What You Need To Know About Non-Fungible Tokens (NFTs)

There’s nothing like an explosion of blockchain news to leave you thinking, “Um… what’s going on here?”

You might be wondering: what is an NFT, anyhow?

After literal hours of reading, I think I know. I also think I’m going to cry.

Okay, let’s start with the basics:

What is an NFT?

Non-fungible token.

That doesn’t make it any clearer.

Right, sorry. “Non-fungible” is, in essence, a collectible digital asset, which holds value as a form of cryptocurrency and as a form of art or culture. Much like art is seen as a value-holding investment, now so are NFTs, more or less means that it’s unique and can’t be replaced with something else. For example, a Bitcoin is fungible — trade one for another bitcoin, and you’ll have exactly the same thing. But unlike a standard coin in the Bitcoin blockchain, an NFT is unique and can’t be exchanged like-for-like (hence, non-fungible).

For instance, famous digital artist Mike Winklemann, better known as “Beeple” crafted a composite of 5,000 daily drawings to create perhaps the most famous NFT of the moment, “EVERYDAYS: The First 5000 Days,” which sold at Christie’s for a record-breaking $69.3 million.

Anyone can view the individual images — or even the entire collage of images online for free. So why are people willing to spend millions on something they could easily screenshot or download?

But NFTs are designed to give you something that can’t be copied: ownership of the work (Because an NFT allows the buyer to own the original item. Not only that, it contains built-in authentication, which serves as proof of ownership. Collectors value those “digital bragging rights” almost more than the item itself.)

NFTs are also generally one of a kind, or at least one of a very limited run, and have unique identifying codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures.

How do they work?

Ethereum blockchain is the basis for most of the currently offered NFTs because it supports the ERC-721 token standard, enabling NFT creators to capture information of relevance to their digital artifacts and store it as tokens on the blockchain. NFTs exist on a blockchain, which is a distributed public ledger that records transactions. You’re probably most familiar with blockchain as the underlying process that makes cryptocurrencies possible. The records cannot be forged because the ledger is maintained by thousands of computers around the world. NFTs can also contain smart contracts that may give the artist, for example, a cut of any future sale of the token.

When you pay for an NFT, what you get is the right to transfer the token to your digital wallet. The token proves that your copy of a digital file is the original, like owning an original painting. And just as masterpiece paintings can be copied and distributed as inexpensive posters, anyone can have a digital copy of your NFT.

Your private crypto key is proof of ownership of the original. The content creator’s public crypto key serves as a certificate of authenticity for that particular digital artifact. This pair of the creator’s public key and the owner’s private key is primarily what determines the value of any NFT token.

What can I buy in the NFT Marketplace?

Besides gaming, NFTs are frequently used to sell a wide range of virtual collectibles, including NBA virtual trading cards, music, digital art, video clips and even virtual real estate in Decentraland, a virtual world. The types of NFTs are super-varied — anything unique that could be stored digitally and be thought of to hold value. Essentially, they are like any other physical collector’s item, but instead of receiving an oil painting on canvas to hang on your wall, for example, you get a JPG file.

Popular NFT Marketplaces

There are several marketplaces that have popped up around NFTs, which allow people to buy and sell. These include OpenSea, Rarible, and Grimes’ choice, Nifty Gateway, Foundation but there are plenty of others.

How to buy NFTs?

If you’re keen to start your own NFT collection, you’ll need to acquire some key items:

First, you’ll need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You’ll likely need to purchase some cryptocurrency, like Ether, depending on what currencies your NFT provider accepts. You can buy crypto using a credit card on platforms like Coinbase, Kraken, eToro and even PayPal and Robinhood now. You’ll then be able to move it from the exchange to your wallet of choice.

You’ll want to keep fees in mind as you research options. Most exchanges charge at least a percentage of your transaction when you buy crypto.

A Comparison Model

Key Takeaways

● Non-fungible tokens prove ownership of a digital item — image, sound file or text — in the same way that people own crypto coins.

● Unlike crypto coins, which are identical and worth the same, NFTs are unique.

● An NFT is worth what someone is willing to pay for it, which can be a lot if the NFT is made by a famous artist and the buyer is a wealthy collector.

● That said, approach NFTs just like you would any investment: Do your research, understand the risks — including that you might lose all of your investing dollars — and if you decide to take the plunge, proceed with a healthy dose of caution.

Zayd Muhamed

Chief Investment Strategist @NVISION Capital

“You should enjoy finding yourself, and you should enjoy expressing yourself. And they can reject you. Believe me, they will. But you just gotta keep doing it.”