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NFTs

What it means and how it works

TokenTalk Staff

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What it means and how it works

Ever since photos of monkeys sold for millions of dollars, people have been asking: what are NFTs? Here we will tell you everything you need to know about NFTs.

So what is an NFT?

NFT stands for Non-Fungible Token.

“Non-fungible” means that the token is unique and can never be replaced by something identical because it does not exist. NFTs are unique.

For example, cash or Bitcoin are fungible. Every $1 or 1 Bitcoin is equal and can be used interchangeably. On the other hand, a unique trading card is unique. If you exchange it for another card, you will have a completely different card.

In the same vein, an NFT is unique and no two non-fungible tokens are identical, which makes them non-fungible. You can trade one with another, but you will end up with an entirely different NFT.

Are they the same as cryptocurrencies?

This is a common misunderstanding since both NFTs and cryptocurrencies are stored on the blockchain.

As we already said, the biggest difference between them is that cryptocurrencies are fungible, while NFTs are non-fungible. Secondly, cryptocurrencies can be divided into smaller parts, so you don’t have to, for example, always trade 1 BTC. However, an NFT is not divisible and must be traded as a whole.

To read: Many of the world’s richest plan to add NFTs to their portfolio

If you translate them to the real world, cryptocurrencies can be considered currency or money. NFTs are more like property titles stored on the blockchain.

So how do NFTs work?

Although many blockchains support non-fungible tokens, the most popular blockchain is Ethereum. Ethereum (ETH) is a cryptocurrency, like Bitcoin (BTC). But Ethereum is also a blockchain that monitors who holds and trades NFTs.

On Ethereum, NFTs are built following the ERC-1155 standard. Originally, on Ethereum they were built on the ERC-721 standard, but the ERC-1155 that emerged a few months later fine-tuned the process and helped reduce transaction costs.

As we said before, NFTs are unique and cannot be duplicated. Although the digital file behind the tokens can be copied many times, ownership of the work cannot be falsified.

Think about it from the perspective of fine art collectibles. You and your friends may have a copy of the Mona Lisa in your living room, but the real one is the one on display in the Louvre museum in Paris. In the same vein, anyone can copy the digital file behind an NFT, but there can only be one original.

What can be NFTized and where did they come from?

Digital art is the most visible form of NFTs today. But in essence, they can be anything digital. The popular NFT marketplace OpenSea has several NFT categories such as music, photography, trading cards, art, and more. In 2021, Twitter co-founder Jack Dorsey sold his first tweet from 2006 as an NFT for $2.9 million.

To read: NFTs in Bitcoin – To be or not to be

At its core, an NFT is just a mechanism for determining ownership. This means it can be used to possess in-game items in the metaverse. A popular application for these tokens is owning virtual real estate in Web3 games like Wolf Game and Decentraland. If blockchain advocates have their way, perhaps one day we could even use NFTs to prove ownership of real land in the physical world.

And although NFTs have only recently become popular, they have been around for nearly a decade. Many credit Kevin McCoy’s digital art titled Quantum as the first NFT, designed and tokenized on the Namecoin blockchain in May 2014.

How are they created?

The process of creating a non-fungible token is called mintage. During minting, digital file information is encrypted and recorded on a blockchain.

There are several online platforms that will help you mint non-fungible tokens, and most will also allow you to list and sell your creations.

OpenSea is the most popular platform for Ethereum-based NFTs. The platform lists millions of NFTs and has accumulated billions of dollars in trading volume since its launch in 2017.

Why are they important?

For artists and creators, NFTs allow them to sell their digital creations to a global audience. To sell a work of art in the real world, for example, an artist will have to rely on an auction house, or a gallery, which limits the audience, and will also keep a considerable part of the proceeds from the sale.

Some marketplaces also allow artists to set royalties for digital art. This ensures that the artist receives a percentage each time the NFT changes hands. In truth, William Shatner (Captain Kirk of Star Trek fame) uses this as a source of passive income.

For collectors and gamers, non-fungible tokens allow them to become immutable owners of a digital asset. As we explained earlier, this could be anything from a unique costume for your digital avatar or a piece of land or structure in the virtual world.

Tokens can also function like any other speculative asset. You can buy and hold it and wait for its price to rise, and then sell it for a profit.

Is anyone other than individuals using NFTs?

Oh yeah. A few years ago, many brands used them as part of their marketing strategies. Tokens offered brands a new way to interact with their consumers.

Popular fast-food giant Taco Bell has created a bunch of artwork called NFT Taco Art inspired by its tacos. Similarly, TIME magazine created and auctioned some of its most iconic covers as non-fungible tokens.

To read: See how you can make money by lending your NFT

McDonalds has also used them to increase engagement. Instead of auctioning NFTs to the highest bidder, the fast-food chain offered them as prizes in a competition.

French automaker Citroën has created NFTs of its cars, which owners can use to race in the game Riot Racers.

Are they safe?

They are virtually impossible to hack. However, as with cryptocurrencies, the weakest link in the security of a non-fungible token is the key. As long as your keys are safe, your NFT will be too. But the devices you keep the key on can be stolen, lost, or destroyed. Therefore, the cryptocurrency mantra, neither your keys nor your coin, it also applies to NFTs.

That being said, scams are not uncommon.

There is nothing stopping someone from copying an already NTF digital asset and then minting another non-fungible token for it. However, it would not be the authentic original, but rather a forgery. This is one of the biggest scams of the moment.

For more technology news, click here.

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We are the editorial team of TokenTalk, where seriousness meets clarity in cryptocurrency analysis. With a robust team of finance and blockchain technology experts, we are dedicated to meticulously exploring complex crypto markets with detailed assessments and an unbiased approach. Our mission is to democratize access to knowledge of emerging financial technologies, ensuring they are understandable and accessible to all. In every article on TokenTalk, we strive to provide content that not only educates, but also empowers our readers, facilitating their integration into the financial digital age.

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