What is NFT?
NFT abbreviation stands for a non-fungible token which means it is one of a kind token and it can’t be replaced or exchanged with something else. What does it actually mean?
Something is fungible when it can be replaced by an item that has the same or identical value; best examples are currencies: 1 USD is always equal to 1 USD or 100 USD holds the same value as 10 USD bills.
Non-fungible means that item is unique, one of a kind.
Let’s take a brand new BMW model for example – when it’s new and unused it’s fungible because it is one of many factory mass-produced models, but when you buy it and use it for some time it becomes non-fungible. Why? Because you will customize it and use it every day making it unique. You won’t be able to replace it with the same car – the model can stay the same but it will be two completely different cars because of the miles, repairs and customizations done on them.
NFT tokens are usually seen as one type of cryptocurrency but that is not entirely true. It is a digital, virtual asset that is made using cryptocurrency as its base and implemented using blockchain technology. They are mostly stored on Ethereum blockchain, because of Ethereum’s ERC-721 standard, which allows for each token to be encoded with a unique set of data making it non-fungible:
- data about the asset
- data about copyright’s holder (creator)
- user rights data
- data about purchase and future trading of the token
- Royalty fees (not always) may be encoded. Every time NFT is traded, the creator will get a cut of the sale.
Simply said, NFTs are like digital certificates of the asset containing all the metadata needed for the trade/transaction.
Since they are stored on blockchain and blockchain acts like a main general ledger for every transaction (with all the information regarding the transaction), NFT can be explained as a subledger inside the main one.
NFTs can be anything digital (photo, audio, video etc) but they are not actually digital media only its representation. Digital media is not stored on blockchain (for now) because it is very expensive and energy consuming. What are you getting with the purchase? A token containing URL for a gif, photo, video stored on some website or app.
There are attempts to tie NFTs with physical, real-world assets, and if that happens it will open many possibilities with purchasing or owning real estates, cars etc, because it will erase intermediaries usually needed in such transactions. More advanced standards of smart contracts will be necessary for it to happen. But, the best attempt for now may be Nike’s CryptoKicks – with the purchase of the physical sneaker buyer gets NFT as a sort of verification of the authenticity.
Production and marketplace
Process of creating a new NFT is called minting. As said before, anything digital can be transformed into NFT. How? Fairly easy, everything needed is a digital wallet stored on Ethereum blockchain, a platform that acts as a NFT factory and file(s) out of which NFT will be created and that’s all the magic.
Depending on the platform, NFT can be minted right away and in that case gas fees will also be charged right away, or there are platforms where NFT is minted when there is a buyer.
Some of the most popular marketplaces and NFT “factories”:
OpenSea – One of the oldest marketplaces launched in 2017. It’s also the largest and the most active one today. The base crypto exchanges are ETH, Solana and USDC. Users can trade and mint any type of NFTs. Most importantly, it’s beginner friendly.
Rarible – Allows its users to create, store, buy and sell NFTs, art, collectibles, video game assets. The base crypto exchanges are ETH, Flow and Tezos but users can use fiat currencies. Interesting fact about Rarible is that its management is based on decentralization, not in-house management.
NBA TopShot – Marketplace for buying NFTs of the greatest moment in basketball history. It is founded by The NBA and they hold the exclusive rights. Cryptocurrencies used are Bitcoin, ETH, DAI, USDC but it supports fiat currencies.
Nifty Gateway – Nifty is specialized in selling artwork NFTs but only ones tied to celebrities and popular artists. You may say it is an exclusive marketplace.
SuperRare – Somehow similar to Nifty, SuperRare is like a high-end marketplace specialized in high-end NFTs. Only quality NFTs are chosen after a long reviewing period. It does not accept “meme NFTs” , only high quality artwork.
NFT – negative and positive sides
Everything new comes with a cloud of doubt and a vagon of people who are trying to scam others. NFTs may be all the buzz but not everyone knows what they really are and how they work.
All the buzz and hype around NFTs revolves around possibilities they give to the artists and creators. NFTs connection with blockchain allows artists and creators to actually earn money with the selling, because it removes intermediaries. Also, with Etherium’s ERC-721 standard and possibility of encoding Royal fees in the NFT – creator will earn commision everytime NFT is reselled. This is an interesting and attractive feature of NFT.
Thing that always pops up when NFT is the theme of the conversation is in the digital form of the token itself. Why pay for something that you can just download with the right click?
Remember when we said that every token is encoded with a unique set of data that makes it non-fungible? Inside those data is built-in authentication that makes it impossible to sell NFT copies as the real thing. Yet, the original NFT and its copied versions are digitally the same down to the last pixel. So why all the hype? Because you are buying the status. Sounds ridiculous, right, but it is the truth. Let’s say you collect baseball cards and you have or buy one with the original, handwritten signature of the player. No matter how many copies are made you are the owner of the original, unique, one of a kind card. Same is with NFT.
Because they are new, NFTs can be used to scam people. Before buying any NFT, be sure to do your homework. Get yourself familiar with the mechanism, explore which marketplaces are the safest regarding customer’s rights, make sure you get the exclusive rights otherwise the creator can mint an infinite number of the same NFT making it less valuable.
But, if we take a step back from the art frenzy, NFTs are an interesting technology with lots of potential. Maybe one day we’ll be able to buy stocks, cars or real estates and use NFT as a proof of ownership? Maybe they can be the way our passports or any ID will be made? Possibilities are endless if you think about it and it’s all thanks to the blockchain – to modify or steal something on the blockchain is nearly impossible. For that to happen smart contracts would have to be even more advanced, but even now NFTs can be used as a collateral in a DeFi loan. See? Endless possibilities make NFT worthy of keeping one eye on it.