Blockchain is yet another buzzword in the digital sphere – blockchain and crypto, blockchain NFTs, blockchain summits… But what exactly is blockchain, and more precisely, what is NFT?
NFTs, or non-fungible tokens, are causing a paradigm shift in nearly every sector of society. They’re transforming everything from finance to art, and there’s reason to believe that almost no aspect of society will be spared.
If that sounds like an exaggeration, rest assured that it is not.
NFTs have proven to be one of the most significant contemporary innovations in technology, finance, fashion, sports, and the arts in recent years. Since entering the mainstream in 2021, NFTs have been the source of hype and confusion as the latest cultural phenomenon.
If you’re new to cryptocurrencies and digital assets, it can be difficult to understand NFTs and everything else going on in the space. But don’t worry. We’re here to help you with all of your NFT problems. Here’s a crash course in everything non-fungible. We discuss what NFTs are, how they’re made, the various benefits and drawbacks, and how to decide if NFTs are right for you.
And if you’ve finished reading and are still unsure about something, please send us a message. Let’s dive into this topic.
What Exactly is an NFT?
A non-fungible token (NFT) is a blockchain-based unique data unit that can be linked to digital and physical objects to provide immutable proof of ownership.
An NFT’s data can be linked to digital images, songs, videos, avatars, and other items. They can, however, be used to provide an NFT owner with exclusive merchandise, tickets to live or digital events, or be linked to physical assets such as cars, yachts, and much more.
In this regard, NFTs use blockchain technology to enable individuals to create, buy, and sell items in an easily verifiable manner. However, keep in mind that, unless otherwise stated, when you purchase an NFT, you are not purchasing the copyright, intellectual property rights, or commercial rights to any underlying assets. However, the legal details can become quite complicated, so we’ll go over them further in the following sections.
The process of creating and selling NFTs is actually quite simple. It works as follows:
- An individual (or company) chooses a one-of-a-kind asset to sell as an NFT
- They create the NFT by adding the object to a blockchain that supports NFTs through a process known as “minting”
- The NFT now represents that item on the blockchain, providing immutable proof of ownership
- The NFT can be kept in a private collection or bought, sold, and traded through NFT marketplaces and auctions
As you might expect, the technical definition is a little more complicated. If you’re looking for a more detailed breakdown, our NFT dictionary provides a comprehensive overview of all the technology and infrastructure in the NFT ecosystem.
What distinguishes NFTs from cryptocurrency?
Cryptocurrency, like money in your bank account, is what you use for all blockchain transactions. Cryptocurrency can be purchased or converted into fiat currencies (such as dollars, euros, and yen) using crypto exchanges. An NFT, on the other hand, is a one-of-a-kind and irreplaceable asset purchased with cryptocurrency. It can gain or lose value regardless of the currency used to purchase it, just like a popular trading card or a one-of-a-kind piece of art.
In this regard, NFTs are non-fungible, whereas cryptocurrencies are.
Consider traditional fiat currencies to gain a better understanding of this. You wouldn’t open your wallet and ask, “Which dollar bill do you want?” if we asked you to lend us a dollar. It would be absurd to do so because each $1 bill represents the same thing and can be exchanged for any other $1 bill. This is due to the fact that the US dollar is fungible. Cryptocurrencies are fungible as well. They are not one-of-a-kind and can be easily traded and replaced.
In contrast, NFTs are non-fungible in the sense that no two are the same. Because there is no identical version, each NFT is a unique unit of data that another cannot replace.
Uniqueness and scarcity increase the appeal and desirability of NFTs. And, as with all rare items, scarcity allows people to sell their NFTs for high prices.
Why should you own NFTs?
The demand for NFT art has recently skyrocketed. However, there is still considerable skepticism. After all, NFTs are typically associated with digital files. So what distinguishes owning such an NFT from taking a screenshot of a photo? Is “proof of ownership” meaningful? Here are some main reasons people own NFTs to help you decide.
#1 NFT Gives artists more power
Publishers, producers, and auction houses frequently coerce creators into signing contracts that are not in their best interests. Artists can mint and sell their work independently using NFTs, allowing them to retain intellectual property and creative control. Additionally, artists can earn royalties on all secondary sales of their work.
In this regard, NFTs have the potential to create fairer models by circumventing the gatekeepers who currently control the creative industries, and many people buy NFTs as a way of empowering and financially supporting the creators they admire.
#2 NFT Gives Obtainability
A 1952 Mickey Mantle rookie card sold for $5.2 million despite costing less than 5 cents to produce. This occurred due to the card’s history, rarity, and cultural significance. In many ways, NFTs are the digital equivalent of this. NFTs provides a unique opportunity for individuals who want to build a collection of digital assets that have never existed outside of traditional collectibles and art markets.
#3 NFT Gives Investing
Some NFT owners are simply looking for an asset that will appreciate in value. In this regard, some collectors regard NFTs as investments, similar to traditional art. Do you want proof? Mike Winkelmann, a well-known American digital artist known professionally as Beeple, sold his Everyday: The First 5000 Days composite at Christie’s in March 2021 for $69 million.
Some may find this strange, given that anyone can see and interact with the image. However, as previously stated, each NFT can only have one owner. For some, this is sufficient. However, due to market volatility, NFT investment is a high risk, with the potential for significant losses.
#4 NFT Connects the Community
NFT ownership also has social benefits, as many creators have transformed their NFT projects into vibrant communities. Perhaps the best example of community building in relation to an NFT project is the Bored Ape Yacht Club. Collectors gain access to a members-only discord, exclusive merchandise, a vote in the project’s future, virtual meetup tickets, and more. As a result, for many collectors, owning an NFT is a matter of identity and how they socialize with friends.
Making, purchasing and selling NFTs
Unfortunately, entering the NFT market is not as simple as it may appear. After all, you can’t exactly buy an NFT with a dollar and then take it home. When you purchase (or mint) your own NFTs, you’ll need cryptocurrency to fund your transactions and a crypto wallet to safely store the data. That’s only the beginning. This section will cover how NFTs are created, traded, stored, and managed.
So, if you’re wondering how to begin using NFTs, this is the section for you.
Step 1: Get a Cryptocurrency Wallet
A crypto wallet, in short, is a physical device or computer program that allows you to store and transfer digital assets. There are two kinds of crypto wallets: software wallets and hardware wallets. A hot wallet is a way to go for the minting and shorter-term trades. However, you should keep your most valuable assets in a hardware wallet for security reasons.
A software wallet (also known as a “hot wallet”) is a type of wallet that is stored on a computer. This is an app that you can download and install on your device. Because they are always connected to the internet, software wallets are more convenient and easier to access than hardware wallets. These wallets, however, are more vulnerable to attacks and easier to hack. As a result, they are generally regarded as less secure.
A hardware wallet (also known as a “cold wallet”) is a type of wallet that is made of metal. This is a physical device, similar to a USB stick that you might use to store files from your computer. Except, in this case, you’re storing crypto and NFTs. Assets stored in hardware wallets are often thought to be far more secure than software wallets because they can be completely isolated from the network.
Step 2: Purchase Cryptocurrency
Nifty Gateway and MakersPlace, for example, allow you to trade NFTs using traditional payment methods. Others, such as SuperRare and OpenSea, only accept cryptocurrency. When it comes to which cryptocurrency to get, Ether (ETH) is the most commonly used for NFT transactions. It is the Ethereum blockchain’s native currency, and it can be purchased in a variety of ways, including through major trading platforms like Coinbase and Gemini, which allow users to buy ETH with a bank account or credit card.
However, given ETH’s high transaction costs and environmental impact, some people prefer to trade NFTs with cryptos from other blockchains. NFT transactions are also supported by Solana (SOL), Tezos (XTZ), Flow (FLOW), and Binance Smart Chain (BSC). However, if you’re just starting, you might want to stick with ETH and the Ethereum blockchain, which has many more marketplaces and users.
Step 3: Locate a Marketplace
When selecting a marketplace, think about whether you want to mint one NFT at a time and auction it off or if you want to mint a collection or batch of NFTs that are each individually priced. Consider a few of the world’s largest NFT marketplaces for the latter. With over 1 million active user wallets on the platform, OpenSea is the most popular NFT marketplace. Rarible and LooksRare are two of the most formidable OpenSea competitors.
If you want to make 1/1 NFTs, platforms like SuperRare, Foundation, and Zora are your best bet.
And be aware that minting has an initial cost. Most of the time, you’ll only have to pay a gas fee (transaction fee) to mint, but marketplaces may tack on additional fees. Similarly, when researching royalty splits, make sure you do your homework. For example, when you mint on a platform like OpenSea or Rarible, you are not guaranteed to receive cross-platform royalties. There are smart-contract, and minting tools like CXIP that help with automated royalty splits to ensure you receive secondary sales royalties regardless of where your NFTs are resold.
Step 4: Create an NFT
New NFTs are created through a process known as “minting.” This is the process of associating a particular set of data — the NFT — with a particular asset or object. Keep in mind that you must own the copyright and intellectual property rights to the item you want to mint when selecting a unique asset. Take your time with this. If you create NFTs with assets that you do not own, you risk getting into legal trouble.
You can start minting once you’ve chosen a marketplace and created an account. This will differ slightly depending on the marketplace. Still, you’ll typically need to upload the file you want to associate with your NFT and fund the transaction with ETH or another cryptocurrency, depending on which blockchain you’re using. It is also possible to mint physical, real-world objects, but the process is more complicated than what we will discuss here.
When the minting process is finished, you will have all of the necessary information about your new NFT, and it will be registered to your digital wallet. You can now keep, sell, or trade it whenever you want.
Step 5: Purchase or sell NFTs
Remember that some NFTs may not be available on the open market or may only be purchased from specific vendors. Historically, CryptoPunks have been sold through the Larva Labs website rather than a public marketplace.
You may be able to purchase an NFT outright once you’ve found the one you’d like to buy. In other cases, you’ll have to place a bid on the NFT of your choice and wait for the auction to end. If you are the highest bidder when the auction ends (or if the seller accepts your bid), the transaction will be completed, and ownership of the NFT will be transferred to your wallet.
You now have ownership of the NFT and can buy, sell, or display it as you see fit.
Selling your NFT follows a similar process as outlined above. You must create the auction on the marketplace of your choice. Before you begin selling, take the time to learn about all of the fees and auction methods available to you. When the auction is over, the NFT will be automatically transferred from your possession, and the transaction proceeds will be transferred to you.
NFTs’ Environmental impact
Of course, the NFT boom is not without drawbacks. One of the most common criticisms is the amount of energy required to run a large blockchain network like Ethereum. This blockchain uses more power than many countries. Many argue that because they promote the use of blockchain technology, NFTs contribute to the overall carbon footprint of the technology.
However, even if everyone abandoned NFTs tomorrow, blockchain would continue to consume the same amount of energy. This is because transactions do not increase the network’s energy consumption. Why? Because blockchains continue to run at the same speed and with the same energy consumption whether or not there are transactions to be filled.
Even if this were not the case, many other technologies have similar energy requirements. Indeed, YouTube and Ethereum have nearly identical carbon footprints. That is not an excuse for blockchains and the carbon footprint they leave, but it is critical to understand the issue in its proper context.
Furthermore, some blockchains are already working to address the blockchain energy issue. Solana, for example, uses a novel combination of proof-of-history (PoH) and proof-of-stake (PoS) mechanisms to reduce energy consumption significantly. In addition, Tezos’ Liquid Proof-of-Stake (LPoS) mechanism consumes approximately two million times less energy than Ethereum.
Rights to NFT Usage and Ownership
NFTs have a complex relationship with the assets to which they are linked. While an NFT is intended to represent the original asset on the blockchain, it is considered a separate entity from any content it contains. We’ve frequently compared NFTs to trading cards in this article, and the analogy also holds true here.
Assume you have a vintage baseball card or a well-known trading card from a collectible card game, such as Magic: The Gathering. You own a representation of the original work, not the original one. The card’s manufacturer completely owns the artwork, design, and branding of the card you own.
Similarly, while NFTs represent an item on the blockchain, ownership of an NFT does not transfer intellectual property or usage rights to you.
Assume you purchase an NFT containing the very first digital copy of Harry Potter and the Sorcerer’s Stone. The NFT is yours. However, this does not grant you the right to sell Harry Potter merchandise, make Harry Potter films, or permit others to use the Harry Potter IP for commercial purposes.
Unfortunately, NFT ownership and usage rights are frequently confused, leading to some buyers purchasing NFTs under the mistaken impression that an NFT effectively grants them the rights to expand upon (and capitalize on) well-established IPs.
There are, of course, some exceptions to these hard and fast rules. The Bored Ape Yacht Club has publicly stated that all BAYC NFT owners have complete commercial rights to that Ape. It can be monetized in any way the NFT owner sees fit. Some projects, such as CrypToadz and Nouns, have gone even further by releasing their intellectual property to the public domain under Creative Commons (known as CC0). However, they should be regarded as the exception rather than the rule.
Any user can mint a new NFT using copyrighted content that they do not own using self-minting platforms like OpenSea. This is risky for the minter, buyers, and original artist for several reasons:
- Profiting from illegitimate content exposes sellers and buyers to legal action from legitimate copyright holders.
- Illegitimate NFTs of the same work may devalue legitimate NFTs issued by the copyright holder.
- Buyers may be unaware that the content they’ve purchased is illegitimate or that they’ve put themselves in legal danger by engaging in an illegitimate trade.
One of the reasons that verified NFT projects and accounts are preferable is due to concerns about legitimacy. Always look for verified projects on platforms and only follow links from official (and verified) user accounts on social media to stay safe on NFT marketplaces.
In the case of official website sales, such as Art Blocks or NBA Top Shot, buyers can act with confidence, knowing that their NFT came from a legitimate source.
NFT scams are a relatively new phenomenon. As a result, the market is vulnerable to con artists who prey on unsuspecting collectors. Here are a few scams and problems with the NFT market to be aware of.
NFT Rug Pulls
Collectors prefer large generative projects, but there isn’t always safety in numbers, and no NFT project is completely risk-free. In fact, rug pull scams have caused many projects to fail. A rug pull occurs when the project creators take the project’s investment money and then disappear. The team has left collectors with worthless assets by stealing all the money.
Notably, these types of rug pulls are not always illegal. Is it unethical? Sure. But there isn’t much anyone can do if a project promises to donate funds but then keeps the money. A rug pull may be considered fraud in rare cases, but this is not always the case.
Rug pulls can also occur when NFT developers make it impossible for investors to sell their tokens. Rug pulls of this nature are illegal, and you may be able to recoup your money. However, it will almost certainly cost you a lengthy legal battle. Furthermore, many NFT creators do not use their legal names, making it difficult (if not impossible) to locate them.
Wash Trading NFT
Market manipulation is possible during NFT auctions, just as it is with stocks and other collectibles.
Working together, a group of potential buyers can artificially inflate the bid price of an NFT until an unsuspecting buyer joins the fray. The asset’s value deflates after the sale, leaving the buyer with a worthless NFT. Wash trading is one of the most common ways to accomplish this with NFTs. When a user controls both sides of an NFT trade, the NFT is sold from one wallet and purchased from another.
When a large number of transactions like this are completed, the trade volume increases. As a result, the underlying asset appears in high demand. This has the effect of increasing the value (price) of the NFT under consideration. To try to increase demand, some NFT wash traders have executed hundreds of transactions through self-controlled wallets.
NFT Scams Involving E-Mail
Scammers will sometimes ask for your private wallet keys and/or other sensitive information like your seed phrase, whether through fake advertisements, NFT giveaways, or some other form of coercion.
The scammer can then access your wallet and remove any cryptocurrency or NFTs stored within, as well as sign transactions without your consent, depending on what information they obtain. Because blockchain is decentralized and often anonymous (there is no regulatory authority, and individuals are not required to submit proof of identity to use it), there is generally no way to recover your assets if this occurs.
These scams, like password phishing emails, come in all shapes and sizes, and they can be difficult to spot if you aren’t looking for them. As a reminder, never share your seed phrase or private keys with anyone, or they will be able to access your funds. Also, only click on links from official websites and accounts.
NFTs and Taxes
Tax obligations will vary by country, but because most NFTs have a trading value, acquiring a large sum of money is likely to be capital gains. If you’re an NFT creator, which means you’ve minted and sold your own NFTs, that income will almost certainly be considered business income, and you’ll need to claim it when filing your tax returns.
The specifics will vary depending on your region’s laws, but NFTs are not tax-free investments. Be cautious if you intend to treat them as such.
NFTs: A Brief History
The very first NFTs
“Quantum” was the first NFT ever created. Kevin McCoy created it on Namecoin in 2014. Several other NFTs were launched on pre-Ethereum blockchains in the years that followed. Spells of Genesis, for example, was the first blockchain-based game to be released in 2015. Rare Pepes was released in 2016 and was instrumental in launching the first crypto art market.
These projects, however, did not achieve widespread popularity. Except for those who were well-versed in cryptocurrency and blockchain technologies, they were mostly unknown.
For most consumers, NFTs only began to gain traction in 2017. The first NFT collections were launched on the Ethereum blockchain around this time. Previous blockchains made trading and ownership extremely difficult. The Ethereum network and its smart contracts functionality allowed token creation, programming, storage, and trading to be built directly into the blockchain. These new features simplified the onboarding process and expanded access.
CryptoPunks, a collection launched by Larva Labs that has become synonymous with early NFT history, was one of the earliest Ethereum projects. As a result, many of its individual pieces have fetched millions of dollars.
NFT Interest is Skyrocketing
Prior to 2021, two catalysts may have aided in raising prices and accelerating public interest. The first was the COVID-19 pandemic, which compelled many people to become more digitally literate and connect with one another on platforms such as Twitter and Clubhouse, where the NFT community has established a strong presence.
Beeple was the second. The long-time artist became an NFT pioneer when he became the first to sell an NFT through a major auction house. When his “Every day’s — The First 5000 Days” auction at Christie’s ended on March 11 for an eye-popping $69 million, NFTs could no longer be ignored.
The sale made headlines around the world, and more sales quickly followed. Stay Free, a piece by Edward Snowden sold for $5 million in April. CryptoPunk #7523 sold for $11 million in June. XCopy’s “Right-click and Save As Guy” sold for $7 million in December.
While digital art and collectibles propelled 2021’s boom, countless additional NFT applications launched around the same time and drew attention to the space. There are virtual worlds based on NFTs, such as Decentraland and CryptoVoxels, as well as blockchain games based on NFTs, such as Axie Infinity and Zed Run.
Sales volumes and price points have increased in tandem with adoption. This sparked a flood of interest from businesses and brands looking to launch their own NFT projects and capitalize on market growth. Coca-Cola and Taco Bell, for example, have created NFTs based on popular food and beverage products. Other companies, such as Hot Wheels and Adidas, have begun selling NFTs linked to their physical products. There have even been reports of Gucci NFT collections selling for far more than the price of their flagship product!
NFTs in the Future
NFTs are still in their early stages. With the technology’s potential applications seemingly limitless, it’s anyone’s guess where NFTs will go from here.
It’s widely assumed that NFTs will play a role in the future metaverse, primarily by serving as a digital representation of the physical objects you own. This may also occur with your digital avatar. Items and skins can be moved between games if NFTs are used to represent items in a video game on a unified blockchain.
However, some critics argue that NFTs have no future. Rather, they claim they are a passing fad that will eventually be relegated to a niche segment of a larger market, similar to how collectible card games and other vintage collectibles have progressed.
What is the most accurate future vision? It’s difficult to say. Given the new NFTs, the only way to know for sure is to wait and see. The current state of NFTs is likely to change dramatically in a short period of time.