9 min read
NFT for Dummies: The Future of Digital Ownership and Authenticity
This guide on NFTs for dummies will help break down the basics. We'll start with an easy-to-understand example of a membership-based NFT and then explore the potential of NFTs. We'll also explain why people are willing to pay astronomical amounts for NFTs and how they profit. By the end of this article, you'll understand NFTs, how they work, and how you can get involved in this exciting new world. So, let's dive in!
By: Khristian Flohr
I have benefited dramatically from NFTs since I learned about them in mid-2021. Since my first purchase of NFTs, I've made more than I would have earned in a 9-5 job. I don't say this to brag or anything like that. This article aims to share a perspective towards NFTs that people often don't see or fail to understand. I hope to share a new perspective on NFTs and their massive potential without trying to sell you anything or make any money from it. It is estimated that the NFT market will be worth about USD 211 billion by 2030.
So, why should you care about NFTs? In this article, we'll explore the true potential of NFTs and how you could benefit from them in the upcoming years. But first, I'll break down the complex world of non-fungible tokens (NFTs) and present them in a way that's easy to understand.
Understanding NFTs (for Dummies)
Let's pretend this is your first time hearing about NFTs, so try to forget everything you have listened to about NFTs. Let's start with an empty mind. And we'll use a few examples that represent the potential of NFTs. We'll start with an example of membership-based NFTs simply because they are easy to understand, and most of us are familiar with clubs and memberships.
So, imagine you are keen to join a club with your friends. But to get in, you must buy a special membership card proving you're a club member. Now, let's say that instead of a physical membership card, the club has a unique digital card called an NFT. When you buy the NFT, you become a club member and can access all the cool things the club offers. But what makes the NFT special is that it's unique, similar to how each club membership card is unique. That means no one else has the same NFT as you do. It's like having a one-of-a-kind club membership! And because NFTs are stored on something called a blockchain, we can know for sure that your NFT is one-of-a-kind and that you own it. It's like having a special certificate that says, “This NFT is yours and nobody else.”
So, in short, an NFT is like a digital club membership card that proves you're a member of a special club. But unlike regular membership cards, NFTs are unique and can't be copied, and they're stored on a blockchain.
Where does the monetary value come from?
Let's assume you decided to buy a lifetime membership to the club in 2023, and you became one of the first 100 members. Because you were one of the earliest members, you earned the title of “founding member.” This means that your membership, or NFT in this case, is more valuable because it's rare and has a special status.
Now let's fast-forward some years in the future… It is the year 2030. It turns out that the club you joined has become a big success and is now very popular. But because they only allow a maximum of 500 members at a time, the club has closed its doors to new members unless a current member is willing to sell their membership. This is where the concept of scarcity comes in. Because there are only a limited number of memberships available (in this case, 500), and no new memberships are being supplied, the price of the existing memberships goes up because people anxiously want to become members and are willing to pay a high price for a membership. So if you, as a current membership owner, decide to sell your membership or NFT, you could ask for a higher price because your membership is rare, and the demand is high!
However, if you hold on to your NFT (membership) instead of selling it, the value may continue to increase with the years, similar to how the value of rare and collectible items can increase over time. In the NFT market, we have seen people paying over $1M just to become a member of exclusive NFT communities. That's how the majority of the people buying NFTs generate profits. People buy NFTs early, while at a low price, with the hope that the price will increase.
One real-life example of a membership base NFT is The Bored Ape Yacht Club. In 2021, a small group of friends created a club with 10,000 available memberships at a mint price (initial price) of $250 per membership. In 2022, the price of memberships reached USD $320,000!! People who bought multiple memberships on the release day and sold at its peak made a fortune in less than a year. Usually, people try to get early into NFT projects to make a profit as the value increases over time.
But wait! Did you say $300K per membership?? What kind of club is this?
The main reason why memberships go up in value is based directly on what the investors/NFT owners get in return. In other words, the benefits of owning a specific membership. In the NFT world, we refer to benefits as the 'utility' of an NFT. The utility is the main driver of value. A few examples of utilities/benefits can be exclusive access to events, community access, unique experiences, monetary rewards, etc., The utility represents how much value members get in return for owning a token from the NFT collection.
Now, back to the membership example. That 'club' can represent a company, a trust fund, a start-up, a business, a decentralized application, or any type of digital collectible like a song, an image, a piece of art, etc. In other words, NFTs can be adapted and used in a wide variety of ways.
Why can't we have normal memberships instead of NFTs?
The answer is simple: authenticity.
With the use of blockchain technology, we can securely and accurately verify who owns and created a specific NFT. The blockchain serves as a public ledger that anyone can access, and the most crucial feature of an NFT is its proof of ownership.
To illustrate this, let's consider the example of purchasing a car. When you buy a car, you receive a receipt or a certificate as proof of ownership. Similarly, an NFT serves as proof of ownership for a digital asset that can be instantly authenticated through the blockchain, so anyone can verify that you are the rightful owner.
While an NFT won't show your exact name, it will display your exact wallet ID. This unique identifier ensures that your NFT is one-of-a-kind and can't be replicated or forged. This means that the digital asset represented by the NFT is authentic and has a value that is recognized by a community of buyers and sellers. NFTs offer a level of security and trust that traditional memberships or ownership certificates just can't match.
NFTs provide a higher level of security and trust than traditional memberships or ownership certificates. Like memberships, NFTs can be applied to a wide number of use cases, including shares of a company, a song, art, contracts, tickets, etc. I recommend reading 10 Useful NFT Applications that Will Change Society in the Next 10 Years.
In the last couple of years, we have seen people making substantial amounts of profits, according to a recent study by Grand View Research, Inc. The NFT market size is expected to reach $211B by 2030.
So, the big question is…
How to Profit from NFTs?
There are two sides to the coin—the side of the creator and the side of an investor.
For an Investor: the idea is pretty straightforward. You could buy NFTs that you believe will gain value over time. Much like investing in traditional assets such as stocks or real estate, the idea is to purchase an NFT at a lower price and then sell it for a profit once its value increases. The actual skill here is to learn which NFT to buy. The ones with a strong utility (benefits) will be the ones that could appreciate and gain in value.
For a Creator: Here's where NFTs shine because the possibilities are vast. NFT technology is a tool that can be used in various ways. And are being adopted by creators of all professions. Below are a few examples of how any professional creator could incorporate NFTs.
Potential Use of NFTs by Profession
Overall, NFTs offer a new way for people to monetize their skills, expertise, and content in a digital form. These examples are just the tip of the iceberg, and as the NFT market continues to evolve, we can expect to see new and creative uses emerge across various fields and industries.
Revenue From Royalties
One of the most attractive features of NFTs is their ability to apply creator royalties through smart contracts! Here's an example I like to use to explain how creators generate revenue with NFTs through royalties.
Let's say you are a musician and want to release an NFT collection. You choose to sell 100 unique NFTs for $10 each and set the royalty rate at 10%. This means that every time one of those NFTs is sold or resold in the future, you will receive a 10% royalty on the sale price.
So, if someone buys one of your NFTs for $10, you get $1. And if that person later sells the NFT for $100, you will receive a 10% royalty fee of $10 on that sale. If the NFT is sold again in the future for a higher price, you will continue to receive a 10% royalty on all future sales forever. And it's also an excellent way for fans to support artists/creators, knowing that you'll receive a share of any future profits from the sale of the NFT.
Fractionalization of Assets
Fractionalization in NFTs allows multiple people to own a small part of a single NFT. Think of it like splitting a pizza between a group of friends. Each friend gets one slice of pizza. Similarly, with fractionalization, an NFT is divided into multiple tokens, and each token represents a share of the original NFT. This way, people who may not have been able to afford the entire NFT can still become owners and enjoy its benefits. Fractionalization can also be helpful for artists who want to raise money without giving up total ownership of their work. By offering fractionalized tokens, they can raise funds while retaining a portion of ownership and control over the artwork. In 2021, the treasured art piece by Banksy, Love is in the air, was fractionalized into 10,000 NFTs, allowing small art collectors to own an official piece of Banksy's art.
This can also be applied to Real Estate, company shares, and other high-valued tokenized assets.
I hope this article has given you a more profound understanding of NFTs and what's to come in the upcoming years. If you're new to NFTs, I encourage you to keep expanding your knowledge, as it's still early (and being early usually pays off). I recommend reading our article, which serves as a complement to this article. Join our Discord group for guidance on your NFT journey.
In an upcoming article, we'll show you how to create a wallet to start collecting and creating NFTs yourself. That's all for this week's outpost! Stay safe!
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