What is an NFT?

Discover what an NFT is and what all the hype is that's surrounding the space.

An NFT, or non-fungible token, is a unique, digital certificate stored on a blockchain. This guarantees the originality of any item, giving the owner exclusive rights to it. Such tokens cannot be discreetly tampered with, split, or replaced because of the nature of the blockchain structure and anonymous encryption technology.

Therefore, this system is best suited for securing rights to a unique object — a work of art, real estate, an artifact in a computer game, or something similar. This article will help you understand the peculiarities of the NFT concept and learn about the most expensive and unusual non-fungible tokens since their creation.

The NFT Concept

You may already know that each unit of value in a blockchain is called a token. In an open blockchain, all tokens are equal and interchangeable. For example, one bitcoin can be easily replaced with another, and nothing will change.

Non-fungible tokens are a game-changer, which work differently. An NFT is a digital asset that cannot be replaced with another token without changing the value and basis of the object.

Like cryptocurrency, NFTs are created on a blockchain, which acts as a database to record all transactions. The blockchain guarantees the uniqueness, safety, and anonymity of non-fungible tokens. Thanks to this system, any user can verify the originality and transparency of the history of a particular NFT through the blockchain.

When you buy an NFT token, you are obtaining a certificate for a digital or real object. However, the work itself doesn’t move anywhere. You only use its digitized file or a certificate of ownership. Once created or purchased, the token sits in perpetual storage. This certificate is just lines of code that confirm it is the token owner who has the original copy of the object.

An NFT token can be compared to a painting, which may belong to a gallery, museum, or individual, but the audience can see it in a catalog or exhibition.

NFT tokens are sold in online marketplaces that operate like Amazon. The creators put them on marketplaces and wait for bids from buyers.

An NFT token can be created by you or by anyone for that matter. To do this, you need to take a digital object (picture, music, photo, etc.), register in a particular marketplace on a platform such as Rarible or OpenSea, and upload the object with a description and price. You will have to pay a fee for creating a blockchain entry on many platforms. However, the costs pay off in most cases, as NFTs are #1 in the crypto world today.

How Do NFTs Work?

NFTs leverage blockchain technology, a decentralized ledger system that records transactions securely and transparently. Each NFT is unique due to the metadata stored on the blockchain, which contains specific details about the asset. Here's how it works:

Blockchain Foundation. Most NFTs are hosted on the Ethereum blockchain, though newer blockchains like Solana and Binance Smart Chain are also gaining traction.
Smart Contracts. NFTs utilize smart contracts, which are self-executing agreements with code embedded in the blockchain. These contracts manage the ownership, transfer, and functionality of NFTs.
Metadata. The metadata of an NFT includes essential information like creator name, description, and transaction history, ensuring each NFT remains unique and traceable.
Decentralized Verification. Once minted, an NFT's authenticity and ownership history can be publicly verified on the blockchain, guaranteeing transparency.

Common Blockchains for NFTs:

Ethereum. The most widely used blockchain for NFTs, with robust infrastructure and decentralized applications.
Solana. Known for its speed and lower transaction fees, it has gained popularity in the NFT community.
Polygon. A layer-2 solution on Ethereum that offers lower fees, ideal for smaller NFTs and microtransactions.

Why Are NFTs Valuable?

NFTs derive their value from a combination of factors, making them attractive to collectors, investors, and enthusiasts alike. The key elements that drive the value of NFTs are:

Scarcity. Limited supply makes certain NFTs rare, increasing their appeal to collectors.
Utility. NFTs can have utility beyond ownership, such as granting access to exclusive content, virtual events, or in-game assets.
Collectibility. Just like physical collectibles (e.g., trading cards), NFTs can appreciate over time, especially if they’re part of a popular collection or series.

Community and Status. Many NFTs, especially those associated with prominent creators or projects, come with social value, creating a sense of community and exclusivity among owners.

How NFT Technology Developed

NFT technology was created in 2017 based on Ethereum smart contracts. Since then, we have witnessed many successful NFT projects and deals. Stories like these perfectly describe the current and future possibilities of the technology.

The development of blockchain technology and the emergence of NFT services coincided with other processes in society and the economy. Many new players appeared in the stock markets, including non-professional traders and amateur investors.

The democratization of financial markets coincided with the pandemic: being in self-isolation, alone with their devices, many people began to pay attention to new financial instruments.

The information that arose around them also played a specific role in the “revival” of NFTs. The big names in the news headlines supporting NFTs couldn’t help but draw attention to them. That is one of the reasons why the success of the technology was inevitable.

High-Profile Projects

In the NFT format, the first piece of art was a black and white work by the artist Banksy, a 2007 stencil called Morons (White). Blockchain company Injective Protocol bought it, burned it, and created an NFT — a virtual asset tied to a “digital image of an art object”.

The first musician to turn his album into a token was DJ 3LAU. He sold a limited edition album and made $11.6 million. After that, singer Grimes, known as the mother of Elon Musk’s child, sold 400 NFTs featuring her drawings. In just 20 minutes, the token sale brought Grimes $5.8 million.

Overall, for creatives, NFTs are a way to monetize their skills and expand their audience. Because of the lack of logistical difficulties, it’s easier to sell artwork digitally than it is offline.

It’s not just artwork that sells in the format of the non-fungible token. Even a popular meme can have a new owner. For example, in the gif Nyan Cat, the cat is hurtling through space and leaves a trail of rainbows behind it, which sold at auction for $590,000.

However, last year’s most high-profile projects in the NFT industry have been the CryptoPunk, Meebits, and BAYC (Bored Ape Yacht Club) collections. They include several thousand collectible cards and pictures in a stylized modern art format. The total value of the collections is estimated at several billion dollars. Hundreds of thousands of crypto enthusiasts and investors are after such NFT exhibits.

These and many other projects likely have growth prospects, as the technology, according to experts, has not yet reached the peak of its capabilities.

How to Buy and Sell NFTs: A Beginner’s Guide to Getting Started

For newcomers, buying and selling NFTs involves a few straightforward steps. Here's a step-by-step guide:

Set up a digital wallet. To store NFTs and cryptocurrencies, you need a digital wallet like MetaMask or Trust Wallet.
Purchase cryptocurrency: Most NFTs are purchased using cryptocurrency, commonly Ether (ETH). You can buy ETH on platforms like Coinbase or Binance.
Choose an NFT marketplace. Popular marketplaces like OpenSea, Rarible, and Foundation host various types of NFTs.
Browse and buy NFTs. Once you’ve found an NFT you like, you can bid or buy it directly. Make sure to check transaction fees, as they vary by blockchain.
Minting and selling your NFTs. If you’re a creator, you can mint your own NFTs by uploading your digital asset to a marketplace and paying a minting fee.

Top NFT marketplaces:

OpenSea: A comprehensive marketplace for various NFTs.
Rarible: A decentralized platform allowing users to create and trade NFTs.
Foundation: Known for high-quality art, often curated by the community.

The Future of NFTs: Beyond Art and Collectibles

NFTs are still in their early stages, but they show promise in sectors beyond art and collectibles. Potential future applications include:

Real estate. Tokenizing physical real estate to streamline transactions, fractionalize ownership, and enhance security.
Identity verification. NFTs could serve as a digital identity, allowing for secure, verifiable identity management online.
Education and certification. Institutions may issue diplomas or professional certificates as NFTs, creating a tamper-proof record of achievements.
Memberships and events. NFTs can function as digital tickets or memberships, granting holders access to exclusive events or communities.

Conclusion

The NFT market is developing extremely fast, and the blockchain infrastructure has undergone significant changes over the past few years. However, today, there are still many questions about how the NFT market can function and in which areas non-fungible tokens can be used.

For example, one potential application of NFT is the blockchain recording of unique documents. Due to the reliability of the blockchain, diplomas, certificates, and various documents can be issued in NFT format, potentially helping to eliminate the risk of forgery.

NFTs are likely to have, and are already having, some impact on formats for creating and distributing content, and art objects. For now, however, it is primarily a trending investment tool for crypto-enthusiasts around the world. The numerous possibilities of this technology will be revealed in the coming years.

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Author:
Ken Melendez
✍️ Head of Content @ Cindicator
📊 Certified Bitcoin Professional
🔐 Blockchain Chamber - Chapter President

Who is Cindicator?

Cindicator is a world-wide team of individuals with expertise in math, data science, quant trading, and finances, working together with one collective mind. Founded in 2015, Cindicator builds predictive analytics by merging collective intelligence and machine learning models. Stoic AI is the company’s flagship product that offers automated trading strategies for cryptocurrency investors. Join us on Telegram or Twitter to stay in touch.

Disclaimer

Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.