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A Different Flavor of Digital Asset: What are NFTs?

Updated: Apr 15, 2023

You might have asked yourself "How can a picture of a cartoon monkey make me independently wealthy?" While we can't answer that question, we can explain what NFTs are and how digital asset ownership is changing the way many people think about value.


NFTs are a recent phenomenon that have become popular over the last couple years. Many think trading digital assets is a fad, but it's clear the technology is here to stay and the space is continuing to evolve.


Keep reading to learn more about this different flavor of digital asset.

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NFT stands for non-fungible token. A non-fungible token is a type of cryptocurrency asset that represents something unique, like a piece of artwork or a collectible item. Unlike fungible tokens like Bitcoin or Ether, each NFT is one-of-a-kind and cannot be replicated. NFTs are created using blockchain technology, which means that each NFT is verified by a decentralized network of computers that keeps a record of its ownership and transaction history.


Imagine having the ability to authenticate something without needing a group of authenticity experts, and then being able to sell it without an arbiter to broker the transaction. Pretty nifty.


A Quick List of NFT Basics


In this guide, we'll go over some of the basics including how NFTs are used, where and how they can be purchased, some of the benefits of NFTs, and some of the risks. Well talk a little about what NFTs are, and what they are not. Lastly we will briefly discuss token standards and the process for minting a NFT. We hope you find this guide useful. If you'd like to check out a specific section, you can click the anchor tags below to navigate the article.



 

How are NFTs Used?


NFTs are used to represent ownership of digital assets like artwork, music, videos, and other forms of digital media. They allow creators to sell their work directly to collectors without needing to go through traditional gatekeepers like galleries or record labels. NFTs can also be used to prove ownership of physical assets like real estate or collectible items.


Verifiable ownership of art, gaming assets, and digital assets are the most common current use-cases for NFTs. Some NFTs allow for entry to view and use otherwise gated content, and others represent ownership or a stake in a physical product or asset. The most robust use-case that has captured substantial interest is gaming. Since many gamers often spend hours playing games and gathering hard-to-find collectibles that they have no power to transfer and that they don't actually own. Speculators believe there is a large market for digital ownership of gaming assets and that giving gamers domain over their digital assets will create a massive digital economy.


Future use-cases for NFTs could eventually include property and vehicle titles, digital identification, and others. The technology is still fledgling, but it won't be long before mainstream use-cases are more common.


Where and How Can I Purchase a NFT?


NFTs can be purchased on various blockchain marketplaces. Some of the most popular marketplaces include OpenSea, Nifty Gateway, SuperRare, and Rarible. To buy a NFT, you'll need a digital wallet that supports the blockchain used by the marketplace where you're buying the NFT. The most popular blockchain used for NFTs is Ethereum, though NFTs can be bought, sold, and traded on every other EVM-compatible blockchain, other non-EVM blockchains like Polkadot, Cardano, and Algorand. At this point, even Bitcoin network has support for non-fungible tokens called "ordinals."


You don't necessarily need to use a marketplace to purchase a NFT. NFTs can be bought and sold peer-to-peer like any other crypto transaction, however, you must absolutely trust the party you're buying from or selling to, and this method is not recommended for new users. Beyond marketplace and peer-to-peer, NFTs can also be purchased directly from a seller via an independent marketplace, or vending machine smart contract often referred to as "minting." Minting can also be risky for a variety of reasons and is recommended for users with a little experience, but we will cover minting later in this article.


Benefits of NFTs


There are many benefits of NFTs, but these are probably the most popular reasons why someone might create or own NFTs:


Ownership and authenticity - NFTs provide a way for creators to prove ownership and authenticity of their digital works, which helps to combat piracy and protect the value of their creations.


Direct monetization - NFTs allow creators to sell their work directly to collectors without needing to go through traditional gatekeepers like galleries or record labels.


Unique investment opportunities - NFTs provide collectors with the opportunity to invest in unique and one-of-a-kind assets that can increase in value over time.


Non-Fungible Risks


Tying into the last benefit in the previous section: people have made a lot of money speculating on and trading NFTs, however, this particular asset class is not only extremely risky, but NFTs are (in almost every case, save a few) illiquid assets meaning that if a buyer does not exist for your token you'll be stuck holding it. If a project quickly pumps and crashes, there's a distinct probability you'll end up holding the bag if you didn't sell in time. Quick money can be made with NFTs, but the risk level is extreme. Exercise caution.


Lack of regulation - The NFT market is currently unregulated, which means that there is a risk of fraud and scams. If you get into NFTs, you will get rugged at least once (it's basically a rite of passage at this point). Some NFT developers and creators spend a lot of time focused on building their communities, the underlying technology or ecosystem their tokens are tied to, or product offering associated with their NFT. Monetization affords these creators opportunities to access and utilize capital to build and develop their products, however, not all NFT creators or developers have good intentions. It's important to be weary of scams, rug-pulls, anonymous teams, and projects without a well-defined roadmap or hard deadlines for delivery. Do your own research, be careful when chasing 'hype' projects, and never spend or invest more than you're willing to lose.


Volatility - The value of NFTs can be highly volatile and can change rapidly depending on market demand. As mentioned before, the majority of NFTs are also illiquid.


Environmental concerns - NFTs require significant amounts of energy to create and maintain, which can have a negative impact on the environment. This became less of a concern when Ethereum transitioned from proof of work consensus to proof of stake (this saved a lot of energy), but it is more of a concern now that Bitcoin network now has support for NFTs (ordinals).


Token Standards


Token standards are the framework that makes NFTs possible. We won't go into great detail here, but essentially, token standards are sets of rules and guidelines that define how tokens on a blockchain should be created, transferred, and managed. These standards ensure that tokens on a blockchain are compatible with various wallets, exchanges, and other applications that support the standard. Ethereum Virtual Machine (EVM) compatible blockchains use some form or variation of ERC (Ethereum Request for Comment) standards. These are the most common types of standards used for NFTs.


Other blockchains like Cardano and Polkadot do not have the same token standards as Ethereum. They have their own unique token standards, which are designed to be compatible with their respective blockchain ecosystems. For example, Cardano has its own token standard called the Cardano Token Standard (CTS), which is used for creating tokens on the Cardano network. While these standards may have similar features to Ethereum's token standards, they are not directly compatible with the Ethereum ecosystem.


If it's an NFT, there's a token standard behind it.


How NFTs are Minted


Minting an NFT refers to the process of creating a unique, one-of-a-kind digital asset and registering it on the blockchain as an NFT. When someone purchases an NFT directly from a drop or initial sale, they are essentially buying an NFT that has just been minted.

The process of minting an NFT typically involves the following steps:

  1. The creator or seller of the NFT creates a digital file of their artwork, music, or other creative work.

  2. They then use a blockchain platform or tool to mint the NFT by uploading the digital file to the blockchain and filling out information about the NFT, such as its name, description, and other metadata.

  3. The NFT is then registered on the blockchain as a unique, one-of-a-kind asset, and ownership is transferred to the buyer.

When someone purchases an NFT directly from a drop or initial sale, they typically need to send cryptocurrency to the creator or seller's wallet address in order to complete the transaction. The creator or seller then sends the newly minted NFT to the buyer's wallet address.


It's important to note that purchasing an NFT directly from a drop or initial sale outside of a well-known marketplace can be risky, as there is no third-party verification of the transaction or the authenticity of the NFT. It's important to do your research and only purchase NFTs from trusted sources.


Closing Notes


NFTs are still new tech. There is a distinct lack of regulation in this space that may or may not be necessary. If you decide to get into NFTs, we'd encourage you to disregard any expectation you have of making serious money doing it. There are opportunities, but we'd encourage you to learn and research first. Get an idea of what a good NFT is, and do some research on how scams and rug-pulls happen. Don't buy a NFT under the assumption that you are getting some type of equity or value. In almost every case, you are the consumer purchasing a product. You wouldn't expect a ROI from a can of soda, you shouldn't expect a ROI from your NFT either. That's not to say it can't happen. There's plenty of room in the market for arbitrage and taking profit if you know what you're doing. So, explore with caution, be skeptical, don't 'invest' more than you can afford to lose, and as always, have fun.


If you'd like to check out a more robust introduction to NFTs, you can check out our free Introduction to NFTs course by clicking here. Otherwise, if you'd like to check out an introduction to cryptocurrency, see how to set-up a metamask, or learn the basics of personal blockchain security, take a look at some of our other resources below!

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