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What Is an NFT
By Jackie Lam MONEY RESEARCH COLLECTIVE
Look in any direction in the art world or celebrity culture, and NFTs seem to be all the rage these days. NFT sales hit $25 billion in 2021. Though the precise number of people who own or have traded NFTs is difficult to ascertain, we do know that more than 2.5 million crypto wallets were used for NFT transactions in 2021.
While NFTs have been around since 2014, it wasn’t until recently that they made it into the mainstream. Celebrities and brands alike have been embracing them. Digital artist Beeple sold his Everydays: the First 5000 Days NFT at Christie’s for a staggering $69.3 million. The musician Grimes sold $6 million in NFTs.
So what’s the craze all about, and why are NFTs so sought-after? Read on to learn exactly what an NFT is and how to buy, sell, and make them.
What is a non-fungible token and how does it work?
An NFT is a non-fungible token. NFTs are essentially collectibles that, unlike other types of digital files, can’t be copied or modified. For instance, you can’t copy and paste an NFT as you would a regular JPEG or GIF. You can’t create an identical NFT with the same properties and code.
NFTs digitally represent unique assets, such as a piece of artwork, a video game, music, a video clip, or a piece of virtual real estate. They use the same technology that powers cryptocurrency: a blockchain.
NFTs are often associated with the Ethereum blockchain. Ethereum is a blockchain-based platform that facilitates smart contracts, which are used to verify and carry out a set of instructions and agreements with predetermined conditions. Only when these conditions have been met are the contracts executed autonomously.
Smart contracts are a significant part of NFTs and blockchain technology as a whole because they offer transparency, remove the need for an intermediary to execute buyer/seller agreements, and work automatically. Plus, they’re secure, meaning they cannot be altered without the consent of both parties.
The Ethereum platform is also open-source and decentralized, which means that it’s not regulated by the government or a central authority like a bank. Most (though not all) NFTs exist on the Ethereum blockchain and have metadata and a distinct ID code.
Each NFT provides proof of its ownership. There is an owner (or sometimes more than one) for every NFT, which can be verified through public records. NFTs are trackable through Ethereum’s blockchain. Owners of NFTs possess the “deeds” to their assets, and NFTs have built-in certificates of authenticity.
Why are NFTs so confusing?
Trying to understand NFTs can be tough sledding for people who’ve never dealt with them before. Part of the problem is that many of the terms associated with them are commonly used interchangeably. For example, Ethereum is a blockchain and its native coin is Ether (ETH), but that coin is also commonly called Ethereum. Similarly, Bitcoin is the name of a coin but also the blockchain it’s native to. Just like “New York” can refer to a city or a state, sometimes you have to know the larger context to understand whether you’re talking about a blockchain or a cryptocurrency.
Why are NFTs valuable?
NFTs can be valuable due to their scarcity (or in some cases, uniqueness), and because they can only have one owner or group of owners at a time. NFTs’ worth is determined by a handful of factors like ownership history, utility, and buyer perception. In recent times, NFTs have become status symbols that give those who create, buy, and sell them a certain cachet. But not all NFTs are valuable, and some are worth much more than others. The hype is in part due to a frenzied social media-driven trading culture. Every time news breaks that an NFT has sold for millions, it makes them more desirable.
Making and selling NFTs can be lucrative for creators, who get paid royalties for their artistry. During the minting process, the owner can set royalties. Royalties are paid out each time the NFT is sold on the marketplace.
What are NFTs used for?
NFTs represent digital assets such as digital images, real-life pieces of art, and virtual real estate. NFTs are sold, bought, and traded on an NFT marketplace. Because they’re one-of-a-kind cryptographic tokens, no one can duplicate them. This creates a marketplace in which the authenticity of a particular NFT is guaranteed via publicly-inspectable records kept on the blockchain.
How to buy NFTs
To purchase NFTs, you’ll first need to buy Ethereum or some other cryptocurrency that can be used on a blockchain that supports the NFTs you’re interested in. This purchase can be made on a crypto exchange such as Binance, Kraken, or Coinbase.
Next, you transfer your cryptocurrency to a crypto wallet. Again, most but not all NFTs are Ethereum-based, so just make sure you get a wallet that’s compatible with whatever blockchain the NFT you want to buy rides on.
You will have your choice of hot wallets and cold wallets. A hot wallet stores the keys that open it on the internet, which theoretically makes it less secure but more convenient. A cold wallet is not connected to the internet and is thus more secure but less convenient. Note that crypto wallets don’t actually store your cryptocurrency or your NFTs. Cryptocurrency exists on the blockchain. Instead, a wallet keeps your public and private keys, which are passwords you need to access your holdings.
Lastly, you link your crypto wallet to a marketplace, such as Foundation, Rariable, Nifty Gateway, OpenSea, SuperRare, or Zora. Once that’s done, you can peruse NFT collections on the marketplaces and buy them there. You’ll have to make sure, though, that the crypto wallet you use supports the NFT you’re interested in.
How to sell NFTs
If the NFTs you want to sell are currently stored in your wallet, the first step is to transfer them to the NFT marketplace of your choice. Then click on your profile, select the NFT you’d like to put up for sale, and press the “sell” button.
You can sell an NFT for a fixed price or have interested buyers bid on the NFT during a timed auction. Besides single NFTs, you can create collectible NFTs sets, like digital trading cards.
How to make an NFT
You can create a digital asset that is a meme, an avatar, a piece of art, music, a video clip — or even a tweet. An NFT can also represent a real-life item, such as tickets to a concert or an album cover. While NFTs are unique digital assets, there can be multiple, numbered editions of the same asset.
Next, you’ll need to decide which NFT marketplace you’d like to sell it on. There are dozens of NFT marketplaces, and the most popular platforms are OpenSea, NBA Top Shot, Rarible, SuperRare, and Foundation.
If you haven’t done so already, you’ll need to open a digital crypto wallet. The next step is to open an account on an NFT marketplace, then link your wallet to your account. Last, upload the file you want to create an NFT and select parameters, such as the price. As the creator, you select the royalty, which is typically 5% to 10%.
When you make an NFT and put it up for sale, there are fees you’ll have to pay. While the fees and the amount vary, standard costs include minting fees, buying and selling fees, and a one-time fee to initialize your account and start selling.
What is the difference between an NFT and cryptocurrency?
While NFTs and cryptocurrency are both underpinned by the blockchain, a significant difference is that cryptocurrency is fungible, which means it can be replaced by something that functions the same way. Like fiat currency, stocks, and other commodities, fungible items are interchangeable. For instance, one bitcoin is the same as any other bitcoin. Or, to take another example, one $20 bill is functionally the same as any other $20 bill.
But NFTs are non-fungible. This means that they’re one-of-a-kind and can’t be replicated or replaced by something that looks identical.
Are NFTs a good investment?
You can profit from NFTs either by buying and selling or creating your own NFTs and putting them up on a marketplace. And as mentioned before, NFTs vary dramatically in value. As a creator, you might be able to make money from the sales and any subsequent royalties.
But it must be emphasized that you can lose all of the money you use to purchase NFTs. NFTs aren’t considered securities. They’re not federally insured like bank accounts or regulated like the stock market. NFT scams abound, and those who have been swindled generally have no recourse. If anyone tells you they can guarantee you a profit from buying and selling NFTs, run away – fast.
NFT glossary
NFT: Short for Non-Fungible Token, an NFT is a unique digital asset representing a real-life object, such as artwork, music, videos, and real estate. NFTs live on a blockchain and can be bought, sold, and traded.
Minted: A minted NFT has been converted to a digital file stored on the blockchain. Once this is done, it can be monetized and sold on an NFT marketplace.
Fungible: An item, asset, or commodity that is fungible can be replaced with other things, assets, or commodities of the same type. In other words, they are interchangeable assets.
Non-Fungible: A non-fungible asset isn’t interchangeable and is distinguishable from other assets. In other words, non-fungible assets are unique.
Blockchain: A blockchain is a digital ledger that stores transactions and helps track assets. This ledger is distributed across a network of computer systems.
Gas fees: Gas fees are payments one pays for the computing energy needed to process and validate transactions on the Ethereum blockchain. These fees are paid in ether.
ERC-20 Token: ERC-20 tokens are what’s most commonly used on Ethereum networks. They’re transferable and fungible, and there’s only a set amount of them available. They’re used to pay for goods and services.
ERC-20 is a standard used for smart contract standards on Ethereum. It lets developers create standards on the Ethereum network. ERC-20 offers a set of rules to create and issue Ethereum-based fungible tokens. Those rules govern how transactions are approved, how tokens can be transferred, and the total number of tokens that are available.
ERC-721: ERC-721 is similar to ERC-20 but is a technical standard for non-fungible tokens. The rules for Ethereum-based non-fungible tokens to follow include the total supply of tokens available on the network, how tokens can be transferred, and the token balance of an account.
ERC-1155: ERC-1155 is a technical standard for both fungible and non-fungible tokens. It can perform the same functions as both ERC-20 and ERC-721.
Are NFTs bad for the environment?
Many of the same arguments about why cryptocurrency has seriously adverse environmental consequences apply to NFTs as well.
NFTs are arguably harmful to the environment because they use a lot of energy. How much energy an NFT gobbles up depends on the number of transactions it’s associated with. The electricity consumed by a single transaction may be equal to that of running a refrigerator for an entire month. How harmful that is to the environment depends largely on how the electricity is generated, but since 61% of the electricity generated in the US comes from fossil fuels, it’s likely that the NFT you purchase is responsible for greenhouse gas emissions.
The root of the environmental consequences of NFTs can be traced to the fact that the majority of NFT transactions are done on the Ethereum platform. As one author explains, “Ethereum, like most major cryptocurrencies, is built on a system called ‘proof of work’ that is incredibly energy-hungry.” Proof of work is a system whereby computers solve complex mathematical puzzles in order to add a new “block” of data to the blockchain. Those computers and the air conditioning needed to keep them cool use a tremendous amount of electricity. While it’s difficult to estimate the amount of carbon emissions that are attributable to the NFT market, one analyst concludes that an Ethereum-based NFT is responsible for an average of between 100 and 500 kilograms of CO2 emissions, depending on how many bids the NFT receives.
Ethereum has been working on a plan to move away from its proof-of-work model toward a more ecologically benign proof-of-stake model. Then too, some organizations have begun offering funding and rewards for the development of “green” NFTs that have a significantly reduced carbon footprint.
