What are Non-Fungible Tokens (NFTs) – Simply Explained

Slance

Slance

15/09/2021
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Learn everything you need to know about Non-Fungible Tokens (NFTs) in our complete A-Z Masterclass.

This guide will introduce you to NFTs, explain what makes NFTs valuable and if you should be investing in NFTs yourself.

Video guide

What are NFTs

NFTs are a way to digitize assets into unique tradeable ownership tokens, making it much easier to buy and sell ownership of a digital asset. 

NFT stands for Non-Fungible Token. 

Fungible means that an asset can be traded without losing it’s value within it’s asset class. This also means that whatever fungible thing is being traded, cannot be unique. 

Because  uniqueness increases value. 

Fungible examples are:

  • Currency bills. If I we’re to buy a book from you for 10 dollars, we would exchange currency in the form of dollar bills. We both know dollar bills represent a certain value, and that value does not change drastically when we exchange the bills. This ensures we both know exactly what we get from the purchase. 
  • Books. Books from the same print are not unique. Even though they are from the same series or print, there is nothing that states every example is unique. 
  • Casino chips. These are not unique because otherwise you cannot freely exchange your chips for money, or use them at a black jack table. 

Non-Fungible means that an asset is unique within it’s asset class and cannot be exchanged for the same thing, because it’s properties make it unique. 

NFTs Non Fungible Token guide

In other words, a digital asset that has been minted as a NFT, becomes unique. 

Minting means that a digital asset has been assigned it’s unique token. It’s ownership data, along with its unique properties and the entire digital file itself, is now stored on a blockchain. 

NFTs are stored encrypted on a blockchain and can be unlocked only with a digital key.

When an asset is minted, whoever starts the minting process is given a digital key and automatically becomes the owner of the asset. This key can be used to unlock, or decrypt, the digital asset on the blockchain.

This means that whoever has the key, is the true owner of the digital asset. Keys can be bought, traded or sold via NFT marketplaces and thus transferring ownership.

How do NFTs gain value?

Uniqueness creates value. Think of limited edition sneakers, an exclusive baseball card, or a one-of-a-kind painting. These items, or assets, are more valuable than non-limited or ordinary assets.

A Non-Fungible Token makes a digital asset unique and stores it’s properties and true ownership data on a blockchain in the form of a token.

Blockchain is a digital record keeping technology. Think of it as a digital ledger. This digital ledger consists of records called blocks, which are used to store different types of data. In the case of NFTs, the unique properties and ownership data of the digital asset.

NFTs Non Fungible Token guide

An asset can be anything such as music songs, artwork, items inside video games, captured moments in sport, fashion items, and scenes from a movie.  As long as it is digital, it can be made unique by a Non-Fungible Token.

Why are NFTs so popular?

The reason NFTs are becoming increasingly popular is because all parties benefit from the process.

Worldwide reach

Creators can freely sell and trade digital ownership of their assets without geographical constraints. In other words, a worldwide audience is ready to pay attention to what creators have to offer.

Investment opportunity

Investors see NFTs as a relatively safe way to invest capital because hype boosts asset value, raising its price.

Because NFTs will be used more and more in the future, investors, creators and marketplaces will keep generating hype around NFTs.

NFTs Non Fungible Token Masterclass

Ease of selling

Traditionally, if you wanted to sell an exclusive or one-of-a-kind physical or digital asset, you would have to use a middle man service to sell the asset.

This process takes time and costs transaction fees, middleman fees and buyer fees. 

Ownership was then verified by a certificate that states the name of the owner. 

NFTs change all that because ownership can now easily be transferred online and without the interference of an expensive middle man service. 

NFT marketplaces still serve as a middleman between buyers and sellers of NFTs, but anyone can tokenize a digital item and sell it, without a difficult or time consuming process.

This means that artists and sellers now have access to a global audience of interested buyers. This opens up new ways for sellers and artists to earn extra income or to gain extra exposure.

The copying problem solved

Copying a digital item is easy. You can screenshot it or copy the entire file.

This means digital items without unique ownership are worthless, because anyone can copy it. 

NFTs solve this problem by making any digital item unique and storing the true ownership data securely on a blockchain. 

This creates uniqueness, which increases value for NFT owners and investors.

Blockchain and NFTs

A public blockchain is a digital ledger that stores data.

As new data comes in, by minting new assets, or selling NFTs, it is entered into a fresh block. 

Once the block is filled with data it is chained onto the previous block, which makes the data linked together in chronological order.

Different types of data can be stored on the blockchain. For NFTs this is ownership data and the entire source code of the asset.

NFTs Non Fungible Token guide

The blockchain that NFTs uses is the Ethereum blockchain.

Decentralized blockchains, like the Ethereum blockchain, are immutable, which means that the data entered is irreversible. 

For NFTs, this means that transactions, ownership data and item data are permanently recorded and viewable by everyone.

With NFTs, blockchain is used in a decentralized way so that no single person or group has control—rather, all users collectively retain control.

Data checks are done constantly via a system called Proof-Of-Work. People who own nodes in the network are rewarded for lending their computer power to verify data on the blockchain. 

Because blockchain data is publicly viewable by anyone, it is a secure and trustworthy system of identifying true ownership.

NFT uses and examples

NFTs have many uses . Let’s discuss the most popular ones:

  1. Collectibles. NBA Top Shots are captured moments of NBA games. These digital screenshots become collectibles when they are minted and are traded amongst fans. 
  2. Artwork. The Collection by Beeple. This art collection includes many of the digital artist’s pieces and was sold for $770.000. 
  3. Memes. A NFT featuring a popular piece of internet history that is the Nyan Cat meme sold for $590.000.
  4. Music. Hairy by Steve Aoki. Musician Steve Aoki collaborated with Antoni Tudisco to produce this high-value NFT that sold for $888.888.
  5. Tweets. Jack Dorsey’s first tweet sold for $2.500.000 million.
NFT examples

Chapter 6: How to create NFTs

Tokenization digitizes the ownership of a digital asset into tradeable tokens, thereby making it much easier to buy and sell digital ownership. 

This process is called minting. 

Minting means the act of attaching a unique token to a digital item and storing it’s ownership data on the blockchain, making it unique. 

The minting process also generates a unique key that unlocks the token and it’s source code data on the blockchain. 

NFTs Non Fungible Tokens Masterclass

Once an NFT has been minted, it exists on the Ethereum blockchain forever and the ownership key is given to you.

What you actually own is the key that decrypts the NFT, unscrambling the data of the file for you and only you. In this case that key can also represent your identity as the owner of the NFT.

NFT platforms allow the tokenization of digital assets. 

Doing business on a marketplace often entails a fee to mint the NFT, which is essentially the process of registering the digital artwork or item as a token on the blockchain.

There are few restrictions on minting:

  • Minting and trading NFTs requires computational power, which requires electricity. This has to be covered by the fees. Most NFT platforms charge various amounts of fees for this reason.
  • Fees are paid in GAS, which is Ethereum’s native currency
  • There is a file size limit because the larger the file size, the more time it consumes to decrypt it’s data on the blockchain, thus more Proof-Of-Work is required, which means more electricity usage. 
  • Most, but not all digital assets can be minted

To be able to trade NFTs you will have to pay the fees in its related cryptocurrency. Do to this, you need to transfer the cryptocurrency from your personal crypto wallet to the NFT platform.

How to buy Non-fungible Tokens?

NFTs are easily bought and traded on NFT marketplaces.

There are two types of marketplaces: Primary marketplaces, where NFTs are minted and secondary marketplaces, where NFTs are resold after the initial sale from the primary marketplace.

The Benefit of buying NFTs from the primary marketplace is the potential of resale value directly after the first sale.

To place an order you need a digital wallet that has sufficient cryptocurrency funds on it. 

You can add funds to your wallet via any crypto exchange and use that funds to make purchases on NFT marketplaces. 

Current NFT platforms are:

  • OpenSea
  • Niftygateway
  • Rarible
  • Decentraland
  • Binance
  • Cryptopunks
NFTs Marketplace

Benefits and downsides of NFTs

Benefits of NFTs

  • NFTs are a blessing for creators and artists that want access to a global audience, without having to use expensive middleman processes
  • NFTs can make any digital asset unique, increasing it’s value
  • Digital ownership is stored on a blockchain, which is a very secure way of storing data 
  • NFTs make digital items more engaging and interactive to a loyal fanbase. This creates hype, which in turn makes NFTs a valuable investment opportunity

Downsides

  • NFT hype drives up prices. This is good for investors, but less so for fans that want to bond with their favorite brand. 
  • Verifying ownership and asset data via a blockchain requires computational power, which requires electricity. This has an impact on our global environment. The growing popularity of NFTs means increased power usage. 
  • Ownership of an NFT does not automatically mean you obtain copyright of the item
  • The key to the NFT needs to be stored safely. A lost key can never be restored because the blockchain is decentralized, and there is no party that can help you recover the key or password
NFTs Non Fungible Token guide

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