8 min read
Introduction to NFTs: Understanding NFTs
A complete walkthrough on Non-Fungible-Tokens. This section will help you understand how NFTs work and how to start your journey into the NFT industry. Whether you are an investor or creator, this section will help you have an understanding of how NFTs work and how you could profit in the upcoming years as the technology matures. Part 1 of 3.
By: Khristian Flohr
They estimate the NFT market to reach $210 billion by 2030. We are living in the early stages of a digital revolution that will affect the upcoming society.
We will use straightforward terms and examples to explain how NFTs work for simplicity. The word ‘token’ might sound confusing at first, but we will break everything into simple terms.
*This is not financial advice. Please always do your research before investing in cryptocurrencies and NFTs.
What is an NFT?
In plain English, an NFT (short for Non-Fungible-Token) is a digital asset that lives on an encrypted network, known as a blockchain, that can be seen, accessed, and verified by anyone. An NFT can represent real-world items like artwork, real estate, and digital assets like a song, an image, a video clip, or a ticket to a concert. The possibilities are endless.
An NFT looks something like this: 0xbc4ca0eda7647a8ab7c2061c2e118a18a936f13d.
Not that impressed? In plain sight, NFTs may not seem that appealing at first sight. That’s why in most cases, they are ‘packaged’ with an image, a .jpeg, or we link them to a specific asset. Let’s break it down.
3 Features of an NFT:
- It represents an asset of value. An NFT can be linked to physical and digital assets. Some examples of physical assets are jewelry, real estate, artwork, and more. Some examples of digital assets are images, songs, event tickets, digital art, video game skins, trademarks, company stocks, and the list goes on. This outpost covered 10 practical uses of NFTs that will make will change society in the upcoming years.
- Proof of ownership. Using a block explorer (a public database), we can verify who the owner of a specific asset is (known as the 'token holder). While it won’t display the owner's exact first and last name, it will display the wallet id (similar to a unique username). It will also show all the history of that specific NFT, including the creation date, buy and sell history, price, and the original creator. Think about the receipt you get after buying a luxury watch, which shows the price, date of transaction, name of the buyer, name of the seller, and the value of the watch. The concept has remained the same, but now it's everything stored in a public secure network.
- It cannot be deleted, modified, or hacked. All NFTs live in a secure and encrypted network known as a blockchain. We won’t go into detail explaining what a blockchain is. You can follow this in-depth video that explains how blockchains work. For now, all you need to know is that a blockchain is a secure network with a public ledger with a list of transactions and assets that anyone can see and verify. It cannot be modified, altered, hacked, or deleted by individuals.
Fungible vs. Non-Fungible
The word Fungible might sound confusing at first. Another word I like to use to explain fungibility is ‘replacement.’ NFTs are used to represent assets that have unique characteristics.
Replaceable Assets: These are assets that can be easily replaced. Let’s say, for example, that you have two different 1-dollar bills. One might be new; the other one is slightly old. But that doesn’t matter. We can use them both for the same purpose. They have the same value. And they look the same. If you lose one of those bills, you can immediately replace it with a different one. In other words, it is a fungible asset.
Non-Replaceable Assets: Let's use the example of an event ticket. Let’s say you are going to a football match with your favorite sports team. You decide to go with a group of friends. The event is top-rated, and just before tickets are sold out, you and your friends decide to buy front-row tickets with assigned seats next to each other. When you receive your ticket, you notice that it includes unique details. It is customized with your name and seat number next to your friends, meaning there is only one exact ticket as yours. If you were to lose it, it would be impossible to replace it. Yes, you could buy a similar ticket, but you will not be seated next to your friends. In other words, that exact ticket is non-replaceable or non-fungible. That’s where NFTs become handy, as they are unique assets of value that cannot be replicated.
Non-Fungible-Tokens represent something unique. As the popularity of digital content rises, NFTs are becoming vastly popular with digital products such as e-tickets, access passes, digital art, memberships, video game skins, photography, songs, digital IDs, and the list goes on and on. In reality, NFTs are a tool that links physical and digital assets and serves as proof of ownership of that specific asset.
Here's the interesting part. In the upcoming years, NFTs will become widely adopted in society. Many users will not notice that when buying a digital asset (like a ticket to an event or a videogame skin), they would actually buy an NFT. The interesting part is that NFTs can be 'packaged' into a wide range of value assets.
But... What’s the Point?
NFTs sound a bit more interesting now, huh?! But... what's the point of owning an NFT? The answer: Utility.
UTILITY OF NFTs
The actual value of an asset relies on what that asset can be used for. In other words, the actual value of an NFT is directly linked to the benefit you get from owning it. Let’s look at these examples to explain utility.
Asset: Concert ticket. Utility: Access to venue and performance.
Asset: Netflix Membership. Utility: Access to entertainment content.
Asset: Gym Membership. Utility: Unlimited access to gym facilities.
Asset: Plane ticket. Utility: Access to board a plane and transport to the destination.
Utility is the main factor that determines the price of an asset. When analyzing NFTs, we need to consider how valuable the utility is. Since NFT technology is still at an early stage, speculation plays a significant role. Because of their future utility, many NFTs are being purchased at a high value. We have seen people paying millions for a single NFT simply because they believe the value will go up with time.
How are People Making Profits on NFT's?
There are sides two the coin. For this, I like to separate Investors and creators.
Investors: Buy Low, Sell High. Similar to investing in the stock market, the most common way of making a profit is by buying an NFT at a low price with the idea of selling it in the future at a higher price. Let’s use the example of the Bored Ape Yacht Club (BAYC), the largest NFT project. BAYC is a club limited to 10.000 memberships sold as tokens. In April 2021, BAYC announced the initial sale of its exclusive memberships. People paid $220 per membership (or 0.08 Ethereum). Each membership offered access to an entire community, a yacht party exclusively for members, and other benefits. By the end of that year, the price for the cheapest membership was USD 225,000. People who purchased that membership at the initial launch date made six-figure profits.
Creators: Royalties & Token Sales. If you are a creator, artist, business owner, or someone with an existing fanbase and community, NFTs might be an ideal tool to raise capital or fund a project. Creators use NFTs to raise money, giving value to investors in exchange. Let’s say, for example, that you own a Coffee shop in your local town. As a marketing strategy, you could release 1,000 NFTs to reward loyal customers. You would offer a powerful benefit, for example, lifetime coffee at a 50% discount for the NFT owners. In return, loyal fans would be interested in buying that NFT as it will give them something of value. If a customer decides to sell the NFT to another potential buyer in the future, you get a percentage of the sale every time it gets transferred to a new owner. This is referred to as NFT royalties, usually between 5 to 10%—creating passive income indefinitely. This is just one of many possible uses.
Many large corporations, including Instagram, Twitter, Reddit, and Starbucks, have seen the potential of NFTs. And are now being implemented. It’s just a matter of time before it reaches mainstream adoption. The beauty is that you don’t need to be a large institution to start. Many small individual creators and investors have profited from NFTs by raising large amounts of capital.
Where to Start?
The first step is to select which blockchain/network you want to buy your NFT. While dozens of blockchains support NFTs, here are the top three listed in order of popularity.
Ethereum. Pros: The most common layer for NFTs. Cons: Transaction fees are high compared to other networks.
Solana. Pros: Fast, instant, and zero transaction fees. Cons: Less popular. Higher risk.
Cardano. Pros: the third largest blockchain for NFTs. It is fast and reliable—cons: Very new and still considered a low number of options. Click here to learn more about Cardano NFTs!
Once you have selected your chain, you will need a Wallet to store your NFTs. In the next outpost, we will give you a step-by-step guide on creating your wallet and obtaining your first NFT through a marketplace.
Creating an NFT Wallet
To start, you will need to create an NFT wallet where you will keep all your assets secure. The wallet is your 'account' where all your cryptocurrencies and NFTs will be stored. In the next outpost, we will give you a walkthrough on how wallets work and how to keep them secure.
That’s all for this part! See you at the next one!
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