hat are NFTs?
The term NFT exploded into the mainstream out of seemingly nowhere earlier this year. In March, a British auction house called Christies sold a work of digital art for a staggering $69 million. It sounds like a scam, and you’d be forgiven for thinking the world had reverted to some modern version of 17th century Dutch tulip madness.
The truth, however, is more complicated than that. NFT’s are not what they appear to be, but their ties to the rise of cryptocurrency make them a little easier to understand.
If they aren’t just art, what are they?
NFT stands for Non-fungible token. It’s a digital asset which represents something from the real world. Often they’re pieces of visual art, but they can also be music, unique items in video games, videos, and more. Sometimes, existing pieces of media — say, a clip from a football game — are encrypted using blockchain technology to become NFTs. Most of the time, however, NFTs are created specifically to be NFTs. Due to the similar use of blockchain technology being used to code NFTs, they are often traded alongside and in exchange for cryptocurrencies online.
NFTs are exclusive assets with unique identifying codes that are incredibly difficult to replicate. Their exclusivity is a crucial part of their appeal. By making them one-of-kind, a scarcity is created that matches that of a real-world object like a canvas painting or a glass vase. When someone purchases an NFT, they can own that NFT in the same way they own physical possessions. It’s the difference between owning a print of the Mona Lisa or having the original hanging on your wall.
NFTs are key components in the growing metaverse, which is the extension of our digital world to encompass aspects of physical living. For instance, if you were playing an open world game and found a unique item, the game developers would still technically own that item. If it were an NFT, you could be the legal owner of that item, even though the game itself doesn’t belong to you.
NFTs vs. Cryptocurrency
NFTs and cryptocurrencies like Bitcoin or Ethereum are programmed using the same methods and blockchain technology, but beyond that, their similarities end. Cryptocurrency, like traditional forms of currency, are considered “fungible.” This means they can be traded and exchanged for the equivalent value in one another. The same can’t be said for NFTs, which all have a kind of digital signature which makes them impossible to compare inherent values on.
How NFTs work
NFT codes exist on a blockchain, which is a digital public ledger which keeps track of transactions. Digital goods are ‘tokenized,’ then added. The most common blockchain used for NFTs is the Ethereum blockchain, which they share with the second most popular cryptocurrency, Ether. However, as NFTs remain popular, more blockchains are starting to host them.
Because of their embrace of supply and demand dynamics, NFTs are tied to what is already popular. Currently, sports clips are some of the most sought after NFTs, especially NBA clips on a marketplace called NBA Top Shots. Other popular NFTs exist in video games and social media.
NFT technology is brand new, so we are only seeing the most basic aspects of what they can do. There is a lot of speculation about how they can be used in the future. For example, universities could issue NFTs to graduates as an easily verifiable digital diploma for future employers. NFTs could also be used in lieu of event tickets to prevent ticket fraud. As of now, however, they are primarily used for digital art.
How to buy NFTs
If you decide you want to buy NFTs, you’ll need to start by converting some traditional currency into cryptocurrency. You have a few options, but we recommend using Ether due to its widespread popularity with NFTs. You can buy cryptocurrency using your choice of popular platforms such as Coinbase, eToro, or Kraken, all of which are user friendly.
You’ll also need a crypto wallet to keep purchased coins in. Before you decide what kind of wallet to choose, look into what NFT marketplaces accept coins from which wallets, as there is currently no one wallet that works on every site. Some marketplaces provide their own wallets, like Coinbase. You should also compare fees between the crypto trading platforms to be sure of what you’ll be spending.
Some NFT marketplaces sell a wide variety of NFTs — everything from digital art and music to sports clips and archived social media posts. Others sell specific niche items, like NBA Top Shots. Some of the popular marketplaces are Rarible, SuperRare, OpenSea.io, and Foundation.app.
Making and Selling NFTs
It should be clear by now that making and selling NFTs can be a lucrative business. If you want to make one, you’ll need two components: the file you wish to upload and a crypto wallet which contains a blockchain cryptocurrency, most likely Ethereum. Choose a marketplace where you wish to sell it and follow the simple instructions on the page. Depending on the platform, it is often as easy as pressing a ‘Create’ button and waiting. There may be fees involved in the creation.
You can easily sell an NFT on these platforms as well, whether you created it yourself or bought it from another seller. There are also often fees involved in these exchanges. If you sell an NFT that you created, you can sometimes receive royalties if it’s resold in the future.
Are NFTs worth it?
Considering how new the technology is, there is no right or wrong answers to whether or not NFT commerce is worth the risk. The future of these tokens is just too uncertain, so think of investments like you would the purchase of a volatile stock. Their value may increase over time, or it may dwindle in popularity, leaving a lessening demand that forces you to sell one for less than you paid.
Also like stocks, NFTs are subject to capital gains taxes. Cryptocurrencies used in the buying and selling NFTs are also subject to taxes. Since the technology is so new, the tax rules have changed repeatedly and may change again after this article is published. Do plenty of current research, assume the risks, and if you believe in NFTs, make the investment. It may pay off handsomely.
Create your NFT project at wondour.com