To most people, the term NFT still remains a mystery. This is because they can neither understand nor tell when such should be used appropriately. And the worst part? These seem to be growing in popularity at the moment. For instance, reports are claiming that over $170million has been spent on NFTs since 2017.
In case you are confused about what this means, there is no doubting the fact that you have come to the right place. The major aim of this article is to explain everything you should know about NFTs. Just read the details below to find out more.
What are NFTs?
NFT is simply an acronym for non-fungible token. In order to break this down in the simplest way to enable you to understand what they are, it is important to explain the meaning of “non-fungible”. This implies something that cannot be replaced. When an item is non-fungible, it can’t be replaced with something else.
NFTs are digital files which have verified ownership and identity. Blockchain technology has a role to play in such verification. In the digital world, NFTs are very unique assets given how they are bought and sold. They are a unit or group of data which has been stored on the blockchain network. Fungible assets are interchangeable. For instance, you can exchange a $100 note for 2 $50 notes. This means you are still getting the same value.
Such an exchange isn’t possible with non-fungible assets. The reason is that their properties are unique. Therefore, they cannot be interchanged in any way. NFTs can be in the form of a painting (art) or house. Whatever the case may be, note that they are always unique. Just like other digital assets, these can be bought and sold. However, they don’t have their own tangible form. These digital tokens can be used as “certificates of ownership” both for virtual and physical assets.
How do NFTs work?
Some of the NFT tokens existing today have been developed via one out of the two Ethereum token standards (ERC-1155 and ERC-721). Simply put, the majority of NFTs have been developed to be part of Ethereum blockchain. Although Ethereum is a cryptocurrency like Litecoin, bitcoin and bitcoin cash, it also supports NFTs. Also, remember that NFTs aren’t restricted to only Ethereum. This is because it is possible for other blockchains to have NFTs versions of their own.
NFTs work in a simple way. For the sake of this illustration, we will be using artwork like paintings which are always unique. Most people value these paintings due to their uniqueness. Of course, you know it is possible for digital files to be duplicated in unlimited numbers. What NFT does is that such paintings can be tokenized through blockchain technology.
When they are tokenized, a digital certificate of ownership will be created. It will then be possible for such paintings to be bought as well as sold. Just as you store your cryptocurrencies, that is how this can also be stored. Due to how such records have been stored, it is not possible for them to be forged. Sometimes, NFTs may have smart contracts. Through this, an artist can earn revenue from sales of the token in future.
How are NFTs different from Bitcoin?
In case you don’t know, NFTs are not the same as Bitcoin. As a matter of fact, this is where the non-fungibility feature will become very obvious. The major difference existing between them is the fact that Bitcoin is not just limited but also fungible. Through such fungibility, it becomes possible for one bitcoin to be exchanged or traded for another. The value in the case is the same just as explained above when the dollar was used.
NFTs on the other hand, are not just unlimited but also very unique. Most importantly, they are non-fungible. For instance, you will not find any two artworks that are similar. In other words, two NFTs can’t be the same or identical. This is the reason why exchange doesn’t happen between them. Apart from not being exchanged for one another, NFTs are similar to real estate items. This is because their value will appreciate as the years go by.
See NFTs as flight tickets which people have purchased. These tickets usually contain details such as passenger’s names, travel destinations and others. With such information, you can‘t exchange your flight ticket for another person’s.
Characteristics of NFTs
Apart from NFTs being unlimited, unique and unexchangeable, there are some other characteristics they possess which you need to know. These will be further explained below:
1. They are indivisible
This is another obvious feature of NFTs. Bitcoins can be divided into smaller units. However, NFTs are different in such regards. For instance, they are usually considered as a whole. Even if you decide to have them sold, it will be in such format.
2. They are indestructible
Blockchain technology (through smart contracts) is what makes the storage of NFTs possible. Due to this, they can’t be replicated, removed or destroyed. Also, these tokens have immutable ownerships. That is to say, their ownerships cannot be altered or changed.
Just as said earlier on, the verification of NFTs takes place via blockchain technology. This ensures that there won’t be any need for verification from a third party. Also, tokens can be easily traced to their original creators.
Why are NFTs appreciating?
Prices of NFTs are also subject to the law of demand and supply. At the moment, they are considered to be of very high value due to their scarce nature. There is a very high demand for them from investors, collectors and gamers. There are people willing to pay lots of money in order to acquire such ownerships.
NFTs can generate money for their owners. A typical example of this is when the token begins to appreciate in value. There are some that are very expensive like Dragon (CryptoKitty) which is valued at around 600 ETH. There is also the F1 Delta Time race car which was sold for around 415.9 ETH. Finally, Alien #2089 was valued at around 605 ETH during the beginning periods of 2021.
One thing is always certain about these digital assets. This is the fact that as the years are going by, their values will be increasing. It is similar to what applies in real estate. The implication of this is that they will command a much higher price in the market. In 2020, William Shatner, the popular Star Trek captain decided to delve into digital or virtual collectibles. He issued over 85,000 digital cards on WAX blockchain. These were different images of himself. Initially, each of these cards commanded a price of $1. It means Shatner now has a source of passive income since he can make money whenever any of such images is resold.
The truth about NFTs assets is the fact that they have come to stay. This will only get better as the years are going by. All of these digital assets which have been mentioned here will command much higher prices in the nearest future.
What you should understand about NFTs
Theoretically speaking, any work can be tokenized. Sometimes, you want to believe that this only involves artwork which isn’t true in any way. For instance, founder of Twitter, Jack Dorsey tokenized the first-ever tweet. You can bet that this attracted lots of bids with the highest being about $2.5m. Furthermore, a new digital art record was set by sale of an NFT (Beeple) for around $69m. More high profile sales are expected to happen in the nearest future.
Do NFTs have any limitations?
Having seen the above details about NFTs, you must be feeling very overwhelmed about their potentials given what they have to offer. There is no doubting the fact that this definitely represents the future. However, it doesn’t mean NFTs don’t have any flaws or limitations just like other technologies that we have witnessed in the past.
For instance, there is one issue which has caught the attention of experts about these digital assets recently. This is the fact that they are non-finite tokens. What this means is that they are unlimited in terms of quantities supplied to meet demand. According to Charlie Lee, founder of Litecoin, a problem like this means it is only a matter of time before the market will crash eventually.
He explained that in a situation such as this, there is always a very high chance of supply overwhelming demand. This defeats the purpose of NFTs which is all about creating digital assets that will be appreciating in value in the future. When there is too much supply, prices of these digital assets will experience a significant drop. This will bring about a market crash for investors.
Another potential danger he also pointed out is that creating these tokens are very cheap for artists at the moment. This means a good number of them will be thinking of how to make a fortune from this trend. This again, can crash the market.
Be sure to stay educated and always do your own research before investing! Don’t try to fomo trade just because other people are doing it. Have a look at our stock market guides or cryptocurrencies guides and stay up to date with all of the information.