Cryptocurrencies such as bitcoin and Ethereum have been gracing the headlines for the past few years now. They have attracted a lot of attention and investment thanks to their high growth rate, market cap, and increasing popularity.
Recently, another blockchain-based asset, the Non-fungible token (NFT), has come to the fore for all the right reasons.
NFTs are taking the world of digital assets by storm. Their popularity is on the rise, and they’re believed to be the digital equivalents of artwork and collectibles.
It is changing the lives of digital artists who are selling off their digital assets as NFTs.
If you also heard about NFTs and are interested in learning about them, you have come to the right place.
This guide will help you understand NFTs, as in what are they and how they work.
Without further ado, let’s dive in and learn about this new digital asset.
What Is an NFT?
NFT stands for Non-fungible tokens. It is a form of digital asset that represents the ownership of a unique item, i.e., a picture, music, or video, etc.
Mostly, NFTs are minted on the blockchain network which provides it the encrypted security to avoid replications.
These digital tokens cannot be copied or replicated, and the record of ownership of NFTs cannot be modified by anyone, as the blockchain serves as the transaction ledger.
This ensures that your digital property cannot be stolen.
Although NFTs cannot be stolen, they can get lost or deleted, just like any physical item. It is essential to keep your digital assets stored in a safe place.
A good option for ensuring this level of security is to put them in a digital asset library that not only stores assets but also organizes and protects them.
Fungible vs Non-Fungible
Fungible is an economic term that means you can trade an item for another of the same characteristics or form. While non-fungible means that it cannot be traded for a similar item; it’s singularly unique, much like famous works of art.
For instance, you can trade 1 bitcoin for another bitcoin, but you cannot trade NFT digital photo for another digital photo because both the pictures have different values.
NFTs have unique properties that help in determining their value. This means that NFTs can neither be replaced nor can they be interchanged.
Other Characteristics of NFTs
Apart from being a non-fungible asset, NFTs have some other unique characteristics including indestructibility and verifiability.
- Indestructible – As these digital tokens are based on the blockchain technology, they cannot be replaced, destroyed, or replicated. The buyer of an NFT gets to own all rights to it. This is a unique characteristic of NFT. You cannot claim someone else’s piece of art or music as your own, but NFTs are entirely claimable for the right price.
- Verifiable – Because these tokens store data of ownership on the blockchain, you can always trace it back to the original creator. It means that you can check whether the item you are buying is an authentic digital collectible or not. You don’t need a third party or regulator to verify the validity. It’s all there on the blockchain for all to see.
How Do NFTs Work
Now that you have learned what NFTs are, it is time for you to learn how these tokens actually work.
Let’s focus on Ethereum-based NFTs, as majority of them are created and traded with Ethereum.
NFTs are created on a blockchain (which can be Ethereum’s or any other cryptocurrency’s blockchain), which acts as a public ledger and stores all the transactions related to a particular NFT.
You might already know about the blockchain technology, as it is what makes cryptocurrencies a reality.
These digital tokens can be created or minted from digital objects that represent both digital and physical assets, including:
- Music Files
- Virtual avatars
- In-game skins
- Domain names
- Legal documents
- Tokenized invoices
- Deeds to a car
NFTs can have only one owner at a time and because the data of ownership is stored on the blockchain network, you can trace it back to the original creator to specify the authenticity of the item.
You can easily buy and sell NFTs because they hold value. The value of an NFT is based on the market and demand. Essentially, the market decides the value of an NFT; the higher the demand, the higher will be the value.
What Is it Used for?
Now that we know how NFTs work, we can go one step further and learn what digital tokens are used for.
Cryptocurrency enthusiasts and people who are into owning digital assets are the primary investors in NFTs.
Apart from those usual suspects, NFTs are commonly bought for the following reasons:
NFTs provide a lot of benefits both for game developers as well as players. As you already know that most games offer in-game purchases of items and characters. But you cannot sell your items to another player in the game.
Imagine buying an item in an online game and selling it to someone else when you have no use for it anymore.
You can then go on to buy something you do need with the proceeds from the purchase. If the in-game purchases of items and characters are NFT based, buying gaming items can be possible.
The developers earn royalties each time their item is bought and resold.
Digital content creators are the crowd that has the most significant use for NFTs. Digital content creators benefit a lot by turning their assets into NFTs.
Traditionally, content platforms take sizable chunks off a digital creator’s profits. However, with the use of NFTs, the ownership of their content remains with them and they can earn money by selling it whenever and to whomever they want.
Creating Unique Memories and Artwork
Another use for NFTs is by creating unique memories and artwork. Even celebrities like Snoop Dogg and Jack Dorsey are creating NFTs of memories they hold onto and selling them for profit.
NFTs are non-fungible tokens that are indestructible. They are verifiable, meaning these cannot be replicated, or destroyed, and are always traceable back to their original creator on the blockchain. These tokens can be images, music files, video files, GIFs, or collectibles. NFTs have a value that is determinable by the market. These provide a lot of benefits for game developers, players, content creators, and many others.