NFTs or non-fungible tokens emerged with the advent of CryptoPunks and CryptoKitties, but became popular in the first quarter of 2021 and introduced the art world and the crypto world into digital assets. When auction house Christie’s auctioned digital artist Beeple’s “Everyday: The first 5,000 days” for over $69 million in March, it propelled the concept directly into the public spotlight.
August 25, 2021, | AtoZ Markets - Iconic esports moments, digital art, valuable esports collectible cards, digital trading cards, GIFs, images, digital music, audio, tweets, and even memes can be turned into NFTs.
Most NFTs use the Ethereum network for verification. Some trace the origin of NFTs to tokens called Bitcoin Colored Coins back in 2012.
Colored Coins were essentially bitcoins that were “colored” to give them special properties that would distinguish them from the rest of bitcoins and had value independent of the face value of the underlying bitcoin.
From there, they evolved into CryptoPunks, digitally generated characters, and the first NFT on the Ethereum network in 2017. But NFTs became popular a little later in 2017 with the advent of Cryptokitties, a digital gaming platform on the Ethereum network that allowed to buy and sell NFTs and create digital cats.
The NFT craze caught on right away, and in 2018, one CryptoKitty sold for 600 Ethereum — the equivalent of $170,500. In March 2021, a CryptoPunk sold for 4,200 Ethereum or $7.57 million.
In early March 2021, Twitter CEO and founder Jack Dorsey put his first tweet from 2006 up for sale as an NFT, and it sold for $2.9 million.
A non-fungible token or NFT is a unique digital asset based on blockchain. Anything can become an NFT — a piece of art, a GIF, pictures, digital music, sports moments, or even a tweet. Unlike cryptocurrencies that also use the blockchain network for ownership verification, an NFT cannot be exchanged directly for another NFT.
- Digital fungible assets: cryptocurrencies, utility tokens, airline miles.
- Physical non-fungible assets: real estate, artwork, personalized goods.
- Digital non-fungible assets: digital art, digital collectibles, digital music.
- Digital assets, such as domain names (Google.com), are not necessarily owned by Google, but by intermediaries, such as GoDaddy or Verisign, even though it is the former that controls the rights to the asset.
These concepts are related to fungible and non-fungible tokens. While digital files, such as Beeple’s digital works, are infinitely reproducible, the NFTs representing them are located on the Blockchain and provide buyers with proof of ownership and a unique ID, since they can only have one official owner at a time.
How do non-fungible tokens (NFTs) work?
NFTs work like limited-edition sneakers or collectible stamps. But instead of getting physical objects, buyers of NFTs get digital files that confirm ownership of some asset, be it a piece of digital art, a sports moment, or a song.
NFTs differ from cryptocurrency because there are many bitcoins and they are all interchangeable, while NFTs each have a unique identification code that exists on the blockchain.
The digital file of any asset that has been tokenized as an NFT is recorded on the blockchain, making it easy to verify ownership and trade NFTs.
You can think of an NFT as proof of ownership of an asset that is verified by the blockchain. Blockchain works as an electronic ledger of transactions that serves as a record of NFT ownership. Each transaction on the blockchain is verified by computers around the world, solving complicated mathematical problems.
The transaction history and data associated with an NFT are made public on the blockchain and cannot be changed after verification is complete. Not only can the owner of an NFT prove his claim beyond doubt, but it also cannot be stolen.
Several blockchains have features that may or may not support the creation of NFTs linked to their ledgers.
The Ethereum blockchain, which is home to the ether token, allows software developers to create applications on its network, making it a particularly attractive home for NFTs, although other blockchains support the necessary technology.
This makes NFTs useful in several industries, and some have already begun to look into adopting them.
But there are still many legal, regulatory, and environmental impact issues surrounding NFTs that still need to be defined. Since NFTs use blockchain technology, they are energy-intensive and have been criticized for their carbon footprint.
Is NFT the same as cryptocurrency?
Although NFTs are created and recorded using the same technology that powers cryptocurrencies, they are different in important respects.
The biggest difference is that cryptocurrencies are fungible, meaning that they can be traded or exchanged. Digital currencies must also have the same value, which means that one bitcoin is always equal in value to another bitcoin.
NFTs are different because there is no guarantee that one NFT is equal to another, whereas cryptocurrencies are designed to function like fiat currencies. NFTs are more like physical collection items such as art.
Although NFTs are stored on a blockchain, not all blockchains are created the same way.
Bitcoin’s blockchain was built for the specific purpose of creating a deflationary cryptocurrency, which is what has caused it to grow to its current market capitalization of one trillion dollars.
In addition, Bitcoin’s blockchain is conservative and inflexible, but highly secure based on a proof-of-work (PoW) consensus algorithm.
However, while proof of work (PoW) offers a high level of security, it has some major limitations, namely the number of transactions it can validate and the energy costs.
Or rather, in terms of the volume of validatable transactions, the proof of stake (PoS) that Ethereum currently uses is enormously larger than proof of work (PoW).
There are now several second-and third-generation blockchains that use proof of stake (PoS) and do not seem to have scalability issues concerning transactions while being energy-efficient.
When it comes to energy consumption, the advantage is enormous, as proof of stake (PoS) requires minimal electricity consumption.
What is blockchain?
Blockchain is a decentralized encrypted database that allows the transfer, recording, and tracking of digital information in a distributed, shared ledger.
It is similar to a traditional database, but the information is recorded in blocks (block) that are linked together by "nodes"(chain), secured by cryptography, to make sure that they are fraud-proof.
Since these records are publicly verifiable, that is, open, transparent, and visible to all, the participants who exchange information within this system do not need an intermediary to validate the transaction. Through this technology, cryptocurrencies such as Bitcoin, Ethereum, and thousands more were created.
NFTs and the Ethereum network
Six years after the launch of Bitcoin in 2015, the Ethereum blockchain was released, becoming the second-largest cryptocurrency with its Ether token (ETH).
However, Ethereum (Ether or ETH) is much more than a cryptocurrency. Thanks to its flexibility and programmability, Ethereum has made it possible to build smart contracts, also called decentralized applications (dApps). As the name implies, these are self-executing programs that complete tasks within the predefined terms of the contract.
The main feature of this blockchain innovation is that they eliminate mediators and all the costs that come with them.
Consequently, Ethereum has created an entire ecosystem of DApps locked into a DeFi (decentralized finance) ecosystem.
How to create an NFT?
Rarible is one of the leading platforms for the creators of NFTs of many different types.
Anyone can create a unique asset by following a few simple steps:
1) Start by organizing your media to decide what you want your NFT to be. NFTs support many file types: visual (JPG, PNG, GIF, etc.), music (MP3, etc.), 3D (GLB, etc.), and more. When your traditional file is ready, you can proceed to the next steps.
2) Next, you will need to set up a digital wallet. By default, many NFT marketplaces work with an Ethereum wallet. You need to create a digital wallet to be able to securely store the cryptocurrencies used for buying, selling, and creating NFTs. The wallet also allows you to securely sign up and create accounts on NFT marketplaces.
3) After you set up your Ethereum wallet, you will need to purchase a small amount of ether (ETH) to cover the costs of creating your first NFT. This is because there are fees related to converting your content into an NFT in most digital art markets.
4) Next, you need to connect your portfolio to an NFT market. An easy example to use is Rarible. When you connect your wallet, click the “Connect” button. Then your Rarible account will be instantly created. Now you have everything you need to create, issue, and sell your first NFT.
5) Finally, upload the file to the platform and fill in the asset description. At this point, you can decide whether you want to create an individual asset or unique edition assets (multiple NFTs in the same batch), the percentage of your copyright, the unlockable content, and more.
When all this is ready, you can begin the issuance process, which requires an amount of ether for the approval and issuance of transactions on the blockchain. Issuing an NFT is how your digital art will become part of the Ethereum blockchain — a public network of records that is immutable and tamper-proof.
NFTs are tokens “issued” right at creation. Your digital art is represented as an NFT so that it can be purchased and traded on the market and digitally tracked, as the owners may change in the future.
How to sell an NFT?
The process of selling an NFT can vary depending on the platform, but there are several easy-to-use options. Normally, you will upload your artwork as an image, GIF, video, audio, or whatever to the platform and then follow the instructions to “mint” it, or turn it into an NFT. By default, you may include a description of the work and suggested prices.
Then, the platform usually hosts an auction at a certain time and connects the winner of the auction with the creator of the NFT.
How can I buy an NFT?
To buy an NFT, first, you will have to find an NFT marketplace or a crypto service. There are many platforms, but some dominate the market like OpenSea, Nifty Gateway, and Rarible, but there are also many others. More niche marketplaces have also emerged, such as NBA Top Shot for basketball video highlights turned into NFTs.
Before buying, it is worth finding out what kind of digital wallet is needed to store the asset and what kind of currency you will need to complete the sale.
Some marketplaces require you to pay in cryptocurrencies like Ethereum (ether) while others accept US dollars but may charge exchange fees when converting them into cryptocurrency.
As for whether you should buy an NFT, there are a few reasons why investors find the market attractive, and advocates point to futuristic uses that may be valuable.
Many investors may be drawn to the market for practical reasons, such as being able to make an image their profile picture on social media without fear of copyright infringement. And, increasingly, some companies incorporate NFTs into their video games, giving users special features.
Other investors see the market in the same way that collectors see the luxury art market: a place for value speculation. These buyers believe that the value of the NFT they wish to buy will increase over time, although some investors have scoffed at the idea.
How to start trading NFT?
NFT markets are just some of the DApps on the Ethereum network. The platforms allow you to create, sell, and buy NFTs.
Although other programmable blockchains offer smart contracts, such as Wexchain, most NFT markets are still hosted on Ethereum. At the time of writing this article, across all NFT markets, the trading volume of NFTs has exceeded $500 million.
Therefore, to buy and sell NFTs, you must have a cryptocurrency wallet with some ETH, which is Ethereum’s native token.
Even if you are just selling an NFT, you will still need to pay a transaction fee of 2.5%, that is, a gas fee in ETH.
And if you later decide to use NFT marketplaces outside of Ethereum, you can still exchange ETH tokens for alternative blockchain tokens.
So, this is the simplest and fastest way to get your ETH funds. After that, everything else is easy.
Otherwise, if you want to create and sell an NFT, almost all NFT markets follow the same procedure:
- Choosing between one or several NFTs
- Uploading the file that will be coined as NFT, ranging from text to image, video, or audio
- Entering information about the file to be minted — name, description, price, royalties
- Paying the ETH gas fee — usually 2.5% — so that your NFT can be listed on the marketplace
- After finishing the last step and clicking “Start,” a pop-up window from MetaMask or another digital wallet, will ask you to sign for the funds allocated for the fee. Click “Sign”, and your newly created NFT will be listed for everyone to bid on!
How much is an NFT worth?
To answer this question is to understand what NFTs are and why they are so valuable. And the only way to understand this is to put NFTs in comparison with traditional works of art.
For example, the most expensive and iconic works of art, such as Mona Lisa or Interchange by Willem de Kooning, can be reproduced in the same way as NFTs.
More specifically, an Interchange painting is worth $300 million. Next to it is Chris Torres’s Nyan Cat NFT, sold for about $600,000 (ETH 300) at the time. Both are visible directly on the screen, which means that you can see them as they are, just as your buyers can see them.
If this is the case, and it is, what do art buyers buy? Simply put, they buy original traceability, which leads to social privilege.
After all, it is one thing to own one of the millions of reproductions, but quite another when you keep a piece of art history that can be traced directly back to its creators.
With physical assets — paintings, sculptures, photographs, books — experts determine whether something is original, labeling them as worthy of being purchased as unique assets.
Since the value of NFTs depends on scarcity and on how much you are willing to pay for it, NFT prices are extremely volatile. For example, according to NonFungible.com, the average asset price of an NFT dropped from $3,932 in February 2021 to $1,426 at the end of March. That’s a decline of almost 64%.
Another thing to keep in mind when thinking about buying an NFT is transaction fees, and all transactions need to be verified by the network. The gas fee is required to conduct this verification and can simply be put as a measure of the computational effort required for the process. However, gas fees can increase your cost of buying NFT and can be substantial.
It can be confusing for buyers and sellers who are not familiar with blockchain and related technologies.
Are NFTs only for institutional investors?
Of course not. To begin with, ask yourself why you want to buy an NFT. Do you want an NFT as a collector’s item or as an investment? This can help you understand how much money you are willing to spend and how much risk you are willing to take.
Investors should also be aware of scams and theft of NFTs. These can be in the form of replica stores or secondary markets posing as legitimate websites, counterfeit NFTs, and even giveaways.
Since NFTs themselves are still relatively new, the regulatory framework for them also remains unclear, even though it is beginning to evolve.
Are NFTs digital assets?
There is also the question of whether or not NFTs are securities. The Securities and Exchange Commission (SEC) does not consider all digital assets to be securities.
According to Latham & Watkins LLP, NFTs that constitute art and collectibles should not be considered securities, but need to be evaluated on a case-by-case basis. There is also the possibility that this could change as the use of NFTs evolves.
It is always worth doing your homework before jumping into making cryptocurrency investments or investing in crypto art to avoid a nasty financial surprise.
The same applies to anyone interested in collectible physical works or risky investments — you research and only use the money you can afford to lose.
Why do people buy NFTs?
There are many reasons why people would buy NFTs. Limited-edition digital collectibles, such as CryptoPunks, have achieved unprecedented success, with images selling for millions of dollars.
Some NFTs sell because they are integral parts — in-game assets — of blockchain games like Cometh or Axie Infinity.
Other NFTs serve as crowdfunding mechanisms for ambitious projects, as happened with Bear Games.
However, for investors trying to enter this market, what matters is taking advantage of cultural trends, which Beeple exemplified perfectly with his NFTs. The most important tip to remember is to leverage your internet presence.
The more notable an artist is, the greater significance their art has, and, consequently, the greater the value of the NFTs associated with this creator.
In what sectors can NFTs be used?
Some sectors already using NFTs are:
- Art world
NFTs can work well in sectors such as art or other creative spaces that may be subject to unauthorized copying and fraud. NFTs have the potential to limit this type of fraud.
Sports highlights often have high collectible value, and NFTs can not only offer fans a way to enhance the experience but also provide a way to prove the authenticity and ownership of high-value memorabilia. For example, NBA Top Shot auctions off NFTs of player moments during games. There may also be a use case for NFTs in the box office of sporting events.
- Licensing or contracts
NFTs have applications in licensing agreements related to intellectual property. This can provide solid opportunities for the owners of various types of intellectual property to license the use of these assets.
Using blockchain to store these contracts can help ensure that all users are aware of ownership and limitations on the use of these assets, such as royalties paid for the use of music. For example, the original owners or creators of EulerBeats Originals still earn an 8% royalty every time the NFT is sold.
- Real estate
In the real estate world, and NFT can be the digital token of ownership on a blockchain network. For example, instead of a paper deed stating that you own a single-family home, you could have an NFT showing your ownership of that home. This could provide some advantages in terms of security and ease of access.
- Notable NFTs transactions
It seems like a new NFT pops up every day. In February 2021, a highlight clip of a memorable dunk by NBA star LeBron James was sold for $208,000.
The band Kings of Leon released a new album, “When You See Yourself” as an NFT in March 2021. The types of assets that can be digitized as an NFT seem limited only by what the minds of creatives and companies can think of.
With NFTs, all of this is handled automatically by contracts based on a blockchain. This is to say that digital art is reborn and begins its journey using a new format: the blockchain — a decentralized digital ledger that is incorruptible, non-falsifiable, and indestructible.
Does Ethereum benefit from NFTs?
Absolutely! NFT tokens are traded like any other Ethereum-based cryptocurrency. You will need to purchase a small amount of ether (ETH) to cover the costs of creating your first NFT. This is because there are fees related to converting your content into an NFT in most digital art markets.
Even if you are just selling an NFT, you will still need to pay a 2.5% transaction fee, called the gas fees, in ETH.
Are NFTs tied to Ethereum?
But NFTs are not always connected to the Ethereum blockchain. For example, NBA Top Shot, the most popular NFT, does not work on the Ethereum network. Dapper Labs, a Vancouver, Canada, based startup that created and runs the program with the league and players, designed its blockchain, called Flow.
The interesting thing about applying blockchain technologies to NFTs is that it has greatly expanded their advantages and possibilities, as it has brought standardization in the representation of non-fungible digital assets through ERC-721. Like ERC-115 and ERC-998, ERC-721 is a smart contract standard that brings a standardized way to verify who owns an NFT, and a standardized way to “move” non-fungible digital assets.
What will Ethereum be worth in 2030?
In reality, there is no reliable way to make Ethereum price predictions beyond the immediate future; after all, ten years in the crypto market is a long time. However, some platforms and analysts have speculated that by 2030, Ethereum could trade as high as $100,000 per token.
There has already been a lot of boom around the Ethereum 2.0 update and altcoins go from a proof-of-work to a proof-of-stake consensus mechanism, which is anticipated to solidify its position as a leading second-generation cryptocurrency and ward off future threats from other emerging altcoins such as Cardano or EOS.
In fact, at the time of writing this article, the ETH price was already projected to increase in value by nearly 20% over the next 30 days.
Does it make sense to buy digital art as a form of investment?
Throughout history, many people have become wealthy by collecting artworks and other items. Today, big luxury auction companies like Sotheby’s and Christie’s, and even e-commerce companies like eBay, Amazon, and Etsy help transact and earn from collections.
Even though digital art is faster to copy and distribute, NFTs build on this same principle when many people still have a fundamental desire to own an original piece.
First, it is important to evaluate whether the asset has a significant and growing value. It’s no use buying a digital item or a piece of digital art if you believe that the artist will produce copies of it. Another relevant point to analyze is the encryption system the NFT is in to ensure that you are not receiving an altered item or one not authorized by the artist/author.
As we are talking about a new business that’s linked to cryptocurrencies, while it has high potential returns, it also involves many uncertainties and risks.
Anyway, it’s always worth knowing and following new technologies that can transform the market, because opportunities may appear at any turn.
Articled sponsored by WePlay Collectibles. WePlay Collectibles is powered by Ethereum, a software platform that uses blockchain technology.