What Are NFTs and How Do They Work?
November 25, 2021
What is an NFT?
NFT or a non-fungible token is a special kind of crypto asset. Unlike a “fungible” asset like a dollar bill (or Bitcoin), each worth the same amount, every NFT token is unique. It is for the same reason NFTs are used to authenticate ownership of digital assets. These can include anything from artworks and recordings to virtual real estate and pets.
For example, a ten-second short video by an artist named Beeple sold online for $6.6 million in February this year. At the same time, Christie’s announced to sell a collage consisting of 5000 digital works by an artist named Mike Winkelmann based in Wisconsin. It was eventually sold on March 11 for $69 million after being put up for a virtual auction block with a starting price of $100. Another fact which fascinated the observers apart from the exorbitant prices was that collectors who bought Beeples did not receive any physical manifestation of the artwork or even a framed print in exchange for their money. However, they did get an increasingly popular crypto asset NFT (non-fungible token). A unique NFT got paired with each Beeple, attesting that each owner’s versions were real ones. Christie’s contemporary art specialist Noah Davis shared that they had more than a hundred bids from 21 bidders and were already at a million dollars in the first 10 minutes of the bidding.
Why are NFTs important?
NFTs are like authentication certificates for digital artefacts that are currently getting used to sell a wide range of virtual collectables like
• NBA virtual trading cards • Video arts by Grimes • Music and video clips from EDM stars like Deadmau5 • Virtual real estates • The original “Nyan cat” meme
After Bitcoin and other cryptocurrencies blew up, NFTs soared as well, growing to about $338 million in 2020. Their primary advantage is that they get stored on an open blockchain, and anyone can easily track them during creation or sale. And given that NFTs use smart-contract technology, they get used by original artists to continue earning a percentage of their subsequent sales. However, non-fungible tokens have also raised some interesting questions regarding the nature of their ownership. For example, why do digital artefacts that can be copied and pasted endlessly have value at all? The theory is that the majority of collectables are not based on inherent value. Often both, rare and worthless sneakers are made of the same materials. Similarly, some paintings are hung up in the Louvre while others end up in thrift shops. The collector who sold the $6.6 million Beeple piece had something interesting to add about this - anyone can take a nice picture of the Mona Lisa, but that won’t make it the Mona Lisa. A Beeple fan also quoted that it does not have any value because it doesn’t have any origin or history of the work. The real value lies in who is behind it.
What does “non-fungible” mean?
Each bitcoin is worth the same as other bitcoins, but each NFT is unique. Goods or assets that are all the same and can get swapped interchangeably are known as “Fungible”. A perfect example would be a dollar bill which is exactly worth one dollar. That is different from concert tickets which are non-fungible. How? Every Radiohead ticket, despite being of the same monetary value is not directly exchangeable. Each of them represents a unique specific seat and date and is not similar to any other ticket.
Where to buy or sell NFTs?
Specialised marketplaces like Zora, Rarible and Opensea sell Digital artwork NFTs. Even Coinbase is coming up with a peer to peer where you can mint, purchase, showcase and discover NFTs effortlessly. For those interested in sports collectables and games, developers like Dapper Labs have created several great experiences. These include NBA top shots (virtual trading cards) and Crypyokitties (digital cat collecting game similar to Pokemon). Online games like Gods Unchained have also started using NFTs now. They use it to sell in-game assets like weapons and upgrades. Markets including Decentraland and the sandbox sell real estate in new virtual worlds.
How do NFTs work?
If you are interested in DeFi, you must have heard of ERC-20 standards. These allow you to create tokens compatible with the Ethereum blockchain and are known as fungible tokens. Some non-fungible ones get built using the ERC-721 and ERC-1155 standards that enable the issue of unique crypto assets through smart contracts. There is a set record starting with the token creation and including every sale. That is possible because each NFT gets stored on a blockchain.
What can you do with NFTs after buying them?
Some people choose to display their digital artworks on large monitors, while others enjoy buying (via NFTs) virtual real estate in which they can build virtual galleries or museums. That can let them roam around virtual worlds like Decentraland and check other peoples collections as well. But for some fans, the true appeal lies in the opportunity of buying and selling, similar to other assets. Many mainstream artists have also gotten involved now, primarily from the music industry. Take the example of the Nashville band Kings of Leon. In early March, they announced that their next album would be in the form of multiple NFTs. And fans will be allowed various perks depending on the NFT they buy. That can be their limited edition vinyl, alternate cover art or even a golden ticket to a VIP concert.