Blockchain

Basics of Non-Fungible Tokens

By Single Broker Academy

NFT is a household name even for those who are not familiar with the digital world. Non-fungible tokens are represented by anything that can be digitized and sold, sometimes for millions of dollars. However, it's still unclear what they are and whether their value is real or a new bubble that will soon explode. We don't promise to predict the future of the NFT, but we will consider its theoretical background.

NFT: What It Is

Although you may already know what an NFT is, we should start with a definition. NFTs, or non-fungible tokens, are unique digital indivisible tokens powered by a smart contract and built on a blockchain that is used to represent unique tangible and intangible items. NFT can be reflected in various objects: a piece of art, a song, a tweet, a video, a pair of shoes, real estate, etc.

NFT and Cryptocurrency: Where the Difference Lies

Non-fungible tokens and cryptocurrencies are built on blockchain. They both can be called digital assets. What is the difference then?

Cryptocurrencies, the same as fiat money, are fungible. It means that 1 Bitcoin can always be exchanged for another 1 Bitcoin, and 1 USD equals another 1 USD. As cryptos are fungible, it enables them to be a trusted means of conducting blockchain transactions.

At the same time, the uniqueness of the object the token reflects makes it non-fungible. A non-fungible token doesn't have an equal token. An NFT has a digital signature that makes the NFT unexchangeable. A picture can't be exchanged for another picture as they have different values.  

Where NFTs Appear

NFTs are built on blockchain, mainly on Ethereum. An NFT has a single owner at any given time. No one can change the ownership, as with cryptocurrency, unless the NFT is sold again.

NFT ownership is managed through unreplicated ID and metadata. Smart contracts are used to mint NFTs, assign ownership, and manage NFT transferability. When creating an NFT, a user executes code stored in smart contracts that conform to various standards, for instance, ERC-721. The information is added to the blockchain. As a result, the record of ownership is available for anyone from anywhere in the world.

Steps of minting:

How to Confirm Ownership when Buying an NFT

NFTs can be bought on various platforms that don't differ much in regards to the process of registration and purchase. A vital thing you should understand is that ownership of an NFT doesn't provide ownership of the actual asset. Thus, the point of NFT's ownership is still a challenge.

Although an NFT and a cryptocurrency are different, the process of proving you are the owner of an NFT is similar to confirming you own the BTC in your account. When you buy an NFT, the ownership of the token is transferred to your wallet via a public address. This token is proof that the copy of the digital file is the original. A private key proves ownership of this original. The public key of a content creator is a certificate of authenticity for this digital ‘masterpiece.’ This public key reflects who created the token you hold, contributing to its market value.

It's also possible to confirm ownership by signing a message to prove your possession of the private key behind the address without disclosing it to anybody, thus proving the NFT is yours.

How to Sell NFTs as a Creator

If you decide to create an NFT, you can easily sell it on an NFT market or peer-to-peer. As the NFT market is close to the cryptocurrency one, you don't need an intermediary to perform a transaction.

When talking about the creation of NFTs, two key terms arise. They are scarcity and royalties. A creator determines the scarcity of the asset. If we talk about something tangible, you  organize a concert, for instance; you can decide how many people can attend the event. As for NFTs, you can decide how many replicas there are. It's possible to create exact replicas, replicas with slight differences (like a ticket with a certain seat reservation), or even a single unique collectible. In any case, every NFT will have a unique identifier.

One of the key advantages of the NFT concept is that a creator can get a percentage every time their NFT is sold. It makes NFTs different from tangible artworks. To get a percentage, creators don't have to do anything; royalties are paid automatically. Although it's not a rule but an option, it is becoming more and more popular.  

Why NFT Was Created

There are several reasons why NFTs exist.  

Easier Monetization

NFTs made the monetization of artworks much easier. Instead of working with galleries or auction houses, artists can digitize their work and sell it directly, gaining a larger profit. What's more, artists can get an additional sales percentage when their item is sold next time. This is possible if they program in royalties. As for real-world objects, it's impossible to get a percentage in case of future sales.  

NFTs are used not only to sell art items but various objects, even to raise funds for charity. Lots of celebrities turned to NFTs to create unique artwork and moments in the form of securitized NFTs.

Gaming

The first NFTs appeared in 2017. That time, the CryptoKittens game presented tokens that enabled players to own virtual kittens. NFTs can be used to record ownership for in-game items, fuel in-game economies, and provide player's benefits.

Easier Ethereum Addresses  

NFTs are used by the Ethereum Name Service (ENS) to create more memorable Ethereum addresses like mywallet.eth instead of a row of numbers. It's also possible to trade ENS names on an NFT platform.

ENS names can:

NFT Features

NFT is digitally unique. You can find an infinite number of copies of mp3 or jpg files on the internet. However, there is no opportunity to copy a non-fungible token. Hypothetically, a supply shortage leads to the value increase of a given asset.  

Why NFTs Are So Expensive

Although NFTs are digital tokens, they represent objects that already exist somewhere. For instance, sports games can be found in a video format on various websites, digital versions of art can be seen on Instagram, for example. When you hear the news that Jack Dorsey, a co-founder of Twitter, sold his first-ever tweet as a non-fungible token for over $2.9 million, you may be shocked. So, if anyone can see videos and pictures online for free, what is the point of spending millions of dollars on something that can be viewed and even downloaded anyway?

Reason #1

The first reason that can explain the high price of NFTs is a professional interest. There is a society of collectors who spend thousands or even millions on paintings, sculptures, etc. As for NFTs, these items are intangible. However, the market already exists, and demand determines an NFTs' value.  

Reason #2

The second reason is connected with the first - the interest of tech-savvy individuals who saw a skyrocket in the cryptocurrency market. The NFT market has surged much faster, and its rise may continue.  

Reason #3

The third reason is NFT uniqueness. The novelty of NFT items attracts artists, content creators, celebrities, and anyone related to the digital world.

How to Purchase an NFT

NFTs can only be purchased and sold online. They are generally bought with cryptocurrency.  

To purchase an NFT, you need to go through several steps:

  1. Get a digital wallet to store non-fungible tokens and cryptocurrencies.
  2. To buy an NFT, you should purchase some cryptos in advance and keep them in your wallet.
  3. As soon as these two steps are passed, you can choose a platform for NFT purchase.  

Here is a list of the platforms that allow buying not only items with a six-figure price tag but also affordable ones:

Wrapping Up

Many people thought the popularity of NFTs would disappear as fast as the hype over Clubhouse, which contributed to the rising interest in NFTs with numerous discussions held by crypto enthusiasts. However, the NFT market keeps growing. It doesn't seem NFTs will disappear any time soon; still, there is no assurance they will become a usual practice in the near future either.