What is an NFT: Guide and Course For 2023
Non-fungible tokens, or NFTs, have been the subject of a ton of hype and mainstream attention after seemingly emerging from oblivion to take the art world by storm.
From NFT collections of digital artwork, music, social media posts, profile pictures that provide users digital bragging rights (such as CryptoPunks and Bored Ape Yacht Club), and video clips, these digital assets sold like hotcakes at the height of their popularity in 2021 – some for over tens of millions of dollars.
Now that we're in the thick of crypto winter and the NFT space in general, and we have the benefit of hindsight to look back at the NFT craze of 2021, it's a good time as any to ask the following question:
Were NFTs worth the hype or the money?
Time will tell, sooner or later.
But whether you believe the experts saying they are just another iteration of the dotcom boom, Beanie Babies, or tulip mania – which could be true – or joining the thinning ranks of crypto bros who are still saying how they will change the world – NFTs and their underlying blockchain technology are here to stay.
That said, what is an NFT? Before you delve into the crazy world of non-fungible tokens, you should take steps to know exactly what you're investing into.
What Is An NFT?
"NFT" stands for non-fungible tokens. They are digital contracts representing various types of digital media, including digital art, memes, social media posts, video clips (NBA Top Shot comes to mind), music, and practically anything – even items in the physical world, such as fine physical art, designer fashion, or real estate.
The "non-fungible" part in "non-fungible token" refers to the uniqueness of the digital asset and its inability to be replicated.
That means while anybody can take a screenshot of your non-fungible token or reproduce its underlying media, the proof of NFT ownership cannot be tampered with on the blockchain as the latter records transactions immutably.
Let's use fiat or physical money as an example: a dollar bill is fungible in the sense that you can trade it for any other dollar bill and end up with the exact same thing with the exact same value.
On the other hand, a non-fungible token cannot be replaced with any other token. That gives them their unique utility to represent a wide array of digital assets.
To emphasize the point: you can replicate a digital file as much as you want, including the art that's on a jpeg file linked to an NFT.
But with NFT technology, you can't replicate the ownership and provenance of the work.
Moreover, the scarcity and ownership of NFTs can be easily verified on the blockchain. Secure due to their distributed nature, they can be used in a variety of applications for different companies, and they are can be used for speculation by trading NFTs on secondary markets.
Such capabilities open up countless possibilities for NFTs for a variety of innovative use cases and business models.
A Brief History of NFTs
While they might have gained prominence just recently, NFTs have been around for a while, dating back to the earliest days of blockchain technology.
In fact, the proof of concept for NFTs began with Colored Coins in the Bitcoin ecosystem in 2012. Colored Coins can be used to represent real assets, such as stocks, bonds, commodities, fiat currencies, real estate, practically any physical asset, and other cryptographic assets.
Digital artists then iterated on the concept, and the first piece of NFT art widely regarded as the first NFT altogether: Kevin McCoy's Quantum, minted in 2014 on the Namecoin blockchain.
After digital collectibles gained a measure of viral popularity, starting with Rare Pepes, NFT projects really took off with Ethereum and its ERC-721 standard – the standard establishing the non-fungible token as we know it today – furthering the circulation and wider adoption of NFTs across blockchains through the power of smart contracts and eventually taking NFTs mainstream.
As of this writing, NFTs have seen their most extensive use in tracking ownership and authenticity of digital collectibles and cryptographic assets. Moving forward, the NFT standard has opened up new possibilities for use cases across industries and verticals.
How Does NFT Work?
Without getting too much into the nitty-gritty detail, most digital creators create NFTs on smart contract platforms – primarily Ethereum.
Other blockchains like Solana, Tezos, and Avalanche have also developed their own NFTs in the wake of Ethereum's success, as well as that of the NFT projects that were created on the platform.
Ethereum's underlying technology allows individuals to monitor NFT owners, as well as who's buying NFTs, and selling NFTs on-chain.
NFTs work and live on-chain. While Bitcoin might be the most renowned cryptocurrency, a great majority of NFT projects are purchased using Ethereum and assume their provenance on the Ethereum blockchain.
What Are The Uses Of NFT?
As we mentioned earlier, NFTs are primarily used as a proof of ownership of digital assets. The basic underlying principle that gives NFTs value is that they can be used to certify the ownership of a digital asset and verify its authenticity. In theory, these attributes allow NFTs to curb piracy and ensure that artists are duly compensated for their creative work.
NFTs have also been used to allow users to transact on decentralized marketplaces.
For instance, NFTs could represent digital art, fashion, or digital objects that can be sold, rented or loaned out to other users.
NFTs can also be used for membership rewards or loyalty points. For instance, companies and merchants could issue membership NFTs that can entitle them to discounts or exclusive offers, incentivizing their customers to maintain the relationship with the company and continue using their products and services.
Digital collectibles are another use case for NFTs. Video games could issue original NFTs representing in-game items varying in rarity, which would be highly sought-after by gamers and can subsequently be traded on secondary markets.
Physical assets such as pieces of real estate, valuable items such as expensive watches and apparel, or automobiles and vehicles can take advantage of NFT technology to serve as immutable proof of ownership that can be monitored on the blockchain. The blockchain then records transactions each time the item changes hands.
Moreover, NFTs can be used as utility tokens that enable followers of content creators to gain access to exclusive content or services while allowing digital artists and creators themselves to open up new revenue streams for themselves in innovative ways.
Lastly, NFTs can be used to demonstrate proof of ownership of carbon credits. This could potentially create a sustainable market for carbon credits that would ultimately work to reduce emissions from corporations, organizations, and individuals altogether.
How To Create an NFT?
NFTs are created by interacting with a smart contract on a blockchain.
There is a plethora of free, open-source smart contract templates available across blockchain platforms that support NFTs, NFT marketplaces, and those provided by developers and creators in the NFT space.
The process of creating NFTs and deploying them on the blockchain is called "minting." Practically anything can be minted as an NFT, as evidenced by the diverse types of NFTs you can find on the NFT market.
The minting process also encodes the metadata and other pertinent details about the NFT, such as its creator and their wallet on the blockchain, allowing anyone to verify its provenance and authenticity.
Then, the NFT is officially minted, and the digital file representing the NFT is uploaded to an external source, such as the Interplanetary File System (IPFS).
You will need to have a small amount of cryptocurrency to deploy the smart contracts that create NFTs, known as gas fees, which are paid to the blockchain's validators as an incentive for them to maintain the integrity of the network – and the ownership status of the NFTs existing on the said blockchain.
Wondering where to learn more about how to create an NFT? We have a course tackling this exact topic. With all the knowledge you will get from this course, you will be able to launch an NFT in no
How Can I Buy NFTs?
Despite the market downturn that has caused the deflation of the NFT market, NFT marketplaces are still home to several million users.
But before you begin building your NFT collection, you'll need to get a crypto wallet that enables you to store cryptocurrencies and NFTs.
Next, you'll need to buy cryptocurrency corresponding to the blockchain on which you wish to buy your NFTs (although most NFTs are on the Ethereum blockchain).
Then, you'll need to move it to your digital wallet before you can purchase NFTs on an NFT marketplace (more on this in just a bit).
Do remember that you'll want to keep a portion of your cryptocurrency balance available in order to cover gas fees and marketplaces fees that NFT marketplaces may charge.
Once your crypto wallet is all set, all you need to do is to head over to an NFT marketplace and begin trawling through the thousands of NFT projects listed therein.
The most popular NFT marketplaces include the following:
- OpenSea. OpenSea is by far the largest and undoubtedly one of the most popular NFT marketplaces around. To begin your journey through the NFT world, all you need is to create an account on OpenSea and begin browsing through NFT collections from the hottest artists around. OpenSea has around 600,000 unique users on its NFT marketplace platform.
- Rarible. Rarible is another popular NFT marketplace that is more focused on promoting decentralization. Rarible's platform liquidity and governance is based on $RARI, its native cryptocurrency. This allows $RARI holders to vote on governance proposals and marketplace features like royalties, fees, and policy changes. Based on DappRadar, Rarible had less than 10,000 unique users on their platform.
- Foundation. Foundation is an invite-only platform for digital creators whose exclusivity gives the platform a more high-end art gallery vibe than OpenSea and Rarible do. Foundation is particularly exclusive with which artists they choose to work with, whose digital art are put up for auction for users to purchase.
While these NFT marketplaces are home to thousands of legitimate NFT projects, creators, and collections, remember the golden rule of buying digital assets: do your own research. There is no shortage of NFT scams and bad actors in the space, all of which have victimized both creators and buyers alike by impersonating the former and scamming the latter.
Moreover, the KYC and verification processes for digital creators and NFT collections aren't the same across NFT marketplaces. Some NFT exchanges like OpenSea and Rarible do not require verification for listing an NFT project on the platform.
Worse, there is little recourse for NFT collectors to be compensated in case they get scammed, so buyers beware.
The Future Of NFT
We've barely scratched the surface of what use cases NFTs can offer – the aforementioned examples are just the beginning.
We will undoubtedly see even more exciting, innovative, and novel use cases in the NFT space as the technology matures.
Crypto experts see NFTs as the gateway to the crypto world, as shown by the massive hype NFT collections like CryptoPunks and Bored Ape Yacht Club generated for a whole new generation of crypto users.
As a result of its undoubtedly increasing popularity, NFTs may very well become part and parcel of tomorrow's digital economy.
- NFTs, like crypto, are a volatile asset class. But if you have a knack for identifying an NFT project with the potential to become the next Bored Ape Yacht Club in terms of profitability and utility, it may be very well worth the investment.
- Do keep in mind that NFTs and their values are based solely on how much someone else wants to pay for them. That said, the profitability of an NFT project is based solely on demand and hype rather than the utility, fundamentals, or economics that equity markets are based on.
- As evidenced by the crypto market downturn, NFTs may be resold for significantly less than you paid for – and they could be totally illiquid if no one is interested in your NFTs.
- Ultimately, the best way to approach NFT investing is to do your own research and be aware of the risks you are taking on.
- If you would like to dive deeper into the world of NFTs and actually create one of your own - try our course!