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NFTs are confusing.
Half the people you've probably heard joking about NFTs canʻt explain what they are. Besides some obscure technical language, non-fungible tokens bring up some philosophical and economic questions that remain unanswered today:
- What constitutes digital ownership?
- What creates digital value?
- Will we one day live in a digital world?
The people that have answered in favor of NFTs are buying them in a frenzy. Those in opposition laugh from the sidelines, calling it the worst fad since Beanie Babies.
In this article, we’ll help make NFT’s less confusing so that you can understand what they are — and more importantly, whether or not you should spend your hard-earned money on them.
What is an NFT?
NFT stands for "Non-Fungible Token." Youʻve probably heard that before, and know thatʻs usually where the explanation stops.
What is a Token?
Letʻs start with the "T" in NFT. A crypto "token" has many different definitions. Still, in its simplest form, a token is ownable data, created for some utility or representing anything from a storeʻs loyalty reward points to company stock.
Tokens can act as a digital currency like Ethereum or Solana. However, what makes a token different from a full-fledged cryptocurrency is that they are built on top of an existing network — meaning they use the security of a larger existing network like ETH or SOL.
Think of an NFT as an arcade token...
Chuck E. Cheese uses the existing US dollar "network," which allows people to exchange USD for tokens that have the utility of unlocking the Skee Ball machine.
The stores themselves do not have a proprietary way of verifying your funds, but they use a credit card reader which taps into banking records and turns your US dollars into an arcade-friendly token.
Chuck E. Cheese tokens can be "minted" at whatever amount the store needs. They arenʻt unique or have any utility outside of the arcade. Anyone can copy and paste a few lines of code and create their own tokens on networks like Ethereum.
However, just because a token is based on the ETH network dosnʻt mean it has any value. You canʻt buy a steak dinner with your leftover Chuck E. Cheese tokens.
What does "Non-Fungible" mean?
A non-fungible token serves as a contract to prove that you own a unique piece of digital property. Not only do you own it, but it is non-fungible, meaning it isnʻt replaceable or interchangeable; there can only be 1/1.
With a stock or cryptocurrency like Bitcoin, all shares or Bitcoins are the same and interchangeable. There are no Bitcoin #1 or first edition Tesla shares; they all trade at the same price.
NFTs are unique and cannot be broken down or split up into smaller shares. Because stock and Bitcoin are fungible, you can buy a fractional share of TSLA, or 0.0001 BTC.
NFTs create extreme scarcity by verifying their individuality.
How do NFTs work?
NFTs use blockchain technology to record and verify ownership. The blockchain works like a traditional bank or records office. If you want to use your bank card to buy a cup of coffee for $4, your bank has a record tallying up your credits and debits to make sure you have enough funds.
The difference with blockchain is it allows everyone to see the records and act as a record keeper themselves.
Blockchain technology decentralizes the process across hundreds of thousands of personal computers, specialized hardware, or for most cryptocurrencies with NFTs, "stakers."
Staking is a process where holders of cryptocurrencies with NFT capabilities like Cardano or Solana can lock away their crypto for a set amount of time to become an automated network validator.
This is known as Proof of Stake (PoS). PoS allows anyone to strengthen the network and receive a reward thatʻs usually around a 3-7% annualized yield.
PoS works on the strength of numbers with a majority rule. To falsify a transaction, someone would have to stake 51% of the total networkʻs value.
In the case of Cardano, someone would have to put up more than $15 billion worth of Cardano to write a false ledger allowing them to send and receive money they didnʻt have.
Crypto networks like Cardano or Solana can efficiently process transfers of funds.
NFTs function in the same way, with a public ledger of who owns what digital property.
NFT vs. Cryptocurrency: What's the Difference?
NFTs are not a cryptocurrency, but you use cryptocurrencies as a network to buy, sell and mint NFTs.
The minting process might require a fee of a few dollars to several hundred, paid out to the network, which then stores and verifies ownership of the data.
NFT "ownership" doesnʻt exactly give ownership of the data but instead connects you to a secured server where the data is stored.
These servers are built on cryptocurrency networks like Ethereum, Solana, or Cardano.
For example, minting or buying an NFT on the Solana network versus Ethereum is sort of like choosing your credit card company.
There may be different fees, rewards, or security measures on each network, and an NFT minted on one network is not transferable to another network.
What gives an NFT value?
Originality creates scarcity, and scarcity creates value. NFTs allow for scarcity in digital art and collectibles.
There is a slight problem with that...
On the internet, anyone can just right-click on an image of NFT trading for hundreds of thousands of dollars and hit "save as."
A non-fungible token that can be infinitely duplicated with two clicks sounds very fungible.
While anyone can screenshot NFT, only one person can verifiably "own" the image.
What people are trading isnʻt the right to view a digital art piece, but the right to the verifiably original piece of work.
How To Invest in NFTs
Thatʻs the neat thing: You donʻt.
Some people call NFTs “gambling”, but that might be too generous.
At least at a casino, you can calculate your odds at the roulette wheel.
With NFTs, there is simply no reliable means to calculate the valuation of a digital art piece and thus cannot be called investing.
Buying an NFT is pure speculation.
Suppose you like the idea of NFTs as a whole and want exposure while minimizing some risk. In that case, you can purchase the underlying network coins featuring NFT markets like Ethereum, Solana, Avalanche, or Decentraland.
To put the risks of NFTs into perspective, cryptocurrency is considered extremely volatile by people in traditional finance, and digital art NFTs are considered extremely volatile by people in crypto.
NFT art is risky.
However, NFTs are proving to have more utility than just digital art...
Types of NFTs
Here are a few of the types of NFTs on the market today.
Digital art
The absolute simplest form of NFTs are digital art.
NFT technology, application, and acceptance are at the very beginning stages today. While digital art is currently the most popular use case, it does not mean thatʻs the only thing NFTs can do.
Digital art is to NFTs, what Pong was to video games.
Gaming
One of the most extensive possible uses of NFTs is video games. NFTs can be implemented to create and sell one-of-a-kind in-game items.
NFT gaming goes beyond what we think of a game today. NFTs could allow you to have a unique in-game identity and a digital home. You can have an entire world of NFTs:
- Virtual reality shopping for digital or physical items
- Office spaces, with your coworkers represented as their NFT avatars
- Digital real estate, theme parks, and casinos
Much of that is already a reality on NFT projects like Decentraland and Sandbox. It might not look like much now, but NFTs allow for permanent fixtures in the digital world that some are calling the "Metaverse."
One day the metaverse might be so lifelike that we spend most of our time there working and playing.
Collectibles
On March 16th, 2021, Twitterʻs CEO, Jack Dorsey, auctioned off an NFT of Twitterʻs first Tweet for 2.9 million dollars. The tweet isnʻt gone from the internet after it got turned into an NFT, but Dorsey has given his stamp of approval for the NFT representing a piece of internet history.
What gives collectibles value is the original creatorʻs "signature." You can buy a full-size replica of the Declaration of Independence, but it's not the piece of parchment that was written and signed by the Founding Fathers.
The question from an "investment" standpoint is if an NFT can represent the original which may have been posted on a different platform.
Real Estate
NFTs arenʻt just for digital items, but they can be used to represent anything, including the deed to your house.
We might be very far away from real estate agents and governments adopting NFT technology, but it could one day streamline the record process for any physical property.
How To Buy, Sell, or Trade NFTs
OpenSea.io
OpenSea is the largest Ethereum NFT marketplace.
The biggest projects like Bored Apes and Crypto Punks have sold here for millions of dollars worth of ETH. OpenSea averages a 24-hour volume of $2-5 million.
The downside to OpenSea isnʻt the marketplace itself but the Ethereum network. You can expect to pay hundreds of dollars for a transaction at peak hours when the network is overloaded.
Superrare.com
SuperRare focuses primarily on more traditionally styled artworks. They are not nearly as popular as their 8-bit, auto-gen NFT cousins, but some great pieces are available.
SuperRare is also ETH-based, so get ready to shell out some hefty fees.
Rarible.com
Raible features Ethereum based NFT projects like Decentraland, Sandbox alongside other digital artworks.
Raible feels more like a blend of a social media platform and a marketplace, making it very popular for buyers and sellers.
Enjin
Enjin aims to be the Steam of NFT gaming.
Steam is the largest video game marketplace, but they have boldly stated that they will never allow NFT games. Thatʻs where Enjin comes in. Enjin is not a game itself but a platform for developers.
The Bottom Line: NFTs
Digital art NFTs are a gamble at best, but donʻt let that distract you from NFTs' potential. The real estate market exists because of property law. NFTs are self-regulating digital property laws.
NFTs are a framework for commerce. Volatility is at an all-time high because the marketsʻ have just opened up, and everyone wants to be first in line.
Go ahead, laugh, and screenshot someone's $30,000 8-bit .jpeg. However, there is going to come a day where NFTs are much more than that.
One day, you might find yourself spending so much time in the digital world that you buy yourself a digital luxury car and a fresh pair of NFT Jordan 1ʻs.
