A Beginners Guide to Non-Fungible Tokens (NFTs)
Non-Fungible Tokens (NFTs) have exploded in the crypto-assets space this year, going from relative obscurity to the latest global mainstream craze. It has become a fully-fledged industrialized digital art sector by its own right, established in the blink of an eye.
Today, NFTs have become renowned for being a symbol of wealth and asset speculation. Everyone, from A-list celebrities, pro athletes, and the person next door, or even you, can create one!
You may be asking yourself: if you don't own a Bored Ape, do you even exist, and how did this crypto-market grow so fast?
As the world leads to tokenization and the metaverse, NFTs may soon become a vital asset.
To help you make sense of what's currently taking place in the cryptosphere, we've prepared this guide to the world of NFTs. In this article, we delve into how NFTs work, their development history, and what the future may offer.
First, let's get things clear on what's the difference between a fungible and non-fungible token and NFT advantages.
An Introduction to NFTs
Tokens come in two types: fungible and non-fungible tokens. Bitcoin and a cent are both considered fungible assets; they're identical in their respective asset classes, and each can replace the other.
Non-fungible tokens aren't identical, and you couldn't replace them. They're like paintings; if you scratch the Mona Lisa, well, aside from getting in serious trouble, you can't replace it!
NFTs in the cryptosphere protect digital assets' intellectual property. That means any digital asset like music, images, and videos can now have an owner.
Typically, you could right-click and save any image you find online. You can then use it whichever way you want, even if you didn't create it. Hundreds of people could also use it, and you can't recognize any as the image's creator–at least not easily! That makes it difficult to define ownership and legal usage, which facilitates theft on an industrial scale.
Instead, NFTs record digital assets on a digital ledger and associate them to you as the owner. While that doesn't stop theft, it can help find the owner quickly.
NFT tokenization can achieve programmability, collaboration, royalties, and more direct connections between artists, collectors, and game players. As the world becomes increasingly more tokenized and the metaverse becomes more popular in the crypto-realm, NFTs will become a digital property with ownership established over the blockchain.
To understand how NFTs work, we'll delve deeper into how the blockchain works.
What is Blockchain Technology?
All crypto assets, including NFTs, use a consensus-based technology called the blockchain. A blockchain is a network of computers that store a database on each node. If one node has an approved change, it propagates across the network. Today, 10,000+ blockchain are running, predominantly used for cryptocurrency projects, NFTs, decentralized finance (DeFi), and smart contracts.
All the information blockchains store is written as clusters, called blocks. Each block has limited storage, and when one block is full, it closes, and a new block opens simultaneously. Every new block is appended or chained to the previous one chronologically, hence the term blockchain. You can think of this as each computer having a ledger without historical entries since everyone on the network has the same self parity-checking ledger.
Blockchains can be either centralized or decentralized, with all crypto-space projects, like Bitcoin and Ethereum, effectively being decentralized. That makes it almost impossible to alter these ledgers on all computers in the network. While this is the current state-of-the-art, many governments are starting to implement a digital, centralized version of their currency, like the Chinese digital Yuan and the British Britcoin.
Blockchain ecosystems are blockchain infrastructures that allow developers to create projects, also called protocols. These projects can create their own tokens and decentralized applications (dApps). The developer can create and sell NFTs through a dApp hosted on an ecosystem without having to make their own blockchains.
Ethereum (ETH) is one of the oldest ecosystems which hosts the largest number of protocols due to a first-mover advantage. Newer ecosystems, like Solana (SOL) and Cardano (ADA), offer lower transaction fees and faster consensus mechanisms. That's why they're growing popular for NFT trading.
The Power of Ownership
It can be very easy to steal someone's work in the conventional digital arena–a right click and save are all you need! An asset's origin–physical or digital–can be very hard to trace.
This ambiguity can allow unknown works from famous artists to be ignored or undervalued in the traditional art scene. Specialists would sometimes have to guess if an unknown piece was created by a known artist or not.
Ownership and validation of an asset's origin are critical to buying and selling genuine content at the correct valuation. When a seller auctions or sells an NFT, buyers can learn about its origin and history from a credible source within a few minutes–the blockchain.
Art with a detailed history and traceable, verifiable ownership is also more valuable. That's especially true for works created or owned by famous people.
Transfer and Storage
You don't need to hold organized auctions to buy or sell digital assets as NFTs. Marketplaces like OpenSea and Rarible make it simple to trade NFTs. That said, trading fees can sometimes be punitive, especially when using the Ethereum ecosystem. That's because network congestion increases transaction fees, also called gas fees. The transaction fees become higher when more people are transacting on the network.
Ethereum is currently attempting to solve this issue with their much-anticipated ETH 2.0 upgrade. Many NFT creators who can't wait for its rollout are looking to the Solana and Cardano ecosystems for faster and more eloquent solutions.
Revenues and Royalties
During traditional sales, art galleries and agencies all charge large commissions for the viewing space and services they provide. No matter the asset class, artists suffer from the limited distribution mechanisms on offer as they struggle in flooded marketplaces. Here's where NFTs help as they enable creators to showcase and sell their work globally without this supply shock or the limitations associated with physical assets.
An artist can also hard-code royalties in their artworks. That way, they can benefit from NFT resale as they gain a certain percentage of the sale proceeds, automatically transferred to them. The standard royalty in the NFT industry is currently between 5% and 10%. You can execute payments through the smart contracts consensus mechanism, depending on the availability of this feature in the ecosystem.
Now that you know more about NFTs and the blockchain, let's check how they came into existence.
The Origin of NFTs
NFTs have been around since 2012 but exploded recently during the latest bull run. Let's delve into this popular crypto-asset's origin and advancement and what made it the latest hot trend.
Following the 2008 global financial meltdown linked to risky, mortgage-backed securities, a decentralized financial system became an urgent requirement. In 2009, Satoshi Nakamoto, an unknown person or group, launched Bitcoin.
It was the first decentralized, self-governing economic model built on a blockchain. It was a perfect substitute for the traditional banking and financial system.
Bitcoin's decentralized nature directly places control in the system's users' hands. That's unlike fiat currency, where governments and banks ultimately decide their currency's fate.
Bitcoin's introduction demonstrated the blockchain technology's potential in many applications and later applied to the development of NFTs.
Colored Coins (2012-2013)
Yoni Hesse, eToro's current CEO, established an assets' tokenization called Colored Coins, which runs on the Bitcoin network. Colored Coins can be considered the forefathers of NFTs.
They can represent a variety of real-world assets and were originally designed to allow asset transfers to happen over the blockchain. This could be anything from coupons, tokens, subscriptions, equities, or shares; the list was limitless.
On December 4, 2012, Meni Rosenfeld created the first whitepaper. It was a crude attempt at defining the protocol, but it was also the start of something big. It wasn't until 2013 that Flavien Charlon successfully launched the Colored Coin Protocol on the Bitcoin network and made asset transfers possible.
Still, Bitcoin's blockchain was incapable of handling such contractual complexities. These coins could only represent an asset if everyone agreed on their value. In turn, Colored Coins were soon overlooked. Despite their failure, they laid the foundation for subsequent developments in the evolution of modern NFTs.
Counterparty was founded in 2014 and advanced its predecessor's work. It provided a peer-to-peer financial platform that acted as an open-source online protocol built on the Bitcoin blockchain. It allowed users to create their own tradable digital assets and currencies.
In 2015, game creators from Spells of Genesis partnered up with Counterparty to pioneer the first-ever in-game assets on the Bitcoin blockchain. They funded and created a token called BitCrystals to help Counterparty. This token was also the in-game currency.
The next big event was when Force of Will and Counterparty teamed up to launch their trading cards on the Bitcoin blockchain. In August 2016, Force of Will was the 4th largest trading card company in North America.
In October 2016, memes and Bitcoin were two of the most popular topics on the internet. It was only a matter of time before these two entities converged and created some interesting assets. On Counterparty, people began trading a meme known as Rare Pepes. The concept quickly gained momentum, and soon, a separate exchange emerged for trading these memes. A meme's rarity determined its price, as is the case with all other collectible assets.
All these projects on Counterparty made people realize the need for verifiable unique digital assets and the huge potential of this developing technology. The idea of trading and owning rare assets on the internet was starting to attract attention as Bitcoin, and other ecosystems, grew.
The Launch of Ethereum (2014-2015)
The Ethereum blockchain's introduction in 2014 and subsequent launch in July 2015, was arguably the most significant leap in NFT history. Ethereum was the next-generation blockchain and offered many new opportunities.
The Ethereum blockchain was the first to include smart contracts and token standards that allowed developers to create their own tokens easily. These advancements were, and still are, vital for developers during the creation, issuance, and deployment of newly created tokens and dApps.
The blockchain now facilitates independent work, providing all the core tools creators need. A new ecosystem emerged with many diverse projects being launched on Ethereum, while Bitcoin retained its cryptocurrency and store of value premise.
John Watkinson and Matt Hall, two creative technologists, quickly recognized the Ethereum blockchain's potential. They created CryptoPunks in 2017, a set of 10,000 images containing one distinct character in each. This project's unique aspect was that no two characters were alike, and their supply was limited.
According to the creators, anyone with an Ethereum wallet could get a CryptoPunk for free. The concept was an instant hit, and people quickly claimed all the characters, resulting in secondary marketplace sales and astronomical prices.
In October 2017, Axiom Zen launched CryptoKitties. It was the first project to use NFT technology as we know it today. It was also the first blockchain-based game and the first true NFT based game.
The game's goal was for users to collect and breed virtual pet cats. These cats were essentially NFTs that you could trade on many platforms. The project became so popular that it slowed down the Ethereum blockchain. Some of the cat NFTs were also trading for more than $100,000 with many people speculating on NFT values and making a lot of money trading these assets.
Eventually, the project was unable to sustain its hype, and traffic decreased over time due to high transaction fees and newer NFT games. Yet, CryptoKitties was instrumental in introducing the general public to NFTs as we know them today.
A Surge of Popularity (2018-2021)
Since 2018, the NFT ecosystem has been steadily growing before exploding in the first quarter of 2021. Many industries are now adopting NFTs, and new NFT projects are coming up nearly every day.
During the period from 2018 to 2021, the NFT industry primarily spread through games and metaverse projects, with Decentraland among the most popular. Decentraland is a metaverse and fully VR-integrated, NFT-backed Ethereum blockchain project. Users can create, own, explore, play games, and collect items. Players own all in-game items, which they can trade on NFT marketplaces. Metaverse projects are increasingly making NFTs more of a functional digital commodity–aiding in further adoption of this asset class.
Axie Infinity, a newer NFT game, was released in March 2018. The idea behind the game is to collect, grow, upgrade, and battle monsters called Axies. You can purchase all in-game items and avatars. What's one reason for Axie Infinity's enormous popularity? Many people in countries, like Vietnam and the Philippines, quit their low-paying jobs to play this game full-time to make money.
As NFTs grow in popularity, the question you'll be asking is what does the future hold?
What is the Future of NFTs?
These fast adoption rates mean it's only a matter of time before NFTs become commonplace. Right now, the metaverse's development is the main growth driver that underpins NFTs. This cryptosphere will have digital parities and heavy integration with the modern world. That allows you to purchase products and interact with a virtual community all from the comfort and safety of your home.
Recently, Walmart released its expectation of a virtual shopping and shipping experience. It'll allow you to walk around a virtual megastore through VR and interact with products just as you would in a physical store. A virtual assistant can provide the users with help, and the store layout changes based on your needs. While this concept looks like a user is in an early 2000's Valve game, it's still a tempting prospect for more realistic future experiences.
Once you're done shopping, you can go straight to your property in the metaverse where all your NFTs are, and interact with them. You may play games on virtual game consoles you've bought in the metaverse, play NFT based games, and use your NFT assets in-game. Millions of items in our world could eventually become an NFT.
Some of the most prominent companies that have embraced this rapidly evolving technology are:
Facebook (now Meta) announced its integration with the metaverse.
Twitter's founder Jack Dorsey is selling his tweets as NFTs.
Warner Bros. has already released Space Jam NFTs.
Nike has bought an NFT-based metaverse company.
This official content and digital merchandise should continue with celebrities, pro athletes, and musicians worldwide selling their branded NFT collections. Almost all major cryptocurrency exchanges are also developing an NFT marketplace. That'll make NFT trading more accessible for the average person.
Now you know that the metaverse will be a big part of everyone's future, you may be wondering how exactly you create an NFT? After all, you could try and sell them and make some fiat soon or personalize your assets as you go into the metaverse. People make their homes in the real world, so why can't you in the virtual world?
How Do You Create an NFT?
The good news is that creating an NFT is much easier and less expensive than you think. That allows creators to come from all walks of life without being experts in the crypto-space. It also makes the metaverse accessible to all.
Here are the key steps that you can use to create your own NFTs and enter the digital world:
1. Choose Your Format
The first step is to decide on the format and nature of the NFT you want to create. For instance, if you're a digital artist or a painter, you can make an image NFT in any file format you like from .jpg to .gif. You may also opt for a .mp4 NFT file format if you're a video creator. Perhaps you're a photographer and want to make some 35 mm pictures into a digital asset; just scan it in and save it. When deciding on a format, you should keep your target use case or buyer in mind, no matter the digital content.
2. Choose Your Blockchain
After selecting your format and digital item, it's time to mint your NFT. Minting is converting any digital item into an asset on a blockchain. You'll have to pick a blockchain platform for this purpose. The most popular option is Ethereum blockchain, while other options could include Solana, Tezos, Cardano, and Binance Smart Chain.
Try to keep in mind that the minting process doesn't effectively alter the digital asset you're adding to the blockchain but associates it in a ledger. The blockchain you choose will also affect the minting procedure, minting fee, wallets, and marketplaces.
3. Setting up Your Wallet
The next step is to set up your crypto wallet for NFTs. If you don't own a crypto wallet already, you'll have to create one. The Atomic Wallet is a great choice, thanks to its user-friendly interface and exchange system.
Once you've created a new wallet, you'll have to buy some cryptocurrency funds for creating and trading NFTs. The type of cryptocurrency required depends on the blockchain and marketplace you choose. For example, if you decide to create NFTs on the Ethereum blockchain, you'll have to purchase some Ethereum tokens.
4. Select a Marketplace
OpenSea is the NFT industry's largest marketplace. SuperRare, Nifty Gateway, and Mintable are also great options for trading. In-game marketplaces are frequently the best places to sell a game NFT. If it's a basketball NFT, you could go with NBA Top Shot and so on. After choosing the marketplace, make an account there and connect your crypto wallet.
5. Setting Up the NFT for Sale
Upload your NFT and follow the marketplace's instructions to set up the sale. Depending on the marketplace you choose, you have different selling options; you can either sell it at a fixed price or auction it. Remember, if you're the creator, you may set up a royalty for each future trade that occurs in some circumstances.
NFTs are a new asset class, and you should see them as highly speculative and potentially risky investments. While each NFT is unique and has a registered owner, any creator can produce similar assets. Slight variations to an NFT image may devalue your NFT due to similar attributes fulfilling the buyer's needs–similarly to low-cost imported goods. This competitive abundance could mean only NFTs created by genuine brands or known artists may retain their value better.
As the NFT marketplace has no traditional stock fundamentals to base valuation on, an NFTs value is based on what a person is willing to pay for it. That way, NFTs share similar traits with hype stocks and fashionable trends. That isn't necessarily bad for some that may become wealthy speculating on the market and trends, but as an investor, you should be cautious with what you purchase.
Recent developments in the cryptoverse show that NFTs have the potential to become an inseparable part of our digital lives within the next few years. NFTs have already transformed the art and gaming industries, giving anyone a space to sell their work through a defined ownership system.
These are exciting times for the purists invested in NFTs for the long term and those who want to integrate them into a new virtual lifestyle. You can create your own digital assets and trade them to create what you want. The metaverse is a new paradigm; as with all paradigms, the early adopters benefit the most. In context, this could include metaverse digital land purchases and NFT purchases.
You can assess the NFT and market in terms of short to long-term timeframes. Speculative NFT purchases for a quick turnaround could be risky, while longer-term investments and creations could improve your digital presence over time. No matter what, always do your own research.
Is NFT trading safe?
NFT trading is currently unregulated, just like the rest of the crypto-space. Non-fungible assets' values can fluctuate extensively over time. Just because you paid $1 million for an NFT yesterday doesn't mean it's still worth $1 million today. It's preferable to trade NFTs on popular marketplaces to protect yourself from frauds and scams.
What are the challenges associated with NFTs?
You can't transform a physical asset into a digital one to create an NFT. Yet, it's possible to tokenize a physical asset, like a painting or sculpture, and create shares for such assets.
Environmentalists are scrutinizing the entire cryptosphere. It's energy-intensive, not just in terms of mining but also its footprint. NFTs take up storage space somewhere, and the finer the resolution used to create assets, the worse this becomes. Storing and curating assets requires energy, and this need will grow with further adoption.
How is NFT ownership verified?
Each NFT has a unique transaction hash that makes it irreplaceable. You can easily trace and verify NFTs on the blockchain through the ledger system. All the information is easily accessible and available for public viewing and verification.
Can I sell someone else's art as an NFT?
Imagine you have an image from the moon landing that you copied from the NASA website; can you sell it? The answer will vary from region to region, the marketplace, and legal requirements. In most cases, though, you can't sell someone else's artwork as an NFT unless you've purchased copyrights; this may not stop it from occurring.
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