What is an NFT (Non-Fungible Token)?
NFT stands for Non-Fungible Token and is a type of cryptocurrency that is enjoying growing popularity in the crypto community. Its beginnings can be traced back to 2010 but it only recently started gaining momentum in 2017 after CryptoKitties went viral.
To understand what is an NFT we need to breakdown the words that make up the name.
Non – a suffix that expresses the absence of the attached word. For example, non-existent means does not exist.
Fungible – a property of any item whose individual building units whose properties are all identical. Whether it is in appearance, size, use, or value; everything must be exactly identical. This means that any building unit is equal to any other building unit and they can be easily swapped without any change in the item’s value.
Token – an object/symbol to which is attached a certain value or individuality. Tokens can be used to represent certain rights or values e.g. ownership rights.
The words, Non-Fungible Token, combined mean any unit/token that is unique and is irreplaceable by any other token. A non-fungible token is also indivisible.
In the crypto community, a Non-Fungible Token is a unique cryptographic token that is linked to a unique digital asset of provable rareness. Hence any asset that is tokenized into NFTs must have verifiable digital scarcity.
In other words, an NFT (Non-Fungible Token) is a unique and inseparable unit that represents a rare asset. Many artists have used NFT technology to gain an alternate means of selling their artwork. A recent example is Beeple, a well-known artist. He sold 20 of his art pieces for a total of $3.5 million using NFTs.
Another example, Christie’s – a renowned auction house, has been making moves in the NFT market. They listed an artwork by Beeple AKA Mark Winklevoss in one of their auctions. Christie’s became one of the first auction houses to accept cryptocurrency in its auctions. It is pioneering new possibilities for art enthusiasts everywhere.
The rising popularity of Non-Fungible Tokens (NFTs) has also been in part due to certain influential figures who believe in and support NFTs. It has gotten to the point that NFT traders are spending hundreds of dollars to buy tweets from people like Elon Musk and Mark Cuban.
The use of NFTs empowers traders and creators to take greater control of the rights of their digital assets like never before. For example, asset owners can now profit on their assets in ways that were not possible traditionally.
Non Fungible Tokens(NFTs) vs Fungible Tokens (FTs)
Non-Fungibility Tokens differ from traditional fungible cryptocurrencies, like Bitcoin, in that each token accumulates value independently. In Fungible cryptocurrency, the value of any token is identical to any other token. For example, 1 Bitcoin is equal to any other 1 Bitcoin.
In non-fungible cryptocurrency, each token represents a unique asset that has its own value. Therefore the value of each non-fungible token depends upon the unique asset it represents. If the asset’s value increases it translates to a rise in the NFT’s value. Because of this, you end up with differently valued tokens.
To better understand what are NFTs, we need to look at what they are – Cryptocurrency.
What is Cryptocurrency?
A Cryptocurrency is an online medium of exchange that people use to invest, trade, or transfer value. In of itself, a cryptocurrency does not have any objective value. Instead, cryptocurrencies have a subjective value, meaning that their value comes from the importance and demand people place upon it.
Cryptocurrencies have been around as early as 2009, with Bitcoin being created in the same year by Satoshi Nakamoto. Over the years, the value of cryptocurrency has surged as more and more people realized the importance and utility of cryptocurrency.
How CryptoCurrency Works?
Cryptocurrency is a form of digital currency used to trade for goods and services. It is a decentralized currency, meaning that the recording and storage of transactions is done through a public ledger that resides on many computers linked to the blockchain.
For any payment system to work, it needs accounts, balances, and a history of transactions. These three are needed to block double-spending or forgery. In traditional payment systems, there is a central server monitors all the accounts’ balances and transactions. However, in a decentralized cryptocurrency, there is no central server to do this job. Therefore, machines linked to the network must replace the role of the central server.
This means that peers on a network have a complete and identical record of all transactions to enable the validation of future transactions.
During a transaction, a digitally signed file from the sender, containing the details of the transaction, is distributed to the blockchain network. Details in the file include the sender’s info, the amount being sent, the receiver’s info, etc.
After some time, the transaction is confirmed/legitimized by miners on the blockchain. After confirmation, peers on the network then update their transaction record/ledger with the newly confirmed transaction.
Miners are individuals who get a cryptocurrency reward for providing confirmation services for transactions on the network.
4 Popular Cryptocurrencies
Bitcoin (BTC): created in 2008 and released in 2009. It was created by Satoshi Nakamoto. Bitcoin’s current market capitalization is over $800 billion.
Ethereum (ETH): initially released in 2015. It is currently the second-largest cryptocurrency by market capitalization with more than $167 billion.
Bitcoin Cash (BCH): a spin-off cryptocurrency from Bitcoin. It was created in 2017 and currently has a market cap of over $8 billion.
Ripple (XRP): created by Ripple Labs Inc, a US-based company. It was released in 2012 and now has a market capitalization exceeding $19 billion.
Screen capture from coinmarket.com with the leading 7 cryptos ranked by market capitalization.
6 Benefits of CryptoCurrency
Although cryptocurrencies give anonymity to their users, they record transactions on a public ledger visible to everyone. This means all recorded transactions are traceable and accountable.
A snapshot of recent Bitcoin transactions from blockchain.com
Blocks any central organization/government that wants to manage your money. Decentralization means there is no central management of transactions but rather a form of self-governance where peers help regulate the system. This peer management ensures that the system is stable without any player monopolizing or controlling the crypto market.
Security and Privacy of Transactions
The identities of traders on the crypto market are not publicized; Instead, they have a pseudo ID that is not connected to their real identity. This grants users a certain level of protection by anonymity.
Worldwide and 24hr Accessibility
Cryptocurrency can be accessed from anywhere and at any time, as long you have access to the internet. Cryptocurrency transactions are not limited by any form of trading hours. This flexible accessibility means you do not have to adjust your schedule to accommodate cryptocurrency activities.
No Banking Fees
Cryptocurrency trades do not require intervention from traditional banks. Therefore, you can avoid the fees banks attach to each transaction. You also do not have to pay any annual fees that banks charge.
Low Transaction Fees
Transferring cryptocurrency across national borders has low fees. This is because whether you are trading across borders or within your country, the transaction fees are the same. The cryptocurrency network is a global marketplace without any borders defined. Also, crypto transfers cost much less than bank transfers.
6 Drawbacks of Cryptocurrencies
Once a transaction is confirmed, it cannot be reversed. Meaning that if you mistakenly send your money to the wrong wallet, there is no getting it back. This lack of a refund option or buyer protection means that if you are conned, you cannot recover that money.
Because cryptocurrencies offer a high level of anonymity and security, criminals have used them to trade illegal goods and services. Some criminals even use cryptocurrencies like Bitcoin to launder their dirty money.
Not Fully Decentralized
Most cryptos (cryptocurrencies) are not 100% decentralized. The organization or person that created the cryptocurrency still controls its flow and the amount available. This makes it vulnerable to manipulations by the creator to drive the crypto’s value.
Cryptocurrency mining needs a lot of computation muscle and electric power. This high resource usage results in a larger carbon footprint on the environment, contributing to global warming. One artist said the massive carbon emissions during an NFT artwork release were more than his entire studio emitted in 18 months.
History of Cryptocurrency Hacks
Cryptocurrency transactions are very secure; however, crypto wallets and crypto exchanges have a history of being infiltrated.
Crypto exchanges store the data of their users, so when they are hacked, the hacker gains access to their users’ sensitive data. This data is then used to gain access the users’ accounts. KuCoin, a Singaporean crypto exchange, lost over US$150 million to hackers. Reportedly, over $2 billion has been lost to cryptocurrency-related hacks.
Huge Learning Curve
Mastering cryptocurrency and its related technologies requires significant effort and dedication. The state of the crypto market is highly volatile so you always have to stay ahead on all the latest news and events.
How NFTs work?
Now that we understand what NFTs are and how cryptocurrency works, we can begin further exploration of NFTs.
The trading of Non-Fungible Tokens is similar to traditional fungible tokens. The main difference lies in that each non-fungible token is unique and is not interchangeable with any other token.
NFTs create unique assets that have verifiable digital scarcity. Due to their unique nature, NFTs can serve as proofs of ownership for your assets – whether it’s real-world or digital. Additionally, because the transaction record of each NFT is public, the token serves as a certificate of authenticity for your digital asset.
Types of NFTs
You can tokenize almost anything with NFTs. You can even tokenize real-world assets with NFT technology.
Here are 4 common sectors where NFT usage is widespread:
NFT Art (e.g. Rarible, NiftyGateway, SuperRare, etc.)
NFT Music e.g. Mintbase
NFT Games (e.g. Decentraland, Gods Unchained, CryptoKitties, etc.)
Virtual Real Estate ( godsUnchained, Decentraland, etc.)
Blockchain-based Domains e.g. Unstoppable Domains
ERC Tokenization Standards
Certain rules or provisions were made to enable NFTs to function on the Ethereum blockchain. These rules are called ERC standards. ERC stands for Ethereum Request for Comment.
ERCs (Ethereum Requests for Comment) allow developers to propose improvements they think should be adopted by the blockchain. Examples of ERC standards are the ERC-20, ERC-998, etc. The unique number after ‘ERC’ is the unique ID number attached to each proposal before it gets approved.
Here are 3 standards that play a key role in NFT trading today.
CryptoKitties, a game that sells digital cats, pioneered the ERC-721 standard. Each cat in the game is unique, indivisible, and represents a single non-fungible token. The ERC-721 standard allows the creation of tokens with different values/properties.
The ERC-998 standard enables bundles of different-valued ERC-721 tokens to be traded in a single transaction. The standard helps to minimize the transaction fees involved with trading multiple non-fungible tokens individually.
The ERC-1155 was created by Enjin, an ethereum ecosystem used by developers to build applications. The standard enables the trading of both fungible tokens and non-fungible tokens (NFTs) within the same ecosystem.
How to Store Cryptocurrency/NFTs? – Crypto Wallets
As with any other cryptocurrencies, you need a crypto wallet to store your non-fungible tokens. There are many types of wallets that you can use to hold your cryptocurrency.
To start trading NFTs you need to create a crypto wallet. This can be easily done by installing the Metamask extension on your Google Chrome or Firefox Browser. You can follow the simple instructions from there.
Examples of other well-known crypto wallets that are compatible with NFTs are Coinbase, Trust Wallet, and Enjin.
Popular crypto wallets can store several types of cryptocurrencies. This means you can have both fungible and non-fungible cryptocurrencies in the same wallet.
Here are five types of wallets available to crypto traders.
5 Types of Crypto Wallets
A Crypto Wallet that is a dedicated application on your mobile phone. Many popular cryptocurrencies have compatible mobile wallets. Examples of Mobile Wallets are Trust Wallet, Electrum, etc.
They offer the second-best level of security on this list. During the early days of cryptocurrencies, paper wallets were the only way to store your crypto.
Web wallets are always on the internet. To use them, you have to install an extension on your web browser e.g. Firefox, Chrome, etc. Most web wallets do not give you your wallet’s private key therefore if the service shuts down you will lose your money. Common examples include Metamask and Coinbase.
Special hardware devices designed to securely store your private keys and public addresses. They offer the most security for your cryptocurrency.
Crypto Wallet software that is installed on your Windows/Linux/Mac operating system. They have a medium level of security with notable desktop wallets being Exodus, Electrum, etc.
Above all, you should know that your cryptocurrency is only as safe as how secure your wallet is. Therefore, choosing the most secure wallet that hackers and thieves cannot access is in your best interest.
How to create NFTs?
To make NFT Art, you need to use websites like rarible.com and opensea.io. Anyone can easily create an NFT artwork without the need for an invite on these websites. Additionally, you can create NFTs without any coding skills whatsoever. However, before you can use the platform, you have to connect your crypto wallet to their service.
One thing to note is that every time you create an NFT artwork, a certain minting or gas fee is deducted when crafting your NFT artwork. This is because each NFT artwork created is recognized as a transaction on the blockchain network.
Also after someone purchases your NFT art, every time your art is later resold you can receive a royalty. You can set the amount of royalty you will receive every time your work is resold.
There are NFTs that are completely digital and on the other hand, we have NFTs that are linked to real-world assets. A good example of digital NFTs backed by real-world assets is Unisocks. Unisocks is a platform selling a limited amount of Non-Fungible Tokens (NFTs) that can be redeemed for an actual pair of socks in the real world. To date, over 180 tokens have been redeemed, with some socks costing as much as $92 000.
How to trade Non-Fungible Tokens (NFTs)
Selling your NFTs
After minting your NFTs, you can list them for sale on NFT marketplaces like Rarible, Opensea, Async, etc. You can either choose to sell your NFT at a fixed price or you can auction it. If it’s your first time selling on the platform, you have to pay a once-off gas fee before you can start selling.
5 NFT marketplaces, in no particular order, are Opensea.io, Rarible, SuperRare, KnownOrigin, and AtomicAssets.
To purchase NFTs, you need to have some cryptocurrency like Bitcoin (BTC) or Ethereum (ETH). You can buy cryptocurrency from crypto exchanges like Coinbase, Binance, etc. with your bank card or account.
After buying your BTC or ETH, you can go signup on NFT marketplaces and start building your NFT collection.
N.B. You should be careful when visiting these websites, as many counterfeit sites look similar to the originals. To be sure, you should check the URL address to see if it is the official URL and you should also confirm if there is a lock/secure icon in your address field.
Benefits of NFTs
NFTs enjoy most of the advantages that traditional cryptocurrencies enjoy. At the same time, they suffer from the same drawbacks too.
However, the unique nature of NFTs introduces new benefits that are specific to them.
Here are five benefits of NFTs:
Better Asset Rights Management.
Artists can directly earn royalties from their work without any need for third parties or middlemen ( e.g. managers and agents) who would deduct their share. This means more money ends up in the content owner’s pocket than before.
NFTs are Authenticated
Blockchain technology keeps a record that is distributed to multiple computers across the globe. This makes it hard to alter recorded transactions or create forgeries as the transaction history is easy to view and verify.
Interoperability of NFTs
Because NFTs are based on the same blockchain. In-game items like skins, characters, weapons, etc. are reusable on other games within the blockchain. This means in-game assets will be fully owned by the user and not rented out by the game developer.
Copyright Infringement Protection
Because content creators can register their work through NFTs, there is less risk of copyright disputes and infringement. This is because the blockchain would hold a transparent and immutable record of all transactions.
Traditional digital items/assets did not have a platform in which they can all reside. NFT blockchain technology enables different digital assets like electronic airplane tickets, in-game items, gift cards, NFT art to all exist on the same network and marketplace.
5 NFT Marketplaces
Opensea Marketplace is the largest general marketplace where users can sell their private NFTs and Collectibles. Its catalog covers almost every type of NFT including art, music, game items, domains, etc. Opensea is the oldest NFT marketplace.
Rarible is the first community-owned NFT marketplace. It is similar to Opensea because it also allows users to sell their NFTs. You can use rarible to create your own non-fungible tokens and sell them.
As the name suggests, SuperRare specializes in trading single edition digital artworks. Each artwork on SuperRare is original and created by an artist in the network. SuperRare was founded by John Crain and Jonathan Perkins.
An NFT artwork on SuperRare has to be approved before it can be listed. Therefore, entry is difficult.
Enjin is a marketplace that provides a product ecosystem for developers to create interoperable NFTs. You can trade on the Enjin marketplace with its native cryptocurrency called Enjin Coin (ENJ).
It specializes in digital artworks like JPEGs and GIFs. It is kind of like an art gallery where artists and designers can list their work for exhibition and selling purposes.
Top 4 NFTs and Collectibles by Market Capitalization
NFTs experienced rapid growth in 2020 and 2021 and now the total NFT market is worth over $250 million. Over 220 000 crypto wallets are now trading NFTs, and the number is still increasing due to the increasing public awareness.
We are going to look at the top four NFT blockchains and ecosystems.
1) Flow (FLOW)
Flow is a decentralized, developer-friendly NFT blockchain that independent of Ethereum. Flow was started by the developers of CryptoKitties because they were frustrated by the congestion on the Ethereum blockchain.
The FLOW token is the native cryptocurrency for the Flow blockchain. At the time of writing, FLOW had a market cap of $623,995,294.
2) Enjin Coin (ENJ)
An ecosystem for linked blockchain-based gaming assets and domains. Enjin allows developers to tokenize their games’ items on the Ethereum blockchain.
Enjin Coin was launched on Ethereum in 2018 and currently has a market capitalization of $551,151,495.
3) Decentraland (MANA)
Decentraland is a virtual reality world built on top of the Ethereum blockchain. In the Decentraland virtual reality, you can purchase virtual assets like land. Decentraland has two native tokens the MANA and the LAND tokens.
Decentraland has a live market capitalization of $397,757,753.
4) Wax (WAXP)
Wax is a blockchain built to make E-commerce much easier and safer for users. William Quigley and Jonathan Yantis created the WAX blockchain. At the time of writing, Wax has a market capitalization of $116,217,222.
A screenshot of the 7 leading NFTs & Collectibles Tokens by market capitalization from coinmarketcap.com.
An increasing number of celebrities and public figures are dabbling into the NFT crypto market. Lindsay Lohan recently sold her first NFT for $17,360 and it was later resold for over $50,000 (33 ETH).
Another celebrity active on the NFT market is Mike Shinoda, the co-founder of rap/rock band Linkin Park. Mike recently auctioned off an NFT music clip on Rarible and was later quoted saying he would not have earned as much as he had if he released the clip on traditional platforms like Soundcloud or Spotify.
Likewise, Dallas Mavericks owner, Mark Cuban has been vocal about his strong belief in Non-Fungible Tokens. The billionaire was quoted saying, “This generation knows that a smart contract and the digital good it reflects or a crypto asset are a better investment than old school see, touch or feel uses.”
These celebrities and others have brought an increasing awareness of NFTs to their fanbases and the public at large. The activities of these celebrities have to some extent helped NFTs reach a wider audience that could become potential traders.
Also, NFTs may have piggybacked a ride on the hype surrounding cryptocurrencies like Bitcoin which has a coin value of over $44 000 and a mark capitalization of around $843 billion.
NFT Use Cases
Besides their established use in gaming and art, NFTs have more use case potential that is left untapped. Examples of where the nature of NFTs can eliminate existing problems are plenty. All you need to do is to think outside the box.
Here are 4 NFT use cases:
Forgery and ticket hoarding to profit from price manipulation is a major concern for event managers. Using NFTs to sell tickets will eliminate these issues, as the blockchain can verify and authenticate each ticket token. They can be used in sports events, music events, bus/train passes, etc.
To monetize your time or skills, you can sell tokenized sessions or skills which can later be redeemed from you. A good example would be freelancing or live events.
Identification and Certification
NFTs can be used to prove authenticity and ownership. The unique and indivisible properties of NFTs can be used to register assets/information as certificates of authenticity and proof of ownership.
Domain Naming Services
Since domain names are unique digital assets, they can be tokenized. This means that you can use NFTs to represent domains. Blockchain domains are uncensorable and unblockable and can only be shut by the owner. This encourages a better and open web that is free from government or commercial censoring. Notable services currently selling crypto domains are Unstoppable Domains and Ethereum Name Service.
NFT Top Sales and Successes
NBA Top Shot, a blockchain-based card trading platform has over 100,000 active collectors and has made over $210 million in sales. An NFT clip of Lebron James dunking recently sold for over $200,000 on NBA Top Shot.
Mark Winklevoss AKA Beeple, a popular graphic artist, has made $3.5 million selling 20 artworks on an NFT marketplace. He has also consigned his NFT opus to be auctioned by Christie’s, a renowned auction house.
Christopher Torres, the creator of the popular meme Nyan Cat, earned around $590 000 after selling an NFT version of Nyan Cat. Torres said, “I’m very surprised with the success, but I think I’m most glad knowing that I’ve basically opened the door to a whole new meme economy in the crypto world”
There are a lot of people making huge profits using NFTs. Some are even making upwards of $100 000.
Future of NFTs
People are divided over the possibilities and reliability of NFTs. Many suspect that NFTs may just be another fade that will soon fizzle out like many others before; leaving investors with ornamental tokens. However, others like billionaire Mark Cuban think the future belongs to NFTs.
Regardless of what the future holds for NFTs, I hope you now know what are non-fungible tokens (NFTs). Furthermore, I believe you are now properly equipped to make your own decision on Non-Fungible Tokens.