What Is NFT And How Does It Works: A Detailed Guide 2021

Hands down, most of us spend more time on our smartphones these days. With the internet and social media, we often get glued to our mobile phones. Yes, almost all of us are present on all online and social media platforms in this digital era.

People are on the internet for entertainment purposes or to acquire knowledge. Also, they prefer staying connected with their family, friends, and the world digitally.

How many times do we share funny memes, infographics, entertaining videos, and other innovative ideas over the internet? Most of the time, we don’t even know who is the creator of such digital assets.

So, who is the owner of those creations, ideas, or digital properties? There comes the need for NFT. In 2017, the first Non-fungible token (NFT) was released as Crypto Punks on the American Studio Larva Lab’s Ethereum Blockchain. John Watkinson and Matt Hall were the pillars behind this project.

Shortly, another project named Crypto Kitties came into existence. It went viral almost after its launch. So, that is how it all started. It is a relatively new technology, but it gained popularity soon.

Now, let us discuss Non-Fungible Tokens (NFTs) in detail. Let us learn about creating NFTs, their characteristics, their benefits, risks, and their future.

What is an NFT?

A Non-Fungible Token (NFT) is a cryptographic token that often represents something unique that sets the item apart from others. It is a unit of data stored on a digital ledger called a blockchain that certifies a digital asset to be distinctive.

In simple words, A Non-Fungible Token (NFT) is a digital asset or a kind of digital certificate for owning any distinct goods or properties.

The digital asset can be anything right from paintings, videos, graphics, postcards, virtual real estate, and so on. However, you cannot replicate or equate NFTs with a similar asset as every NFT property is unique by itself. Though copies of these digital items are available for everyone, one can track NFTs on blockchains. Thus, it provides the owner with proof of ownership that is different from copyright.

Let us understand NFTs with an example. Consider you have a shopping gift card for JCPenney. Can you shop in Macy’s with a JCPenney card? Of course not. It is because both of them are not equal. The same concept goes with NFT. You cannot exchange tokens with similar products/services.

How Does An NFT Work?

A digital asset is way too different from owning a physical asset like a stamp or coin collection. Yes, every NFT holds noticeable data that makes it distinguishable from other NFTs. Thus, the authentication of the specific collectible becomes effortless.

NFTs are present on a blockchain, which is a distributed public ledger that records transactions. As most of us know, cryptocurrencies also work using the same blockchain technology.

  • User can create NFTs for any digital objects like:
  • Art
  • Videos
  • GIFs
  • Virtual avatars
  • Video games
  • Music

However, NFTs are not only limited to the above-listed items. Even tweets can have NFTs. Twitter co-founder Jack Dorsey sold his first-ever tweet as an NFT for around $2.9 million.

NFTs can have only one owner at a given time. Thus, people get exclusive ownership rights. For instance, a graphic designer can sign his/her work by including a signature in an NFTs metadata.

With NFTs, one can track the original item, and the legal user reserves all the rights. Even if there are two NFTs on a single platform, they are still not the same irrespective of the same qualities. Thus, you cannot exchange NFTs directly with anyone.

NFTs versus Cryptocurrencies

As we discussed, both NFTs and cryptocurrencies work using blockchain technology. Now, most of us will doubt whether they both are the same or different. However, the similarity ends with the technology. They both work differently in real-time.

Physical money and cryptocurrencies are fungible, which means you can trade them or exchange them for one another. Also, they are always equal in their values. One dollar is the same as another dollar. Likewise, one bitcoin equals another bitcoin.

Cryptocurrencies use blockchain technology for reliable transactions. NFTs use a digital signature that makes them non-fungible. Thus, every NFT is distinct, and you cannot exchange it for one another.

Purpose of NFTs

NFTs provide immense benefits to content creators, artists, and other professionals. Yes, they can now monetize their skills over the internet effortlessly. Creators need not rely on galleries, auction houses, or personnel to sell their art/work. Instead, they can directly trade their work to the consumers as an NFT.

NFTs also allows the creators to keep more profits, for that matter. Yes, artists can program in royalties for their creations. Thus, they will receive a few percentages of sales whenever the people sell their work to other people. It is not a one-time sale and a one-time profit. The creators can receive money for every single sale of their digital assets.

Generally, artists do not receive any benefits or claim any royalties after their first sale. Royalty is an impressive feature that creators can enjoy with NFTs. Thus, NFTs are gaining massive popularity among people these days.

How to Buy NFTs?

So, how to buy NFTs and enjoy their benefits? Let us discuss. You would need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You will need to purchase cryptocurrencies like Ether or others, based on your NFT provider’s demands.

Platforms like Coinbase, Kraken, and Robinhood offer crypto. Users can buy crypto from these platforms by using their credit cards. Thus, you can move the cryptos from the exchange to your digital wallet faster.

Before buying crypto, all users must look into the fees. Most exchanges charge transactional fees while you buy crypto from them.

So, now after setting and funding your digital wallet, you can start shopping NFTs. Here are a few of the popular NFT marketplaces:

  • OpeanSea.io: It is a peer-to-peer platform that sells digital items and collectibles. Users can create an account on it and start browsing NFT collections. Consumers can sort out pieces by sales volume to discover new artists.
  • Rarible.com: Rarible is another marketplace that allows artists and creators to issue and sell NFTs. The platform issues RARI tokens that enable users to assess features like fees and community rules.
  • Foundation.app: It is yet another platform to buy NFTs. Artists/creators must receive upvotes or an invitation from fellow creators to post their creations. It provides an exclusive community that boasts high-quality work.

Though creators worldwide use these platforms for creating NFTs, always make sure you do your research before buying. Some creators have fallen prey to fraudulent activities like listing and selling their work without even their permission.

Apart from that, the verification processes for creators and NFT listings vary from one platform to another. Thus, it is always safe to double-check the norms before investing in NFTs.

Benefits of NFTs

  • Exclusive Ownership Rights: Users can use NFTs to address not only digital assets but also physical properties. Creators often use NFTs for collectibles and gaming in the digital world. However, one can use NFTs for all unique items like houses, craftsmanship, cars, etc. NFTs will gain more popularity, and customers can use them to get special access for several occasions or for booking flight tickets.
  • Personalization: NFTs can offer customized details for your assets. Unlike fungible tokens or agreements which have partial data, NFTs hold all the information within themselves. Yes, NFTs contain all the necessary information like name, ownership, history of the token, and other relevant data. For instance, if an NFT represents a house, it will have all its necessary details. The NFT will have all the data right from the image of the house, its previous owners, the interior of the house, etc.
  • Secure Trade: Selling any physical or digital properties always involves the risk of fraud. However, with NFTs, the risk is minimal or almost nil because of blockchain technology. One can transfer the ownership of any property securely.

Risk Involved with NFTs

  • Valuation: NFTs carry a similar risk as other assets. Unlike blockchain asset tokenization trading cards or buying a physical property, NFTs are still an upcoming market. Thus, no one is sure about their demands in the future. If there is no demand for the NFT you bought, you may end up losing profits, or you cannot sell. However, you can create your NFT. But still, there is no guarantee that you will make a sale.
  • Storage: One can monitor and record NFT sales through blockchain technology, which describes ownership. In real-time, the system stores NFTs through market places and platforms like Open Sea or Rarible. Users cannot access the work if in case these platforms get shut by any chance. Thus, it is comparatively less secure than owning a physical art or game or other physical assets.
  • Regulation: As of now, there are not many regulations set for NFTs. Thus, you must be sure that you are purchasing a unique piece of work before investing in it. Apart from that, if regulators and administrators worry about any security issues, they may pose limitations on their platforms. That may again decrease the NFT market value.

Conclusion

Crypto industry experts predict that around 40% of new crypto users will use NFTs as an entry point. NFTs may continue to grow alongside the exponentially booming decentralized finance industry.

However, That doesn’t mean you need to invest them right away. Yes, just because you can afford it, you would not need to invest in NFTs. Since it is an upcoming industry, it does carry some risk and uncertainty. Thus, investing in NFTs is more of a personal decision.

Yes, if you have spare money, you can consider NFTs for additional income. Like any other investment, you need to play safe with NFTs by not disturbing your savings or other mandatory expenses.

You can start investing in small amounts in NFTs rather than putting in vast money. In that way, you can minimize your risk if the market value decreases or any mishappenings.

Like with any other investment, always do your research before investing in NFTs. Understand everything about NFTs and weigh their risks before investing in them. It is always wise to play safe than feel sorry.