Have you noticed that NFTs have made their way into pop culture and mainstream media? You may recall some Bored Ape NFTs featured in Snoop Dogg and Eminen’s MTV award show performance, or perhaps you’ve heard celebrities like Jimmy Fallon and Paris Hilton talk about their collections. Maybe you saw a QR code to claim NFTs at Universal Studio’s Halloween Horror Nights this year. The average person may not notice, but anyone who knows anything about NFTs sees references popping up all over the place! If you are in the Web3 space, you know NFTs continue to gain popularity and are taking the space by storm. So what are NFTs, and why should you even care? Let’s dive into the topic to see what the deal is.
NFT is an acronym that is short for “non-fungible token.” Not helpful, right? Basically, NFTs are digital assets such as digital art, music, videos, and games; the possibilities are endless and ever-growing. Just like physical assets, digital assets carry value based on market demand. All NFTs have unique identifiers (metadata) that remain with them in perpetuity. Some NFTs are 1/1 (one of one) assets, meaning there is only a single copy in existence. 1/1 NFTs are equivalent to an original piece of artwork. Some NFTs have several copies created. You can think of these as prints or editions of a piece of art. Even if there are multiple copies, each NFT within the collection is considered unique and identified as so. These unique identifiers also provide proof of ownership and are what put the “Non-fungible” in the acronym NFT.
Fungible vs. Non-fungible
Fungible assets include interchangeable things such as cryptocurrencies (i.e., Bitcoin). They have equal worth, meaning I could trade 1 Bitcoin for 1 Bitcoin and have an identical amount of value. Non-fungible assets are all unique and therefore are not interchangeable. They can be exchanged, but all have their own unique value. NFTs fall in the latter category. The seller sets the value, so even 2 NFTs that look the same could trade for different amounts.
How do NFTs work?
NFTs began on the Ethereum blockchain. Ethereum created 2 NFT token standards, ERC-721 and ERC-1155, as a blueprint to streamline the process for creators. Sounds complicated, right? You just need to know that these token standards involve specific smart contracts that allow the tokens (aka NFTs) to exist and interact within the Ethereum ecosystem. With that said, many other blockchains have now created their own NFT token standards. We will speak broadly here to discuss how the process works.
First, an NFT must be minted (aka created) on a blockchain (Learn more about blockchain technology in our article, The Basics of Blockchain Technology). Minting is the process of turning an item (art, video, etc.) into a digital asset. This process typically requires a minting fee that is paid via cryptocurrency. Upon minting, the NFT is assigned the unique identifiers discussed above and is now trackable on the blockchain. Things like authenticity and ownership can be verified, and the blockchain acts as a public ledger preventing the NFT from being destroyed, removed, or replicated.
Once an NFT is minted, it can be bought and sold. Unlike cryptocurrencies, NFTs cannot be traded on traditional cryptocurrency exchanges. NFTs have specific marketplaces that house transactions. Popular marketplaces include OpenSea, Rarible, and Foundation, though there are many options, with more popping up all the time. Additionally, there are website integration options so purchases can happen directly on a project’s website.
To purchase an NFT, at a minimum, you must have a cryptocurrency wallet or be willing to create one (learn more about wallets in What is a Cryptocurrency Wallet Part 1). Some sites will even take care of wallet creation for you as part of the purchasing process. Your wallet’s keys will be linked to the NFT on the blockchain; therefore, ownership is linked to you as the wallet owner. Cryptocurrency is most commonly used for NFT purchases; however, some sites and creators are willing to accept traditional FIAT (a government-issued currency not backed by a physical commodity, such as gold or silver, but rather by the government that issued it, such as USD). When purchasing with crypto, gas fees will need to be paid in addition to the purchase price. While this can be a bummer, we are often stuck paying credit card fees with traditional FIAT, so it’s tit-for-tat. The only caveat is crypto gas fees are variable, so if you are buying during a high volume time for a specific blockchain, the gas fees will, in turn, be higher.
To sell an NFT you own, you would also do so on an NFT marketplace. While you could make a “direct sale” where you would accept payment without a middleman, this is not recommended due to the risk of losing your asset without getting paid. The marketplace intermediary allows both parties to conduct transactions more safely. As the owner, you get to set the price and how to sell, such as a “buy now” price or an auction. Remember, upon selling the NFT, and you will receive the proceeds minus fees taken by the third-party marketplace and any artist royalty fees (more on this below!).
When first learning about NFTs, most people, myself included, don’t get the hype. You may be asking, why would I want to buy a virtual picture? There is more to an NFT than meets the eye! Many benefits exist for everyone involved in the NFT ecosystem, including creators and collectors.
Autonomy: NFT creators or artists retain full autonomy over their projects, including how to sell their NFTs and at what cost.
Automatic Authentification: NFTs can be authenticated easily and traced back to their creator because they are on a blockchain. This makes dupes and fakes easier to spot.
Increased Profits: Creators retain greater profits when selling their work than in traditional models such as art auctions or galleries. The existing marketplaces typically take a small cut of each NFT sale (i.e., Opensea’s cut is 2.5%). With that said, this may not be true for much longer, as Apple recently launched an NFT program that takes 30% of each sale. Yikes! On the other hand, there are some marketplaces in development that plan to eliminate extraneous costs, such as gas fees (though these will have to be absorbed somewhere in the process). It will be interesting to see how this space evolves.
Royalties: Perhaps the most exciting benefit for creators is royalties! The royalty percentage is set at the time of NFT creation by the creator, typically in the range of 5–10%. Each time the NFT is sold, the pre-determined percentage of the sale goes back to the original creator in perpetuity. Pretty awesome, right?
Access: Because NFTs exist within the blockchain and cryptocurrency ecosystem, the same access benefits apply. Anyone can participate, including groups that traditional financial institutions underserve.
Immutable: Upon purchase, a collector owns the digital asset, whether it be art, music, or a piece of armor for your favorite Web3 game. This means you can sell it in the future to someone else, and you get to take it with you if you choose to leave a game or platform. This contrasts significantly with Web2 purchases, where you essentially pay to listen to a song or use a piece of armor in a game, but you don’t retain access or ownership if you leave the platform. *A quick caveat on NFT ownership and rights: This is an extremely hot topic right now with the emergence of CC0 licensing (creative commons 0 — no rights reserved), where NFTs can be used commercially by the general public, not just the creators and owners. This is a topic for another day, but it’s important to know this exists and is being used by some NFT projects.
Ease of Trading: As was noted above, when you are ready to sell an NFT, you can do so on an NFT marketplace, set your price, and retain the majority of the profits. Once you know what you are doing, it’s a relatively quick and efficient process. Wake up at 4 am and decide you want to sell your NFT? Go right ahead! The market is worldwide, so they never close.
Proof of Ownership: Proof of ownership is easily identified since all the sales and purchases of each unique NFT can be traced on the blockchain. Additionally, NFTs can be authenticated easily and traced back to their creator by potential buyers. No special skills are needed to do this, unlike with physical art such as paintings. This is another benefit of a trustless, transparent system!
NFTs may have started as just a new way to collect art, but the use case innovation is ever-expanding. Perhaps the most exciting part of NFTs is “utility,” a function beyond just being nice to look at and share. Let’s explore a few NFT utility use cases here:
IRL Events: NFTs can be used as the new ticket to your favorite sports game or concert. Rather than keeping a shoe box of your favorite concert tickets, your tickets will forever be memorialized on the blockchain! Imagine custom artwork being used on the NFTs to provide a souvenir to attendees for different events. So cool! Many big companies like Ticketmaster and Universal Studios are starting to dip their toes in the NFT ticketing pool.
Metaverse/Gaming: NFTs are being used as proof of purchase of Metaverse land or apartments and for in-game purchases. As we mentioned previously, the buyer owns these items in perpetuity and can sell them at any time.
Charitable Giving: Profits from NFT purchases are being used for charitable causes. When donating, the buyer gets an NFT in addition to that warm fuzzy feeling. I personally LOVE cause-based NFTs!
Memberships/Loyalty Programs: NFTs as memberships are being used widely across the blockchain ecosystem, especially by DAOs and NFT communities. Web2 companies are also starting to get in on this, including Starbucks, which recently launched its NFT-based loyalty program.
Identity/Certificates/Licenses: This area of NFT utility has yet to take off, but it is emerging. Everything from college diplomas, to professional licenses, to driver’s licenses could be granted via sole-bound NFTs (sole-bound NFTs can not be sold or traded). This would also vastly cut down on identity theft and the creation of fake IDs (sorry, kids! LOL).
Ownership of Physical Assets: Think certificates of authenticity for art, house deeds, car titles, etc. Again, not an area that has taken off, but it has significant potential!
Dynamic NFTs: NFTs that change? Yes! These are already in use, and the technology is pretty cool. Our friends over at Good Morning News use a dynamic NFT to bring their daily news articles to NFT holders. There are other NFT projects on the horizon where the NFTs will transform based on certain events or user participation.
So…Do you have the itch to join the NFT revolution? Or do you think we are living in an NFT bubble that is bound to burst? Either way, the NFT train is speeding down the track of the unknown. You can either get in and hold on or watch it speed by!
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The content is for informational purposes only. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer of a security, token, or application. This is not investment or legal advice. Please do your own research.