What Is An NFT? Non-Fungible Tokens Explained

There are many "blank spots" in the web world of 3.0 technologies, whose meaning is not so easy to explain to the layman who decided to reach new horizons. In fact, the detection mechanisms of blockchain, crypto market, and token, in a nutshell, are difficult to explain. This is the whole concept of next-generation interaction on the Internet. Everything seems much more manageable with NFT. If the above terms are something abstract, then what NFT will appear knows almost everyone - costly pictures.

Of course, everything is far from being so simple, but the brightness of an object is of interest. Few technologies in the Web 3.0 galaxy are as well-received.

Five years after the advent of Bitcoin, the minting and sale of NFTs began. The first NFT was created by Kevin McCoy in May 2014 and then sold for just $4. Next, McCoy minted the Quantum, making $1.4 million.

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Layman can't understand why people pay for the opportunity to own images that are available to everyone on the Internet. So let's figure out where the shoe pinches.

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Definition of a Non-Fungible Token (NFT)

NFT stands for “non-fungible token”. After deciphering the abbreviation, it didn't get much more evident, did it? If the token is non-fungible, it is not equivalent to any other (whereas, for example, if the same bitcoins are all the same, any can be exchanged for any). It's hard to argue that you can't trade a Da Vinci painting for a Van Gogh painting. The value of both artworks is high, but in different ways. The same is true for art world images.

Therefore, many think NFTs are just another collection (like stamps, coins, or beer coasters.) But, actually, it's even more fun. After all, if you buy a painting by Thomas Cole for your private collection, the maximum that "shines" for other not-so-lucky connoisseurs of art is to see reproductions or photos on the Internet, which is not even close to the original. But with NFT, you can at any time get your free ownership of that part of the state that belongs to the GIF or a video for which someone paid several million dollars.

Why do you need virtual sneakers 100 times more expensive than just going to a shoe store and buying a genuine copy?

What is the meaning of all this? What is an NFT for real?

First, NFTs are just as speculative as any other trend: repurchase it to resell expensively. However, goals can be nobler. For example, you want to support your favorite artist (in case you understand something about digital art). Well, for everything - you need the legal rights.

In turn, this is an opportunity for self-expression for the artist without needing to "struggle" in an art gallery or auction house to exhibit, popularize, and sell digital artwork. In addition, artists can program royalties to receive a percentage of each sale towards their artwork. This is an excellent incentive for creators because this will not work with tangible assets - for your physical artwork, you can make a profit only once. NFT creators can also add their NFT details such as creator identity, secure file links, and more during transactions.

In 2021, the NFT market was valued at $41 billion, approaching the total value of the entire global fine arts market. According to CNBC, from the second quarter of 2021 to the third quarter, the market grew by 704% (and from 2020 to 2021 by 21,000%.)

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At the same time, in May 2022, The Wall Street Journal reported: "The NFT market is collapsing." Daily sales of NFT tokens decreased by 92% compared to September 2021, and the number of active wallets in the NFT market fell by 88% compared to November 2021. While rising interest rates had impacted risky bets across the financial markets, NFTs are among the most speculative. An authoritative newspaper makes this conclusion.

DappRadar data shows that NFT trading volume on OpenSea (the largest NFT marketplace) has reached $300 million per day, with over 9.5 million transactions so far this year in 2021.

These figures are significant, but the hype has already subsided: the average daily volumes fell to $71 million in December, while the number of active users and the number of transactions decreased slightly.

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What You Need to Know about Non-Fungible Tokens (NFT) - Unique Digital Assets Built on Blockchain Technology

Each NFT is a registered token stored on the network and connected to the Ethereum platform. It is worth noting that specific token standards offer different use cases. The Ethereum network was the first to support NFT with its ERC-721 standard, and it is currently the most widely used. Many other phenomena are being added or are planning to add NFT support. ERC-721 is Solidity's legacy smart contracts standard; "inherited" means that developers can create new ERC-721 compliant smart contracts copying from the reference implementation. ERC-721 provides basic methods that allow you to track the owner of a unique identifier, as well as a permitted method for transferring an asset to another owner.

The ERC-1155 standard offers "semi-fungibility" and also provides a counterpart to ERC-721 functionality (meaning that an ERC-721 asset can be created using ERC-1155). Unlike ERC-721, where the unique identifier represents a single asset, the unique identifier of an ERC-1155 token represents an asset class. There is an additional quantity field to represent the class quantity that a particular e-wallet has. The ERC-1155 standard reduces the transaction and storage costs required for NFTs and combines multiple types of non-fungible tokens into a single contract.

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NFT is a digital asset representing real-world objects such as art, music, in-game items, and videos. They are bought and sold on the Internet, and the exact mechanisms usually encode them as many cryptocurrencies. Like cryptocurrencies, NFTs are issued on the blockchain with unique identification codes and metadata that distinguish them from each other. In addition, each NFT has its digital signature, which allows owners to verify ownership as well as authenticity. Non-fungible tokens are created when blockchains combine records containing cryptographic hashes - sets of characters that identify a set of data - with previous records, creating a chain of identifiable data blocks.

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NFTs can represent real-world items such as art and real estate. The tokenization of these real tangible assets makes buying, selling, and trading more efficient while reducing the chance of fraud.

Technically, everything digital can be sold as an NFT - Nyan Cat GIF ($590 thousand) and Doge meme ($4 million), a piece of Limp Bizkit video clip, a screenshot of a tweet, animated stickers, digitized Pokemon cards... So what can we say if there is even non-fungible toilet paper!

NFTs can eliminate intermediaries, simplify transactions, and create new markets. However, there is a drawback to this digital analog of art. Over time, some formats in which certain NFTs are created will become outdated and lose their relevance. And transferring to another structure will mean a symbolic "loss" of the original. For now, digital art creators are converting PG, PNG, and MP4 to NFTS for sale.

It is also worth considering that the creator of the NFT, at his discretion, can create both a one-of-a-kind sample and release several copies of the same collectible. Moreover, you can combine one NFT with another to "spawn" a third, unique non-fungible token.

How Is an NFT Different from Cryptocurrency?

Five years after the advent of Bitcoin, the minting and sale of NFTs began. Kevin McCoy created the first NFT in May 2014. McCoy minted the Quantum, which earned $1.4 million at a Sotheby auction in November 2021.

We have already mentioned above that Bitcoin (as well as any other cryptocurrency - Dogecoin, Ethereum, Litecoin...) is an absolutely interchangeable story. All "coins" have the same value and are similar, like twins. But NFT is always something original that has no equivalent. The technical principle of creation is the same, but the similarity ends there. Each has a digital signature, making it impossible to exchange NFTs one for one. NFTs are usually stored on the Ethereum blockchain, although other blockchains also support them.

Advantages and Disadvantages of NFTs

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What is an Example of Non-Fungible Token?

An NFT is created from digital objects representing sometimes tangible and sometimes intangible items, for example:

  • Graphic art
  • Physical art
  • GIFs
  • Videos/Photos
  • Music
  • Games/Virtual avatars
  • Collectibles
  • Designer stuff
  • Legal documents
  • Signatures
  • Domain name
  • Tickets/Coupons
  • Memes, etc.

They can be immediately created in the form of a non-fungible token or be in a different format, and then, if necessary, the asset can be minted.

Speaking of examples of NFTs, one cannot fail to mention the artwork Everydays: The First 5000 Days. The digital artist Beeple sold his work for $69 million. This is one of the NFT records to date, and this photo collage by Mike Winkelmann was the third highest-grossing piece of art sold by a living artist. By the way, here's another advantage of NFT for you - you don't have to die to become famous (we all know how artists usually end up, for whose paintings hundreds of millions are given after their death.)

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Less famous but even more appreciated digital art was Pak's The Merge. In December 2021, 30,000 collectors bought the NFT painting for $91.8 million. So yes, in digital art, a work can have several owners; each has its part of the chain.

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Rare Bored Ape Yacht Club is an NFT illustration of costumed monkeys that seems like just a fun picture for a book at first glance. However, it is something more. This is a kind of digital philosophy - a community of like-minded apes, a set of 10,000 unique avatars generated by algorithms. At Sotheby's auction, $24.4 million was paid for this image.

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An example of an NFT as the new branded merchandise might be Coca-Cola. And doing so well in the marketing field, the sparkle water brand decided to auction off an NFT series loot boxes, including a branded jacket that can be worn in Decentraland. In addition, all purchases were accompanied by a fully stocked Coca-Cola refrigerator. The auction brought in over $575,000, going to charity.

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The most famous use case for NFTs is Cryptokitties. Launched in November 2017, they are digital images of cats with unique identifiers on the Ethereum blockchain technology. Each kitten is individual and has an Ethereum price. They breed among themselves and produce new offspring with different characteristics and ratings than their parents. Within a few short weeks of launching, the Cryptokitties amassed a fan base that spent $20 million of ETH to buy, feed and raise them. Some enthusiasts have even spent over $100,000 on it.

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However, it would be a mistake to think that NFT is your ticket to wealth. More than half of the registered sales did not reach the $200 mark - so more than 75% of NFTs are sold for as little as $15, if not less. And this is even before the commission of the exchange, which sometimes levels out all earnings, making it meaningless because the average cost of minting a digital file, at the moment, is $70.

The average check of "lucky ones" on NFT marketplaces is $500-900. And only 1% of such tokens are purchased for $1500 and more. Although after the NFT boom, it became much more challenging to make sales statistics, so you should not rely on this data entirely. On the other hand, you also can't ignore it so as not to be disappointed.

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Like any art, digital artwork is about marketing, performance, and chance, not about non-fungible tokens per se. Moreover, the same NFT artwork can cost different money at different times. However, according to CNET, around 250,000 are actively trading on just one of OpenSea's NFT marketplaces each month.

Speaking of demographics; almost half of the collectors belong to the millennial generation, and there are three times more men than women. NFT lovers mostly live in the Pacific region. However, the countries of Africa and South America began to show steady growth. But the first-world countries are much less interested in such investments. So, according to Finder, more than 70% of US residents do not even know what an NFT is. Perhaps this may be because people from advanced economies prefer to invest in more stable and time-tested assets.

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Why would Anyone Buy an NFT?

The purpose of buying NFT can be different - for your own collection, as an act of charity, and as a digital asset for further resale. As a result, several marketplaces have sprung up around NFTs that allow people to buy and sell. The popular NFT marketplaces include OpenSea, SuperRare, Foundation, Rarible, Mintable, Axie Infinity Market, Nifty Gateway, but there are many others. Each of the exchanges has its specialization. However, they are all ultimately focused on digital artwork.

Now the most exotic options are being discussed, where an NFT could be used. For example, with valuable assets like cars and real estate represented in Ethereum, you can use NFTs as collateral in decentralized loans. This is especially useful if you are not rich in cash or crypto but own physical assets. And in this case, NFT is already intersecting with another pillar of the web3 world - DeFi.

Experts warn that although NFTs have been around for almost a decade, this is not enough to speak with certainty about their investment prospects despite their attractiveness and relative success. The value of an NFT is based entirely based on what someone else is willing to pay for it. Thus, demand will determine the price, not fundamental, technical, or economic indicators that usually affect stock prices and, at least in general, form the basis for investor demand.

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In other words, if you draw monkeys now, it's not a fact that someone will need them, unlike the legendary NFT Rare Bored Ape Yacht Club, which was sold in 2021 for $3.4 million.

It is also worth noting that in 2021, NFT secondary sales crossed the $15 billion mark.

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Also, do not forget that NFT is not immune from plagiarism, theft, or fakes like any art. Exchanges are trying to track this unpleasant trend, but, unfortunately, the phenomenon cannot be avoided. For example, a process known as "sleepminting" allows a fraudster to mint an NFT in an artist's wallet and transfer it back to their account without the artist becoming aware. And since legal processes are not regulated, the deceived buyer has nowhere to look for the truth.

To sum it all up, approach NFTs the same way you would any investment:

  • Do your research
  • Understand the risks, including that you could lose all your dollars invested if you decide to take the plunge
  • Tread with a healthy dose of caution

How to Buy NFTs

Depending on the creator's wishes, you can buy NFTs for both physical money and cryptocurrency. However, when setting a price tag in dollars or euros, it should be understood that at first the payment will be made in cryptocurrency, which must later be converted into cash.

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If you want to create your NFT collection, you need to purchase some essential items. First, you need to get a digital wallet that will allow you to store NFTs and cryptocurrencies. A digital wallet is a cryptocurrency wallet that supports the blockchain protocol on which NFTs are built.

You will likely need to purchase some cryptocurrency, such as Ether, depending on which currencies your NFT provider accepts. You can buy cryptocurrency with a credit card, then move it from the exchange to your wallet.

Afterword

How far will NFT take us digitally? Perhaps soon, we will open a house with our Ethereum wallet as a cryptographic proof of ownership. But perhaps these funny pictures will quickly lose their relevance, like spinners, simple dimples, or Tamagotchi (does anyone even remember what Tamagotchi is?)

In any case, digital assets have become too visible to be ignored. So the decision to invest in non-fungible tokens (NFTs) or not should be based on a high level of awareness so that you do not wish for missed (or not missed) opportunities in the future.

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Elena Vodovatova

Editor