NFTs Explained! Beginner’s Guide to Non-fungible Tokens

In Brief

• NFTs are unique digital tokens that are backed by the blockchain and cannot be duplicated.
• NFTs represent real-world items, including digital collectibles, music, artwork, event tickets, domain names, in-game tokens, and even ownership records for physical assets.
• NFTs allow these real-world assets to be bought, sold, and traded.

Image credits: CNBC

Did you know a JPG file has been auctioned for a whopping $69 million? Yes, you read it right! $69 million for a digital image file made by digital artist Mike Winkelmann aka Beeple, became the third-highest purchased artwork after Jeff Koons and David Hockney. But what is so special about this JPG file, and what is NFT?

What are Non-fungible tokens or NFTs? 

NFT is a unique digital certificate attached to any digital asset, be it art, music, or video, confirming its ownership to the holder, which remains public and stored on computers across the internet. When this is combined with the cryptocurrency, backed by a digital ledger platform called blockchain, the result is non-fungible tokens. NFTs are non-fungible tokens, have no standard value like money, and instead have a unique value. An original digital artwork, for instance, would be non-fungible objects.

Why are NFTs worth millions of dollars?

Each and every NFT is different and unique as they are characterized by their unique qualities and authenticity. These digital tokens cannot be duplicated. Authenticity plays a crucial role in the rise of NFTs. The tokens are easily verifiable and can always be followed back to the original creator.

How do NFTs work?

When you send bitcoin to someone via blockchain, a ledger entry gets made. In the case of NFT, a ledger entry is created, which contains an address to the file to establish ownership of that NFT. When someone transfers one token to someone else, the token code also gets transferred to another person. This process makes it easy to check on the blockchain who owns the NFT. Like Bitcoin, NFTs contain ownership details for easy identification and transfer between token holders. Owners can add metadata or attributes pertaining to the asset in NFTs. Our blockchain development service is a one-stop solution to create NFTs representing digital or physical artwork on a blockchain.

Earlier, when you buy pieces of offline art, you have to either custody it or keep it somewhere; that’s how the ownership is decided. But now, they can also be tokenized where a digital form of that art exists and whoever owns that token owns the actual art.

NFTs are individual tokens with extra information stored in them. That additional information is the critical part, which allows them to take the form of art, music, video in the format of JPG, MP3s, videos, GIFs, and more. Because they hold value, they can be bought and sold just like other types of art – and, like with physical art, the value is primarily set by the market and by demand.

Dogecoin isn’t an NFT. But this GIF of a dogecoin is. GIF credits: NyanCat on OpenSea

How are NFTs used?

NFTs are being used as a means to sell exclusive items online and have the potential to be used to verify anything that would have value in proving ownership, such as original artworks, music, collectibles, domain names, even tweets can be sold as NFTs. For example, Twitter co-founder Jack Dorsey auctioned his first tweet in March 2021 for $2.5 million, converting the proceeds to Bitcoin and donating them to charity.

Although digital items and collectibles are one of a kind, there is also value in items that might have multiple copies, such as sports trading cards. If you want to know more about sports trading cards and NFTs, register for the online event for free here.

NFTs through the lens of visionaries and thought leaders

Wrapping one’s head around NFTs can be enough of a challenge. As digital natives, we see this new technology really has its way of flipping our whole way of seeing things.

Creators, especially digital artists, have always struggled with copyright and plagiarism of their work. In the world of digital, it just takes a few clicks to make a copy of the media without having to compensate the creator.  NFT solves this problem by acting as a virtual certificate of authenticity that ties original artwork with the token thereby providing unique status and because this token exists on the blockchain, it allows us to verify the authenticity on a public network.

However, there are concerns about NFTs skyrocketing value being a fragile speculative bubble that could crash at any moment, bringing down the investors with it.

Even Beeple, an artist who recently sold his art for nearly $70 million using this technology said– “The cryptocurrency art boom involving non-fungible tokens (NFTs) is an “irrational exuberance bubble”.

Seth Godin, in his recent blog on why he thinks NFTs are a dangerous trap, said,” The trap, then, is that creators can get hooked on creating these. Buyers with a sunk cost get hooked on making the prices go up, unable to walk away. And so creators and buyers are then hooked in a cycle, with all of us up paying the lifetime of costs associated with an unregulated system that consumes vast amounts of precious energy for no other purpose than to create some scarce digital tokens.”

Investor Gary Vaynerchuk said, “NFTs are like the dot com bubble. A lot of people talked about the internet being a fad. In reality, the internet was this game-changing revolution of technology, but a lot of the early projects were just overpriced on the excitement.”

According to Mason Nystrom, a research analyst at Messari said that the NFT sector is caught up in massive amounts of hype right now and that as a result, a significant portion of NFT is likely to fall in price at some point. Nonetheless, even with the present risk being relatively high, he expects the market to stabilize in the longer term.

Is investing in NFTs worth it?

The most apparent benefit of NFTs is market efficiency. Investing in NFTs has a lot of potential, growth, and relatively high risk. Since NFTs can’t be duplicated, it creates scarcity for the asset hence value for it. The conversion of a physical asset into a digital asset opens up many opportunities for artists and investors. Physical assets like real estate, collectibles are much easier to divide a digital asset among multiple owners than a physical one, making it one of the best NFTs investments. Some of the most popular NFT marketplaces to get you going are SuperRare, Makersplace, Rarible, and Zora.

However, in any case, if you plan to invest in NFTs, you’ll need to dive deep into the complex world; you’ll need to think strategically, and you’ll have to do your homework.