NFTs explained

NFTs explained – that will be the topic of today’s article.

It’s been a while since NFTs came into the emergence and a lot of people started talking about them. You might be hearing a lot about NFTs on news channels, websites, Instagram posts, YouTube videos, etc., among other means.

You may have heard about an artist named “Mike Winklemann”, also called “Beeple”, who sold an NFT for a hefty price of $69 million.

If you follow celebrities, then you may have been seeing news about Elon Musk turning down an offer of $1 million for his NFT, which is nothing but a song about NFTs.

By the time of writing this article, a collection of cartoon digital images, known as “Bored Ape Yacht Club”, were sold for a whopping amount of $24.4 million. To make it even more interesting, the same NFTs have total sales of more than $100 million so far.

NFTs explained

So, most people who may not be familiar with these trending digital assets might be wondering “what are these, and why is everyone spending millions and millions of dollars on buying these?”

Some other questions might also arise, such as “who sells them?”, “can I sell?”, “How can I sell?”, “where can I sell?”, “Is it really worth it?”, and “are these a good investment?”

Well, to clear all of your doubts regarding these so-called NFTs, we are going to explain each and everything you need to know about NFTs.

However, instead of jumping straight into the topic, we must discuss a few details about some other topics such as Blockchain, Ethereum, etc., for clearly understanding the operational procedure of NFTs.

Blockchain basics – Those who already know a thing or two about cryptocurrencies might be aware of the concept of blockchain. For beginners, a blockchain is a public ledger that contains all the information related to transactions in the crypto realm.

For example, the Bitcoin blockchain consists of all the transactional data of the Bitcoin network, and similarly, the Ethereum blockchain contains the history of transactions that take place within the Ethereum network.

However, this blockchain is nothing but blocks of data that are linked together, and as they are linked together, they are referred to as a chain. Hence, the name Blockchain.

The data on a blockchain cannot be altered or modified, and moreover, all the data is public so that any person can be able to access the data (but can’t change the data).

Different cryptocurrencies have different blockchains. Bitcoin has one, Ethereum has one, Dogecoin has one, and every single cryptocurrency operates on the base concept of blockchain.

Cryptocurrency transactions take place with the help of wallets, which are nothing but addresses.

For example, emails are sent from one person to another with the help of an email address. In the same way, cryptocurrencies are sent with the help of wallet addresses.

These addresses are unique and consist of a string of alphanumerical characters. There are different types of crypto wallets including software wallets, hardware wallets, and mobile wallets.

This is the basic functionality of a blockchain, and we cannot discuss each and every specific detail because our primary objective is to discuss NFTs.

A little bit about Ethereum – Ethereum is a cryptocurrency (crypto network to be precise), with Ether as its crypto token, which is used to make transactions.

NFTs explained

The two main functions of the Ethereum network are Smart Contracts and Decentralized Applications (dApps), other than the main goal of making transactions.

  • Smart Contracts

Smart contracts are programmable lines of code, which happen to be immutable. Smart contracts make sure that the parties involved in a transaction do their work perfectly so that the transaction could be executed.

For instance, if a person agreed to pay $10,000 for some work to be done, and it has been programmed into a smart contract, then the worker is obliged to complete the work in order to get paid and the person is obliged to pay after the work is completed.

Yes, it can be done with the help of a lawyer or a reputed computer application, but you won’t be having the privacy and anonymity that you would have with smart contracts.

  • Decentralized Applications

On the other hand, decentralized applications are the applications where the authority does not reside within a single organization or an individual.

For example, Facebook is overseen by Mark Zuckerberg and other major investors, and they have the ability to control the operations of the application. This means it is a centralized application, and the authority belongs to Mr. Zuckerberg and his fellow investors.

If you post something that might seem inappropriate to some other people, then they could report you so that your post can be removed.

When it comes to decentralized applications, nobody has authority, which means you will have more freedom than normal applications.

However, it does not mean that you should post inappropriate content, instead, it means that you will be having the freedom of opinion, and we strongly advise you not to misuse it.

Why is it necessary to know about smart contracts and decentralized applications? Well, we will get to that point in a few minutes.

Now, coming to our topic for today, i.e., NFTs (Non-Fungible Tokens) and everything you need to know for understanding them.

NFTs (Non-Fungible Tokens):

In layman’s terms, Non-Fungible Tokens are digital assets that come with unique characteristics.

For example, a fungible asset would be something that can be replaced with a similar asset, whereas there won’t be a similar asset to replace non-fungible assets.

A dollar or a pound sterling can be replaced with another of the same kind, whereas a painting of Picasso cannot be replaced by some other painting because it is unique in terms of its characteristics.

Why would someone want to create something unique, which cannot be replaced with something of a similar kind? Well, imagine antique collectible items, let’s say, basketball trading cards signed by Michael Jordan.

No other trading card would have as much value as those, especially because they are rare.

Such rare items stand out among the other items in their category and can be used by people to be exchanged for a significant amount of money or anything else of huge value.

Mostly, people tend to pay more attention to unique physical items such as Mona Lisa painting, Crown Jewels of British Monarch, or the Pink Panther diamond (just kidding).

Yet, NFTs only exist in the digital realm and the ownership is transferred on the blockchain, of which, the details would be made public.

It is just like a scenario where an expensive painting existing in a warehouse was bought for a million dollars and is still kept by the buyer in the same warehouse because of its security features.

The painting won’t move a bit, yet the ownership would be transferred while involving a huge amount of money.

Why would anyone want to buy something that is not even physical? Well, there is nothing stopping the artists, art connoisseurs, and art lovers, regardless of the form of art’s existence.

NFTs include a wide range of assets such as music, digital paintings, memes, digital collectibles, and many more.

When someone purchases an NFT, the ownership is transferred to that person’s name, of which, the details would be added to the blockchain so that everyone can know about the ownership details.

Imagine there was a meme, which is being sold for $1 million, we can just copy the image from its preview and save a lot of money, right?

Well, think of it as something like having an original Rolex and a cheap knock-off. Both can be uncanny, yet the pride of the customer and the value of the original watch would be of more importance.

Similarly, owning an NFT would let you have the rights of that asset, which can’t be obtained by just copying the digital image.

How do NFTs operate? – NFTs exist only within the blockchain, especially Ethereum in many scenarios.

Each NFT would be having a user identifier, which makes them stand out among the assets that have similar characteristics. This identifier is generally assigned to the NFT during the creation process, which is known as the minting process.

These ownership details are securely stored within a blockchain and could be easily verified by anyone on the network.

NFT Marketplaces – NFT marketplace is an online platform that allows people to buy/sell/create NFTs.

Some of the commonly used NFT marketplaces are OpenSea, Rarible, Foundation, SuperRare, Nifty Gateway, etc.

You can also find some asset-specific NFT marketplaces such as Sorare, Decentraland, Valuables, Axie Infinity, etc.

  • Owning NFTs:

The ownership of any given NFT can be proven easily without having to go through a lot of hassle.

As we said earlier, nobody can be able to alter the details related to the ownership of an NFT, and owners can keep their assets with them as long as they want.

  • Creating NFTs:

There is an excellent advantage for NFT creators on most platforms, and the details of the creator would be added into the metadata of that asset.

The ownership details change with the asset being changing from one person to another, but the details of the creator remain the same.

As for the advantage we are talking about, the creators receive royalties on their NFTs on every resale of that specific asset.

For example, if John was the creator of an NFT, and it was purchased by Joseph. Now, let’s say Joseph sold that NFT to Laura, then John (being a creator) would receive royalties from that sale.

However, you have to know the details regarding royalties before getting involved because some platforms might pay royalties automatically while some other platforms might not.

In the days to come, all the NFT platforms would be having the concept of paying royalties to the creators. If the NFT consists of a programmable code for receiving royalties, then they will be paid automatically.

Apart from that, the creator is the only individual who can be able to determine the rarity of the NFT. This means the creator can mint a single copy of their NFT or mint more than one, as per their wish.

You might be wondering why someone would want more than a single copy of an asset, where the primary objective is to make the asset stand out among other similar assets.

Well, imagine a person who wants to sell limited-edition music albums, and such person won’t just sell a single copy (at least won’t profit from selling a single copy).

In such cases, they might want to mint more copies, and the same applies in other assets such as collectibles of common-type rarity, tickets to a special event, or something similar to these.

Another possible question most people have is “what to do when a person sells two copies to two different individuals while saying to each of them that the asset they have is one of a kind (unique)?”

It is not possible because the information of these NFTs would be made public and anyone could access this data, therefore, there is a possibility for such types of fraudulent activities.

Adding to that, creators are not obligated to sell their NFTs on a particular platform. They have the complete freedom of selling their NFTs on whichever platform they want.

The fees or commissions charged by the platforms for the transaction of NFTs is comparatively low when compared to auction houses that sell physical items.

  • Buying an NFT:

NFTs are purchased through online platforms which are known by the name of NFT marketplaces, and they can be purchased at a fixed price or in an auction.

In some other instances, people can directly approach the owners with an attractive quote, and owners may or may not sell them to those people depending on their intentions.

  • Selling an NFT:

Purchasing an NFT is a seamless process, which was easily understood by everyone, right? However, selling an NFT is a process that may not be as simple as that.

At first, the creator would have to create an account with an NFT marketplace and upload it. It should be duly noted that NFTs only exist in digital form and physical applications of NFTs is still an under-developed concept.

While uploading, the creator would have to determine the aspects such as the royalties, type of sale (fixed-price or auction), etc.

After uploading the asset, the marketplace would verify the asset, and upon successful verification, the NFT would be listed on the marketplace.

People who are interested in your NFT would approach you with a quote higher than you stated or for the same amount stated by you. After that, you can choose whether or not to sell the NFT for the price mentioned by the buyer.

In this way, the transaction takes place between the buyer and the seller, and the transaction details would be uploaded to the NFT marketplace (in most cases).

  • Minting an NFT:

Minting is nothing but the process of creating an NFT, just like we state while talking about creating physical coins (i.e., minting coins). Not just NFTs, but almost all the crypto tokens use the same term for stating their creation.

Only digital assets can be minted, with the help of blockchain technology, and there is no way an NFT can be minted without the help of blockchain.

Most NFTs are created on the Ethereum blockchain, and in such a situation, the digital asset is to be present on the blockchain. For minting an NFT, you must have a crypto wallet that supports the ERC-721 token standard.

An ERC-721 token standard is a smart contract that helps in the successful functionality of assets on the Ethereum network.

Upon selecting the wallet, you must add some cryptocurrency into the wallet, and for the process of minting an NFT, you might need Ether (ETH) that is equivalent to an amount of around $50 – $100.

After completing this process, you can go to a marketplace such as Rarible or Open Sea, where you’ll be provided the option to “Create”, and by clicking that you can mint your NFTs.

Where are they used?

NFTs have a lot of use-cases such as Digital Assets, Games, Domain Name Services, etc. Let us have a brief look at some of the use-cases of NFTs, just so that you can understand their applications.

Digitals Assets include various assets like digital art, collectible items, music albums, tweets, pictures, etc.

Generally, games come with in-app purchases, and in such cases, people spend a lot of money buying in-game assets to advance in the game. At a point, when the gamer is not interested in the game anymore, he or she would lose all the money invested in the form of in-game purchases.

Remember decentralized applications? When games are built using the technology of decentralized applications, these game assets can be sold by the gamers when they no longer need them or lost interest in them.

Therefore, NFTs are quite useful when it comes to gaming.

Domain names can be converted into NFTs, which can be customized as per your requirement, and then sold for a higher price when you no longer wish to keep them.

The Ethereum Name Service (ENS) is currently used for Ethereum wallets, where wallets can be customized with a name as you desire. 

The use-cases of NFTs are increasing with the advancing technology, and there are some concepts being developed to use NFTs in real estate, house deeds, physical collectibles, etc.

Top 5 expensive NFTs:

  1. Everydays – The First 5000 Days

As we discussed in the beginning, this is an NFT created by Beeple, which was sold for a price of around $69 million, and it was sold at Christie’s auction house.

  • Cryptopunk #7523

Cryptopunk is a type of NFT collection, which consists of cartoon-like characters known as Cryptopunk, where the rarity determines their price. Most expensive Cryptopunks are those belonging to the rarity types of ‘alien’, ‘ape’, and ‘zombie’.

Cryptopunk #7523 was sold for an amount equivalent to $11.8 million by the time of sale.

  • Cryptopunk #7804 and Cryptopunk #3100

We’ve included two NFTs in the third position because both these NFT fetched a price of 4200 ETH individually, yet the actual price was a bit different.

  • Crossroads

This is another NFT of Beeple, which was sold for $6.6 million, while it depicted the loss of Donald Trump.

  • Oceanfront

In March 2021, this NFT was sold for an amount of $6 million, while the profits from the sale were donated to Open Earth Foundation, a non-profit organization dealing with global climate change.

Pros and Cons:

Advantages – NFTs are good for determining the ownership of a digital asset and rewarding for the creators. Nobody can tamper with the data related to the creation or ownership, and the details can be verified easily.

They are good at maintaining anonymity, and no specific authority has power over them.

NFTs can be bought or sold easily with the help of NFT marketplaces, while people won’t have to pay money in terms of fees that are usually paid to third parties that act as middlemen.

Disadvantages – NFTs rely completely on the network of Ethereum, which means if there was anything to happen to Ethereum, then the marketplaces based on its blockchain would be affected.

What would happen? Well, there is a possibility that the dealings with cryptocurrencies could be banned, or artificial intelligence might take over and claim all your digital assets (jokes apart).

People who have stored their NFTs in their wallets should maintain their wallets carefully because if something happened to their wallets, the NFTs would be lost.

If you forgot your password to your wallet, then it would literally mean that you can kiss your NFTs goodbye.

Moreover, NFTs run on the Ethereum blockchain, which runs on the basis of the PoW (Proof of Work) consensus algorithm. This algorithm is considered a major threat to the environment because of the necessity for a lot of computational power.

Bottom Line:

There is no harm in buying a few NFTs at a reasonable price as a hobby or even start creating them as a passion.

We strongly suggest that you should go knee-deep into NFTs and spend thousands or tens of thousands of dollars because you may be affected in the future.

If you are considering them as a form of investment, then you must think again because prices of digital art can go up or down in the future, depending on their appreciation.

If the prices go up, it would be okay, but if they go down, then your financial situation might get affected. Therefore, never put money into anything more than what can afford to lose.

If you are searching for a financial planner or wealth manager to take care of your investment needs, you can opt for the best-in-class solutions offered by us.

That being said, we strongly hope that you were able to find this information useful for knowing all the details related to NFTs.

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Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 317.2 million answers views on Quora.com and a widely sold book on Amazon

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