Although Quantum, a hypnotic pixelated octagon, was already minted by the digital artist Kevin McCoy in 2014, it wasn’t until much later in 2021 that NFTs have exploded into the market scene. And the trigger? The $69-million sale in March 2021 of “Everydays: The First 5,000 Days,” an NFT digital collage of 5,000 images by the digital artist Beeple. The commotion over NFTs has turned heads not just from the art circles but also from sports and business. And today, NFTs are gaining more popularity even from the mainstream arenas.
So what are NFTs? Read on to discover what NFTs are all about. But before we introduce NFTs, you must first have an understanding of cryptocurrencies, which are the NFTs’ medium of exchange, as well as how they work.
What are cryptocurrencies?
A cryptocurrency or crypto is, in its simplest definition, digital or virtual currency. The “crypto” part is coined from cryptography, the information and communications system that allows only transmitted encrypted data (data converted into unreadable format) to be seen only by the owner, who has the “key” to decrypt the data. If the data owner so chooses, they can send the “key” to a recipient, who accepts and uses the key to likewise decrypt the data.
These blocks of encrypted data are interlinked to form one single blockchain. A blockchain is basically a digital database or ledger of transactions shared in a network of computers. Every time a new block or node is added to the blockchain, the transaction has to be verified by the majority of nodes before it can be stored in the virtual ledger. Thus, there is a working mechanism in the blockchain that makes transactions on the blockchain, such as those of cryptocurrency, highly secure from duplications and hacking.
How do they work?
Cryptocurrencies, like Bitcoin and Ethereum, are on public blockchains, making transactions open and decentralized. They are, unlike fiat currencies that are subject to regulations from the world’s governments. This means that anyone can buy and sell cryptocurrency without revealing their identities unless they choose to.
To trade cryptocurrencies, you need to have a digital wallet, which essentially holds your cryptos. All you need to do is create an account in a cryptocurrency exchange platform, such as Binance, Coinbase, or Kraken, and secure a wallet address. Then you can start purchasing cryptos using fiat or physically real money. Your wallet address will allow the exchange of fiat and cryptocurrency to take place. So where does NFT fit in all this? Let’s first take a look at that seemingly odd term: ”non-fungible.”
What does non-fungible mean?
Definition of non-fungible
If you’ve been on the internet for the past year or so, it’s virtually impossible to be unfamiliar with NFTs. You may even have googled it at one point to discover that NFTs are non-fungible tokens. Let’s further break down what that means.
Non-fungible refers to anything that is unique and cannot be interchanged or replaced with anything like it. A typical example used to explain non-fungibility is the baseball card Honus Wagner T206, a collector’s item. You may have pictures taken of it or have someone make duplicates of it, but the original is solely yours. Unless you trade it or sell it to someone else, you will forever be the owner of that non-fungible item. That Honus Wagner T206 is your non-fungible asset.
What is the difference between fungible and non-fungible tokens?
Fungible assets are, of course, the opposite of non-fungible assets. Consider oil, bonds, and dollar bills. All these are examples of fungible goods and are common and easily traded for an identical item. They represent assets that can be exchanged with something exactly like it and which would have the exact same value or essentially have the same identical properties.
Fungible tokens would then be non-unique representations of digital assets, such as cryptocurrencies. They are therefore generic, divisible, and interchangeable. Take the example of bitcoin. When you have one bitcoin, you can exchange it with another bitcoin and there will be no difference. You can also split the value of that bitcoin into fractions of it in the same way that you can split the value of a dollar bill.
Non-fungible tokens, on the other hand, are one-of-a-kind, non-divisible, and non-interchangeable representations of digital assets. A digital asset is something that can be stored digitally, like illustrations, animations, and digital artwork. They can also refer to other forms of digital content such as photos, videos, even tweets.
What are NFTs?
In other words, NFTs are unique digital representations of digital assets with inherent value, the use of which is limited by the rights of the owner. So what role does cryptocurrency play in the world of NFTs?
NFTs, on a high level, can further be defined as non-interchangeable units of data (remember the blocks or nodes we talked about earlier?) that are built with cryptocurrencies and are managed and held in the blockchain space. To create or “mint,” buy, or sell NFTs, you will need to have and use cryptocurrencies.
Currently, it is generally the Ethereum blockchain that supports NFTs, although there are other lesser-known blockchains that you can use for NFT transactions.
What can NFTs be used for?
NFTs are used by content creators to enhance the earning potential of their digital creations. Digital artists have made large profits by minting their creations. Beeple and Whisbe, for instance, have each sold their NFT art of digital collages and videos for millions of dollars.
In the world of sports, college football athletes and professional league stars have also leveraged NFT for sports to create more value for their NIL (name, image, and likeness) by minting trade cards, videos, and other sports memorabilia.
Others who purchase NFTs from the NFT marketplace see them as investments to hold on to until such time that these can be sold at higher values. Some buy NFTs for the purpose of collecting them and keeping them for their own pleasure.
Definition of NFT
Why would someone create or want to own an NFT?
Through NFTs, people are able to create value with unique tokenized assets. Once a digital asset is minted or “turned” into an NFT, it becomes one of a kind, and therefore scarce. In a way, the NFT is not just a digital asset but also the verifiable proof of digital ownership. Once you are the verifiable owner of an NFT, that fact can never be taken away from you until you decide to list, sell or trade the NFT. That makes you the sole owner of a rare item, the value of which can go up in due course.
Some financial circles also see NFTs as investments that can hedge against inflation, since the value of NFTs is not subject to regulations and whatever is going on in politics or in the economy.
What is digital ownership?
NFTs also serve as a digital proof of ownership of the digital asset. This is the proof that what you possess is undeniably the only one of its kind. For this to happen, each NFT has an identification that is tied up to a singular ETH address. Your proof of ownership is your private key that you can use to access the ETH address.