A Non-Fungible Token or NFT, is a non-fungible token is a unique digital asset that represents ownership of a specific item, such as an artwork, music, video, or tweet. NFTs are created and kept track of on a blockchain, which provides a transparent and tamper-proof record of ownership and transaction history. They differentiate themselves from fungible assets like cryptocurrencies (e.g., Bitcoin), which are easily exchanged for another of equal value.
NFTs can be bought and sold on various online marketplaces, and their value can be influenced by factors such as the artist’s reputation, the item’s rarity, and the perceived cultural significance of the content. However, like any investment, the value of NFTs can be volatile, and buyers should be aware of the risks involved.
What do I get when I buy one?
There is no single answer to this question, as the contents and value of an NFT depend on what is being represented by the token. Generally speaking, though, when you buy an NFT, you are getting:
Ownership: of a unique digital asset. This could be anything from a piece of digital art, a video clip, an audio track, a virtual item in a game, or even a tweet. Unlike traditional digital files, where duplication is easy, NFT ownership is verified and recorded on the blockchain.
Proof of authenticity: The blockchain records the provenance and ownership history of the NFT, providing a certificate of authenticity. This can be particularly appealing for collectors and investors who value the originality and rarity of an item.
Rights: The terms and conditions linked to NFT ownership can vary widely. Some NFTs grant their owners the rights to use, display, or even profit from the underlying content. In other cases, the NFT may only represent ownership, with no additional rights provided. It’s essential to understand what rights come with the NFT before buying as your rights are often unclear.
The potential for appreciation or return on investment: While the value of NFTs isn’t guaranteed to go up, the allure of potential profits can drive demand and push prices higher – at least for a time. The willingness of other buyers to pay more for an NFT can make them speculative assets.
What rights do I have with NFTs?
It’s important to understand what parts of an NFT are being enforced. Some rights are being enforced by technology, while other may or may not be protected by law. Because NFTs currently have little to no legal precedent, purchasers should always be wary of what rights they’re actually being afforded and by what system they are being enforced by.
On the blockchain, ownership rights are enforced by cryptographic signatures. These signatures are analogous to a digital lock that only the key holder can activate. With NFTs, these signatures often protect a digital document that certifies one thing or another about the NFT. Digital certificates vary widely but the basic structure of the certificate is documented in ERC-721. ERC-721 provides the basic information needed to manage the certificate, such as who owns what within the NFT collection. This is what’s referred to by ownership.
Authenticity is captured on the blockchain, as it documents who transferred ownership and when. Blockchain records will indicate that the NFT came from the original minter who can identify themselves publicly.
However when it comes to rights, digital locks only apply to digital record keeping. For the legal side, most people are on their own, as it’s often unclear what legal rights are given to an NFT owner. NFTs will often lack which jurisdiction they are protected by, giving the owner little recourse for enforcement outside the digital world. This is often the crux of the confusion when it comes to NFTs. Most people incorrectly believe they are getting legal rights to the art or asset. But turns out, this is rarely the case.
As far as appreciation is concerned, this can apply to anything of value. However, the potential utility of NFTs and the concept of exclusivity often put NFTs in the light of investments. This is much like domain names during the dot-com bubble.
Why would I want to buy something that’s not enforceable?
While the legal protection of rights represented by NFTs may be ambiguous, some reasons why someone might still want to buy an NFT include:
Digital Ownership: The buyer may be interested in supporting the artist or creator, and owning the NFT could feel akin to owning a limited-edition physical copy of their work.
Participation in a Community: NFTs often create social and cultural communities around certain projects, artists, or digital assets. Purchasing an NFT can provide the buyer with access to exclusive events, opportunities, and discussions within these communities.
Portability of the Asset: Unlike physical collections, which can be difficult to transport, store, or display, digital assets represented by NFTs can be easily shared, sold, or displayed online. NFTs can also be divided among multiple owners, offering flexibility in how they are managed.
Financial Speculation: As with any asset, NFTs can be purchased with the hope of their value increasing in the future. With the high-profile sales of NFTs fetching significant sums, it’s not uncommon for people to see NFTs as a potential investment opportunity.
Supporting New Technology: Early adoption and investment in emerging technologies have often been lucrative. Some buyers might view NFTs as a cutting-edge development in the world of digital art and collectibles and wish to be part of its growth.
It’s essential to approach NFT purchases with an understanding of the associated risks, the lack of strong legal protection, and a balanced perspective on the potential appreciation of the NFT’s value.
What are the risks?
There are several risks associated with buying and selling NFTs, including:
Volatility in Value: The prices of NFTs can be highly volatile and are influenced by market sentiment, scarcity, and public opinion, not only the underlying asset. It’s possible to lose money if the market perception of the NFT changes or new similar assets flood the market.
Lack of Regulation and Legal Uncertainty: As NFTs are a relatively new phenomenon, the legal landscape surrounding them is still evolving. Issues like copyright and ownership are not yet completely settled, and the rights associated with NFTs may change as laws are adapted to the digital age.
Security and Privacy: NFTs and the blockchain technology they rely on are not completely immune to security threats. Hacks, scams, and technical issues can potentially compromise your NFT investment.
Environmental Concerns: The process of minting and trading NFTs can be energy-intensive due to the energy consumption of blockchains, especially for those using proof-of-work consensus algorithms such as Bitcoin. This raises concerns about the environmental impact, waste of resources, and potential contradiction with ethical and sustainability considerations.
Metadata rot: Depend on how the NFT is managed and stored, meta data associated with the asset such as its name, description, or the image itself may not be stored on the blockchain. If that data is removed, it could impact the value of the asset.
NFTs use too much power
The power consumption associated with NFTs depends on which blockchain they’re being issued on. So this is really less about NFTs and more about the blockchains themselves. For example, the Ethereum blockchain, one of the largest platforms for NFTs, has since moved to Proof of Stake mechanics, removing the necessity for power hungry systems. Like Ethereum today, there are also other blockchains that don’t require large amounts of power to function. Ultimately, this issue can largely be mitigated by only buying NFTs on a blockchain that doesn’t use proof-of-work to secure it.
How do you buy or sell an NFT?
Buying or selling a non-fungible token (NFT) involves the following steps:
Create an NFT wallet: To buy or sell NFTs, you’ll need a cryptocurrency wallet that supports the blockchain on which your chosen NFT is hosted. Popular wallets include MetaMask and Trust Wallet.
Purchase cryptocurrency: Most NFT marketplaces require you to buy and hold a specific cryptocurrency to participate. For instance, Ethereum (ether) is commonly used for NFTs on the Ethereum blockchain. You’ll need to purchase this cryptocurrency through a cryptocurrency exchange like Coinbase, Gemini, or Binance.
Choose an NFT marketplace: There are several platforms where you can buy and sell NFTs, including OpenSea, Rarible, SuperRare, Mintable, and Foundation. Make sure the marketplace you choose supports the NFT and blockchain you’re interested in.
Create an account: Sign up for an account on your chosen NFT marketplace using your email address and password. Some platforms may require additional verification.
Finding and bidding on or buying an NFT: Browse the marketplace for the type of NFT you’re interested in. You can usually filter results by platform, type of NFT, and price range. Once you’ve found an NFT you’d like to buy, you can place a bid or buy it outright, depending on the platform’s rules.
Confirm and pay: If you win an auction or buy an NFT immediately, you’ll be prompted to confirm and complete
How do you make an NFT?
The process of creating an NFT (non-fungible token) typically involves the following steps:
Create or select the digital asset: This can be an artwork, music, video, virtual item, tweet, or any other digital content that you want to tokenize as an NFT.
Choose a blockchain: Select the blockchain network on which you want to create and mint your NFT. Popular choices include Ethereum, Binance Smart Chain, and Flow. Each blockchain has its unique advantages and fees, so your choice may depend on factors like cost, speed, and the blockchain’s NFT ecosystem.
Choose a platform: You’ll need to find or develop an NFT platform, marketplace, or tool that supports the blockchain you’ve chosen. Some popular minting platforms include OpenSea, Rarible, Mintable, and SuperRare. You may need to create an account on the platform and connect your cryptocurrency wallet (e.g., MetaMask, Trust Wallet).
Add metadata: Metadata is the information about your digital asset, such as its name, description, and image. This data is typically stored on an off-chain platform like IPFS (InterPlanetary File System) to reduce the load on the blockchain.
Set up the token’s attributes: Depending on the platform and blockchain, you may be able to assign specific attributes to your NFT, such as rarity levels, provenance tracking, royalty percentages for future sales, or even custom actions like granting access to exclusive content or events.
Mint the NFT: Once you’ve prepared all the necessary information, you can mint your NFT on the platform. Minting is the process of creating the token and recording it on the blockchain. A transaction fee (gas fee) is typically required to complete this process.
List the NFT for sale or auction: After minting your NFT, you will need to list it for sale or auction on an NFT marketplace. You can choose to sell it on the same platform where you minted it or on a different platform that supports your chosen blockchain. Following the listing, potential buyers can view, bid on, or purchase your NFT.
Remember that creating an NFT comes with costs, such as gas fees and potential royalty fees, and may require some technical knowledge. Be sure to research the process and use reputable platforms to ensure a smooth experience.
If you’re not interested in buying or selling them, why should you care?
Given its popularity and utility, there’s a good chance NFTs will become pretty common place in the future. For example, even if it takes awhile for legal systems to decide on how to handle NFTs, the application of NFTs still have many viable applications:
Sports: NFTs can be used to verify the authenticity of digital sports memorabilia, such as digital video highlights, trading cards, or even virtual versions of game-worn jerseys. Fans could own unique collectibles that are tied to a specific event or athlete, granting access to exclusive content and experiences.
Virtual Reality (VR) and Augmented Reality (AR): NFTs can provide validation for virtual assets within VR and AR environments. These assets can range from virtual clothing and accessories to entire virtual properties. In these immersive digital worlds, NFTs can help create a sense of ownership and a true digital economy, with users being able to buy, sell, and trade unique virtual items.
Gaming: NFTs can be used to authenticate virtual goods and assets within online games. Players can collect, trade, and sell these digital assets, creating a different dynamic of ownership within the gaming world. NFTs can also enable gamers to monetize their in-game achievements, skins, or characters, allowing them to have real-world value.
Digital Identity: NFTs could play a role in the realm of digital identity and verified ownership. For example, educational credentials, citizenship documents, or professional licenses could be tokenized and securely stored as NFTs on a blockchain. This could streamline the process of authentication and verification while minimizing the risk of fraudulent activities.
Charity and Philanthropy: NFTs can be used as a crowdfunding tool for charities and non-profit organizations. Donors can contribute by purchasing NFTs representing a specific cause, and the NFTs can be used to promote awareness, demonstrate support for a cause, or even grant the owner special access to events or experiences. Furthermore, NFTs can help track donations, contributions, and their impact, ensuring transparency and traceability in the allocation of funds.
These applications demonstrate the potential of NFTs to become an integral part of various industries and sectors, and as the technology evolves, we can expect to see more novel use cases and applications. Consequently, understanding and staying updated on the developments in the NFT space can be valuable, even if you are not directly involved in buying or selling NFTs.