What are NFTs and how it works?

What are NFTs and how it works?

If you are a new-age curious investor who explores different investment options, NFTs may already have caught your attention. 

If you are fond of creative arts and already know about how crypto works, half the job of knowing an NFT is done.

In simple words, if you put digital artworks and the basics of cryptocurrency together, you will find a unique combo called NFT. For example, if you often go to art exhibitions to collect some great paintings, you can now do that digitally.

It means an artist can convert his/her painting into a digital form or NFT and sell it for a great price. Art collectors can bid on that piece, and the highest bidder will win its ownership.

One of the best things about this process is when a digital artwork has an NFT attached to it, you can be sure that it is 100 per cent original. It is because the underlying cryptographic technology will never allow a duplicate.

How NFTs are Making a Wave

In 2021, the global NFT market value was $11.3 billion, andit will likely reach $231 billion in 2030. 

Besides crypto investors, many celebrities are also jumping onto the NFT bandwagon keeping an eye on the future. Particularly, NFT artworks in the digital form are selling for millions of dollars. 

For example, digital artist Mike Winklemann, who has the alias name “Beeple” has created a composite of 5,000 drawings daily to create one of the most famous NFTs called “EVERYDAYS: The First 5000 Days.” At Christie’s auction, the drawings fetched a record-breaking $69.3 million!

Besides art, NFTs are trending in fantasy gaming, online casinos, music, fashion, and others.

Leading NFT marketplaces are OpenSea, NBA Top Shot Marketplace, Axie Marketplace, Larva Labs/Crypto Punks, SuperRare, and others. These marketplaces auction rare digital collectables.

What is NFT?

NFT stands for “Non-fungible token.” NFTs are cryptography-based digital assets that symbolize original physical items in digital forms, including art, gaming, music, pictures, and videos. 

NFTs are tokens developed through Blockchain technology with complex algorithms, and they carry unique identification codes, and they are immutable. It means NFTs cannot be altered or changed. Also, NFTs are not divisible.

Users need Ethereum (ETH) cryptocurrency for buying and selling NFTs.

Brief Background of NFT

In the past, coloured coins on the Bitcoin blockchain were the earlier forms of NFTs. Those coloured coins represented various assets, such as digital collectables, property, coupons, and subscriptions. However, their functionalities were limited and less effective than the present NFTs. 

Still, those first coins made way for today’s non-fungible tokens. 

In 2014, a peer-to-peer protocol-based platform was developed on the Bitcoin Blockchain, which led to the creation of current NFTs. 

In 2017, when Ethereum took off, NFTs began building on this cryptocurrency.

Types of NFT

Here are different types of NFTs, including:

  • Art

  • Fantasy gaming

  • GIFs

  • Online casinos

  • Music

  • Collectables

  • Fashion

  • Memes

Even tweets fetch millions. For example, Jack Dorsey (Twitter co-founder) sold his first tweet as NFT for over $2.9 million.

How do NFTs Work?

NFTs are built on a blockchain, which is a distributed public ledger that keeps records of transactions.

NFTs are typically developed on the Ethereum blockchain. 

An NFT is built or “minted” into a digital form that represents tangible as well as intangible items. However, when someone buys an NFT art or music, the individual will get a digital file instead of the physical one.

Buyers get exclusive ownership rights. It means there can only be one NFT owner at a time.

How NFTs are Different from Cryptocurrencies?

Non-fungible NFTs are different from fungible cryptocurrencies like Bitcoin.

A non-fungible token or NFT is built using similar programming as in cryptocurrencies like Bitcoin. Except for this, there is no similarity.

Cryptocurrencies are “fungible.” It means it is possible to trade or exchange with one another. 

Conversely, NFTs come with a digital signature, and it does not allow any exchange. 

Questions You Should Ask Before Investing in an NFT

If you are seriously thinking about investing in NFTs, here are a few questions you need to ask:

Does an NFT seem attractive due to its novelty today, or will there be any long-standing value? 

Will the NFT market live up to the hype in the future? 

Do the creators have a strong community that they have developed over a period? 

If the creator sold NFTs previously, did they perform well?

How to Buy NFTs

If you want to buy NFTs for collection, you need a few things first:

Get a digital wallet where you can store NFTs and cryptocurrencies. 

You need to buy cryptocurrency, preferably Ethereum. It also depends on the cryptocurrencies your NFT service provider accepts. You can buy cryptocurrencies from eToro, Coinbase, Kraken, and other platforms. 

Keep in mind the fees for NFT transactions. Crypto exchanges charge a certain percentage of your NFT transactions. Also, there is an NFT trading fee that NFT marketplaces charge as a “gas fee.”

Closing Words

If you are interested in NFTs, you can take the necessary steps to make sure that the NFT you choose is worth buying by checking the utility of the NFT project and the people behind it. 

Again, always keep high gas fees in mind. Buying an NFT using Ethereum (ETH) cryptocurrency will take up hefty gas fees that you will end up paying to make up for the power costs of computing.

Although you can surely make large profits from buying/selling NFTs, avoid the common mistakes many investors make. One of them is to buy fake NFTs. Cybercriminals are targeting the NFT industry and releasing many duplicate NFTs. 

You should be careful while choosing NFTs. Fake NFTs don’t list any unique properties, real NFTs do. Check the seller verification that will have a blue tick in the account. Also, review the contract address to find where an NFT is minted. Checking these areas will help you buy genuine NFTs.