What are NFTs, and how do they work?
An NFT is a kind of digital asset, similar to a cryptocurrency (though with some important differences). They’re most commonly associated with unique, digital artwork or other collectibles that can be minted by an artist or designer and sold exclusively to a single buyer (often using cryptocurrency). But NFTs have a much broader set of applications than just art and collectibles.
In this article, we’ll define NFTs and what they can be used for today (we won’t pretend to know all the possible future uses of NFTs). We’ll also explain how they’re created, purchased, and sold. And, finally, how you can get into NFTs.
What is an NFT?
NFT is an abbreviation that stands for Non-Fungible Token. NFTs can be used to indicate ownership of any unique, or non-interchangeable item (sort of like saying “this car” rather than “any car”). Let’s break down each of the root terms to explain more:
Fungible: Most often used in relation to currency, fungibility simply means something that can be exchanged for something else of like value, because it’s defined by a preset value rather than uniqueness. For example, 1 US dollar can be exchanged for any other US dollar, because it’s this preset value ($1) that defines it. For all intents and purposes, each dollar is identical and interchangeable.
A US dollar might be considered non-fungible if it was defined by its unique serial number or unique artwork, rather than its currency value.
Non-fungible: By contrast, something non-fungible is defined by a unique set of properties (an ID number, for example, or an image) rather than its value. In this case, one painting could not be exchanged for another painting, because each has individual properties, and may have a different value (depending on the quality of the artwork, its condition, and valuation by experts). It is unique and non-interchangeable.
Token: A token is an indicator of ownership. NFTs allow people to tokenize (or “mint”…more on that later) things like digital artwork and collectibles, but also things in the “real” world like cars, houses, even physical paintings. In this regard a token can be thought of as a certificate of authenticity and a deed of ownership, all rolled into one.
NFTs are secured by a blockchain, meaning they’re secure from “theft” in that no one can modify the record of ownership. While people could easily reproduce (or “copy”) the image in an NFT, they must do so with the legal permission of the creator or owner.
What are some examples of NFTs?
As discussed above, NFTs can be used for almost anything, even unique items in the physical world. But it’s still the early days of NFTs and blockchain, so for now they’re mostly used with digital collectibles. Here are a few examples:
A digital artwork (like images, songs, and more)
A digital collectible (like a gif)
An original tweet, social media post, or social video
Certain website addresses (specifically .crypto domains)
Licenses and certifications
Tickets to a concert or sporting event
How are NFTs created? How do they work?
NFTs are predicated on blockchain technology. Volumes have already been written about blockchain, so we won’t try to recreate all of that here. But here’s a short working definition:
- Blockchain is simply a kind of database, sometimes referred to as a distributed ledger. A blockchain is typically peer-to-peer and decentralized (meaning it can be hosted on thousands of different computers), rather than hosted by a central authority. And it’s considered secure by design, in that any transaction or change to this ever-growing list of records must be consistent with all of the computers that host the ledger.
An NFT is created (or “minted”) when its creator first enters its unique identifier in a publicly available blockchain. NFTs can only have one owner at a time, so once the creator sells the asset (or transfers ownership in some other way), a new record is listed in the blockchain designating this transfer. The new owner becomes the sole owner, and can do with the asset what they please. This ownership is designated by the unique ID and other metadata specific to that token, and only that token, and the current owner must be verifiable.
The owner of an NFT can prove they own the original copy of the asset, and then choose to hold it, sell it, or license it (for example, as a reprinted piece of artwork). In some cases, a licensed asset (like artwork) will earn royalties for the creator, the owner, or both.
It’s also important to remember that NFTs are dependent on the concept of scarcity. In the real world, there is generally only one copy of a famous painting; its value comes from its uniqueness, and the fact the creator only made one version of it.
In the world of digital assets, this scarcity also depends on the creator. But it lets the creator choose how many versions to mint, and thus to determine the scarcity. With concert tickets, a creator might mint 500; with digital art, the creator may choose to mint only a single copy. In both cases, the value comes from the asset’s scarcity.
Are NFTs a good investment?
As with items in the real world, many factors determine whether a digital asset has value and maintains that value, including:
The current market for that asset
The quality of the asset
The popularity of the creator or artist
The scarcity of works by that creator or artist
Art can be fickle, and so can NFTs. And remember: some NFTs are tied to physical assets (like the deed to a house) or experiences (like concert tickets), rather than digital ones, presenting a new wrinkle on forecasting whether to invest in NFTs. Also remember that some assets might be worth buying just because they mean something to you, rather than for their appreciation potential.
If you do decide to get into NFTs, it’s important to do so using a secure crypto wallet so your investment stays secure.
Where can I buy NFTs?
Almost any crypto wallet will give you the option to buy, store, send, or swap NFTs. They’ll also give you access to NFT marketplaces like OpenSea, Rarible, Foundation, SuperRare, and more.
Brave Wallet, for example, is a great option. It’s built directly into the Brave privacy browser, rather than being a downloadable extension. Browser extensions are easily-spoofed, exposing users to asset theft, phishing, and data leaks. Browser-native is much less vulnerable to these schemes. Want to learn more? Check out this great TedTalk about NFTs and what they can do for you.
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