and it could be worthless. The value of an NFT will depend on other people willing to buy it for a specific amount. If no one is interested, then there is no value.
What is an NFT Marketplace to Buy and Sell NFTS?
In order to buy or sell an NFT, you will have to use an NFT market.
These marketplaces are online NFT exchanges that allow buyers and sellers to trade these assets similar to a regular exchange.
Here you can buy an NFT, perform NFT trading or browse NFT collections. You have the option to use one of the several NFT marketplaces available. What you need to do is create an account in order to mint your NFTs.
These marketplaces are built on top of a blockchain so minting is possible. The direct connection also allows the use of the currency and all other blockchain benefits. Ethereum, as the main blockchain, is available in the largest NFT marketplaces.
Here, you can trade NFTs, list new NFT projects and connect a digital wallet to the platform. NFT platforms also provide a convenient and user-friendly way to mint your first NFT if you’re a beginner.
Especially, the popular NFT marketplaces provide everything a starter needs without demanding knowledge about the topic.
Starting with the NFT bandwagon hype in 2020, the NFT ecosystem gained immense popularity in 2020 and 2021.
Can NFTs Transform the Design and Art Sector?
NFTs have the potential to transform the art and design world because of its benefits.
Try to think of an artist painting a nice picture.
If he sells it, someone else gets it. Maybe in a few years this artist will become famous and all this painting will be worth millions.
He may have sold his pictures in his beginnings for a few hundred dollars and now they are worth millions for which he won’t get any additional income. Now think of if he could earn further money for all secondary sales in the future.
This is one of the key advantages of NFTs and they are called royalties. They allow the NFT creator to earn a royalty for every sale that will happen in the future. In the artist’s case who becomes famous, he will continue to earn money for his old paintings.
Artists are already taking it a step further and providing special events or communities for all owners of their NFTs.
A common example is the Bored Ape Yacht Club, where every owner of an NFT from this collection gets special benefits such as access to a community only for the owners of these NFTs.
Artists can even provide special physical events where only owners get an invitation.
Does the Crypto Technology Prevent Copying NFTS?
The cryptography used by the blockchain prevents the possibility of copying NFTs.
It not only provides a proof of ownership with a digital signature, it also cannot be copied.
The only thing someone could copy is the image itself by taking a screenshot or saving the image file. This would get the person a copy of the image but not of the NTF itself. The NTFs token is stored on the blockchain, not somewhere locally.
We can only access the data in the blockchain but not take a copy. Our access to this data acts as our proof of ownership. If we could copy the data from the blockchain, then we wouldn’t need to have access to it because we already have it stored on our computer.
This would mean that now we can easily copy it and the information is not unique anymore and therefore worth nothing. NFTs ensure that there will always be only one original available.
The image file itself can be copied, but without the token, it will be just a general image, not a real NFT.
What Cons, Like NFT Scams, Should You Know Before You Buy NFTS?
NFTs have huge potential, but they also come with some drawbacks you should know.
One of the biggest cons is that this technology is new and scammers exploit this to scam people.
They try to trick people with little knowledge as beginners and try to steal the NFTs from their crypto wallet. Because most people don’t understand the difference between regular images and NFTs, they could get easily tricked.
Another major drawback can be the costs you could face to mint and sell NFTs. Even if you can create them with low costs, you could face higher costs in particular scenarios.
If you use the Ethereum blockchain to mint your NFTs, you could pay high fees depending on the network activity. If you inform yourself properly, you can avoid it, but some people could be surprised to see what they actually need to pay.
Another factor is that NFTs are a new market. The technology could be therefore prone to bugs or errors which could lead to financial losses.
Volatility is also a big factor as even if your NFT artwork increases in value, cryptocurrencies may crash, decreasing the value of your NFTs.
The volatility can be similar to cryptocurrencies, and you should know what you can expect before you mint or buy NFTs.
Finally, NFTs represent digital work, which is not common for most people and therefore they could get easily overvalued, so eventually every NFT drops in value instead of increasing.
Are NFTs Worth It and Can You Make Money With NFT Digital Art?
NFTs provide a unique way to possess digital assets.
This is an exciting invention which will lead to many new markets evolving from it if people understand and use this technology.
From this aspect, it is worth taking your first steps into the digital world of NFTs. If you want to possess an NFT just to try this technology out, then it can be a great opportunity to get in touch with this new technology.
If you are a digital artist, you can also try to mint your own NFTs. This could open a new market for you and grow your audience and possibilities to monetize your work. You could now sell a piece of digital or physical art to build an income stream.
Compared to physical art, you can also earn money in the form of royalties for every secondary sale in the future, which is not possible with physical art. This could establish NFTs as a key market for designers, creators, and artists.
For investors, NFTs also can provide a new opportunity to invest their money into digital items which could gain in value. Here, however, you should always remember that the market is new and volatile.
NFTs use blockchain technology like cryptocurrency (bitcoin or ether), so you have a similar fluctuating component in this investment. As much potential as there is, you also have to calculate with huge losses.
From this perspective, NFTs could be more of a risk than a potential. This is a decision everyone should carefully take for themselves.
FAQ
Do NFTs Increase in Value?
If NFTs increase in value depends on several factors.
They are unique and not interchangeable, which makes them scarce.
This can give them the potential to increase in value if they become more popular. NFTs not only represent digital fine art but also collectibles, virtual real estate or unique game items. As more people realize the potential, the demand will increase.
Prices for an NFT may then go up. Prices are determined by supply and demand in the crypto market. They can also decrease in value because of losing interest or market crashes. You should always be aware of every possible scenario.
Should NFTs Be Considered Art?
NFTs should absolutely be considered art as they are art.
Just because they are done digitally does not mean that they aren’t worth being considered art.
If you want to create an incredible picture, you will need the skills to do that for digital images in the same way as for physical art. People could argue that NFTs are only digital files and therefore cannot be real art.
Try to think of all the designs we have today, nearly everything of it is done on computers. This cannot be a reason to not consider it as art. This always will be the opinion of every individual.
However, we cannot deny that NFTs allow artists to monetize not only their work further but also more efficiently compared to physical art. Royalties can provide an artist further income for all secondary sales, which is not possible with physical art.
Have NFTs or the NFT Market Died?
The NFT market is not dead, but it already crashed heavily, leading people to this assumption.
Starting in 2020, it gained extremely in value up to about $17 billion dollars at the beginning of 2022.
From there, it has fallen down to only about $140 million dollars at the beginning of 2023. This is a decrease of over 99%. This is a massive crash, and it comes to no surprise that people say NFTs are dead.
Crypto markets have also crashed, so maybe NFTs will rise again together with crypto. This is something the future will show, but the potential is still there and waits to be adopted.
Do NFTs Have Copyright?
Everything you create is automatically copyrighted.
The specific regulations will depend on the country you live in, but overall, this concept is commonly used.
Every person can create things and to protect it legally, you will have the copyright automatically assigned to it. If someone now copies your work, you will have to sue the person. But the right to sue someone else cannot be done automatically.
Before you can sue someone, you often will have to register the copyright. This will also depend on your country and its regulations. For such detailed questions, you should always consult an attorney to help you with these kinds of matters.
Conclusion: What is an NFT?
Blockchain technology and NFTs are new and really exciting because if people will understand this concept then they will adapt it, which could lead to many new possibilities and use cases in the future.
Because this market is new, it also brings risks which you should always be aware of. It is recommended that you inform yourself properly before you start your first NFT project in this digital economy, the NFT space.
NFTs (Non-Fungible Tokens) are digital assets that leverage blockchain technology to provide unique ownership and provenance to digital files. They have gained popularity in various industries, particularly in digital art, gaming, and collectibles. NFTs offer benefits such as authenticity, ownership verification, programmability, and transferability. While NFTs and cryptocurrencies share similar blockchain technology, they serve different purposes.
