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Non-Fungible Token (NFT) Definition
Non-fungible tokens (NFTs) seem to have exploded out of the blue in 2021. Some of these digital assets are selling for millions of dollars now.
The question is – are NFTs worth the money and all the hype?
Some experts say NFTs are a bubble like dotcoms in 1999. But others believe NFTs are here to stay for a while, changing the way we invest and becoming the basic tool for the upcoming metaverses.
What Is A Non-fungible Token NFT?
An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, mostly with cryptocurrency, and they are generally based on blockchain and encoded with the same software as many cryptos.
First NFTs were developed back in 2014, but were out of sight until 2021. And since then they are becoming an increasingly popular way to buy and sell digital artwork.
NFTs are also generally one of a kind, or at least one of a very limited run, and have unique identifying codes.
NFTs are the way to prohibit copying of digital assets, thus creating digital scarcity.
Many NFTs, at least in these early days, have been digital creations that already exist in some form elsewhere.
It is now common to create NFTs from iconic video clips, popular photos and songs. Some of them are sold by famous auctions for enormous amounts of money.
Why Buy NFTs If You Can Watch Them Online And Make Screenshots?
Yes, mostly it is possible to make screenshots or records of any NFTs. So why are people willing to buy the non-fungible tokens?
The answer is very simple.
Because an NFT allows the buyer to own the original item. Being built on a blockchain, each and every NFT contains authentication, which serves as proof of ownership. To some collectors the rights are almost as important as the object of the ownership itself.
What Is The Difference Between NFTs and Cryptocurrencies?
The similarity between NFT and cryptocurrency is obvious. They are both based on the blockchain. Often, crypto and NFTs even use the same blockchain. Many NFTs are based on the Ethereum blockchain, for instance.
But that’s where the similarity ends.
Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another. They’re also equal in value.
One dollar is always worth another dollar. The same is correct for crypto as one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain.
NFTs are different.
Each NFT has a digital signature that makes it unique.
It is impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible).
How Does an NFT Work?
NFTs exist on a blockchain, which is a distributed public ledger that records transactions. Blockchain is also capable of holding records of any data through multiple copies.
Many nodes validate every blockchain record so the information is stored securely and it is almost impossible to somehow corrupt it.
When someone creates an NFT (the process is called minting) the objects of art become unique. And blockchain holds records of them owned by somebody.
Essentially a non-fungible token transforms a digital work of art and other collectibles into a one-of-a-kind, verifiable digital asset that can be traded on the NFT market or NFT blockchain technology. Many NFTs come with their own unique information, including ownership and transaction details stored under its smart contract. NFT creators can also add details to their NFTs such as the creator’s identity, secure links to files, and more during transactions,
Those interested in collecting or investing in non-fungible tokens need a digital NFT wallet. A digital wallet is a cryptocurrency wallet that supports the blockchain protocol on which NFTs are built. Users often use Bitcoin, Ethereum network, and Dogecoin as cryptocurrencies which are the medium of exchange.
NFT vs Cryptocurrency
Cryptocurrencies as digital versions of physical money that are controlled by a private cryptographic key that often involves a string of random numbers. Like paper money, cryptocurrencies offer the same values and help to fuel the digital economy acting as currency. Ownership of cryptocurrency is determined by holding a private key and using the private key to make transfers. Cryptocurrencies helps in converting a digital file into a non-fungible token referred to as ‘minting’ as well as act as the medium of transaction for NFTs.
Similar to cryptocurrencies, NFTs are issued on blockchains, Each NFT comes with its unique digital signature which allows owners to prove ownership as well as the authenticity of the NFTs.
What Objects Can Be Minted as NFTs?
Lots of different things actually.
- Videos of any kind
- Virtual avatars and video game skins
- Designer sneakers
- Post in Social networks, like tweets
Essentially, NFTs are much like physical collector’s items, only digital.
When you buy a painting that is minted as NFT, you get a digital file instead of an actual painting.
Basically, owning NFT means owning exclusive ownership rights.
Each NFT can have only one owner at a time.
NFTs’ unique data makes it easy to verify their ownership and transfer tokens between owners.
The owner or creator can also store specific information inside them. For instance, artists can sign their artwork by including their signature in an NFT’s metadata.
What Are NFTs Used For?
Blockchain technology and NFTs afford artists and content creators a unique opportunity to monetize their products and creations.
Artists no longer have to rely on galleries or auction houses to sell their art.
Instead, they can sell it directly to the consumer as an NFT, which also lets them keep more of the profits.
In addition, artists can program in royalties so they’ll receive a percentage of sales whenever their art is sold to a new owner. This is an attractive feature as artists generally do not receive future proceeds after their art is first sold.
How to Buy NFTs
Buying NFTs is quite a simple process that doesn’t require any special knowledge.
You need to get a digital wallet that allows you to store NFTs and cryptocurrencies.
Then you have to get some crypto in your wallet. It should be one of the popular ones, like BTC or ETC. Or any other that the NFT marketplace accepts.
The easiest way to combine these steps would be to register on one of the biggest crypto trading services or crypto exchanges. They usually allow you to get a wallet for all kinds of crypto and buy any currency with fiat money from your credit card. Also these services usually give you an opportunity to hold NFTs.
Of course, exchanges always charge some fees for transactions, so you can always search for the most acceptable options for you.
Popular NFT Marketplaces
There’s no shortage of NFT sites to shop.
Here is the list of the largest NFT marketplaces:
- OpenSea.io. This peer-to-peer platform bills itself a purveyor of “rare digital items and collectibles.” To get started, all you need to do is create an account to browse NFT collections. You can also sort pieces by sales volume to discover new artists.
- Rarible. Similar to OpenSea, Rarible is a democratic, open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform enable holders to weigh in on features like fees and community rules.
- Foundation. Here, artists must receive “upvotes” or an invitation from fellow creators to post their art. The community’s exclusivity and cost of entry—artists must also purchase “gas” to mint NFTs—means it may boast higher-caliber artwork.
For instance, Nyan Cat creator Chris Torres sold the NFT on the Foundation platform. It may also mean higher prices — not necessarily a bad thing for artists and collectors seeking to capitalize, assuming the demand for NFTs remains at current levels, or even increases over time.
Can I Be Fooled When Buying NFTs?
Yes, of course.
But the fraud isn’t likely to happen because of the blockchain issues.
Fraudsters usually try to fool people using illegal impersonations of famous artists. Be sure to carefully check what you are buying, before you pay for the NFT.
Should You Buy NFTs?
Well, the answer depends on why you want to buy NFTs?
Is it because of the hype? Or are you an investor eager to try something new?
Of course, NFTs are risky. One year ago nobody knew what NFTs are, and now many people are ready to pay millions of dollars for them.
We don’t have a lot of history to judge their performance as investitions.
May experienced investors still avoid from buying many NFTs, because they aren’t sure what happens when the hype goes down.
But keep in mind, an NFT’s value is based entirely on what someone else is willing to pay for it. Therefore, demand will drive the price rather than fundamental, technical or economic indicators, which typically influence stock prices and at least generally form the basis for investor demand.
You shouldn’t forget, an NFT may resell for less than you paid for it. Or you may not be able to resell it at all if no one wants it.
NFTs are also subject to capital gains taxes—just like when you sell stocks at a profit. Since they’re considered collectibles, however, they may not receive the preferential long-term capital gains rates stocks do and may even be taxed at a higher collectibles tax rate, though the IRS has not yet ruled what NFTs are considered for tax purposes. Bear in mind, the cryptocurrencies used to purchase the NFT may also be taxed if they’ve increased in value since you bought them, meaning you may want to check in with a tax professional when considering adding NFTs to your portfolio.
How Does Non-fungible tokens work?
The token is generated and stored on a blockchain network (like Ethereum). Every NFT has encoded record of its ownership.
What is the Difference Between Fungible and Non-fungible Tokens?
Fungible tokens are interchangeable. One bitcoin always equals another bitcoin. Non-fungible tokens are absolutely unique.
Are Non-Fungible Tokens Safe?
Non-fungible tokens, which use blockchain technology just like cryptocurrency, are generally secure. The distributed nature of blockchains makes NFTs difficult to hack. One security risk for NFTs is that you could lose access to your non-fungible token if the platform hosting the NFT goes out of business.
How Do I Buy NFT Tokens?
You can use any of the popular NFT marketplaces to choose and buy NFTs with cryptocurrencies. Your NFTs will belong to you only.
How to Make an NFT?
There are plenty of services that provide the means to mint NFTs.
How to Create an NFT?
You have to register on a website that allows NFT minting, attach your cryptowallet and decide what kind of NFT do you want to create.
How to Invest in NFT?
The only way to invest in NFT is to buy some digital assets you believe might be sold in the future for more money. You should consider the risks though.