FAQ NFTs: Everything You Need to Know About NFTs
After a digital-only artwork has sold at Christie’s auction house for $69m, everyone is buzzing about a unique digital token known as an NFT. Where Bitcoin was called the digital answer to currency, NFTs are now being promoted as the digital answer to collectibles.
NFTs will stay with us for a while, and you can't ignore this fact. Moreover, you can't ignore the most asked questions about NFTs to figure out what it is and how to use it. We prepared the list of FAQs about the new phenomenon NFTs.
- 1. What is an NFT? What does NFT stand for?
- 2. How do NFTs work?
- 3. How are NFTs used?
- 4. What's next for NFTs?
1. What is an NFT? What does NFT stand for?
Non-fungible tokens (NFTs) are certificates of authenticity that use blockchain technology to prove ownership and scarcity of digital assets. NFTs are pieces of digital content linked to the blockchain (the digital database underpinning cryptocurrencies such as Bitcoin and Ethereum). Unlike NFTs, those assets are fungible, meaning they can be replaced or exchanged with another identical one of the same value. For example, a Bitcoin is fungible since you can trade one for another bitcoin, and you’ll have exactly the same thing.
On the other hand, NFTs are non-fungible meaning they are not interchangeable. So, when you trade NFT for a different let’s say limited-edition baseball card, you’d have something completely different.
So, what does NFT mean? NFTs are a sort of certificate of authenticity. NFTs aren’t the item itself. It represents ownership in things and it tells everyone in the world that you own something. NFTs are typically used to buy and sell digital artwork and can take the form of GIFs, tweets, virtual trading cards, images of physical objects, video game skins, virtual real estate, and more.
What is NFT digital art?
While digital art has been around for a while, NFTs begin to transform the way we buy and sell digital art. When something exists in the physical space, it’s easier to understand why they are worth something. It can be harder to understand why digital art, or any other digital file, has value.
Digital art has long been undervalued, in large part because it’s so freely available. To help artists create financial value for their work, NFTs add the crucial ingredient of scarcity. For some collectors, if they know the original version of something exists, they’re more likely to crave the “authentic” piece. Scarcity explains why baseball-card collectors, for example, are willing to pay $3.12 million for a piece of cardboard with a picture of Honus Wagner, a legendary Pittsburgh Pirate.
What are the examples of NFTs?
It seems that world history was made on March 11, 2021, when digital artist Mike Winkelmann aka Beeple, sold a non-fungible token (NFT) artwork for $69m at a Christie’s auction. No painting, print, or sculpture exchanged hands; instead, it was a GIF that was sold via a digital transaction that consisted of getting an NFT digital token, also known as ‘bitcoin for art’.
But earlier, on 19 February, an animated Gif of Nyan Cat - a 2011 meme of a flying pop-tart cat - sold for more than $500,000. A few weeks later, musician Grimes sold some of her digital art for more than $6m. It is not just art that is tokenized and sold. Twitter's founder Jack Dorsey has promoted an NFT of the first-ever tweet, with bids hitting $2.5m.
Projects like Decentraland, Landgraze, Cryptovoxels and Somnium Space allow you to own virtual land as NFTs. Ownership of the land gives you build access, so as thousands of people own land and people build whatever they want from conference centers to art galleries.
NBA Top shot has seen over $100M in sales volume. These aren’t just collectible NFTs, they can also be incorporated in multiple games. In fact, a whole ecosystem of sports games can be built around these NFTs. Digi-physical goods are another use case of NFTs. Metafactory for example sells custom hoodies in real life that come with an NFT.
What are CryptoKitties?
CryptoKitties is a game where you collect, breed, and even sell virtual cats for real money. Every single cat in the game is entirely unique and also impossible to replicate. One single person owns them so that no one can take them away from him/her, and it is impossible to destroy the virtual kittens.
So, in 2017, NFTs circulated by CryptoKitties, a project developed by Dapper Labs to sell ownership of unique cat avatars, jumped so much in popularity that a surge in demand took up significant transaction space on the Ethereum blockchain and slowed the entire Ethereum network in December of that year.
What makes NFTs so unique?
Traditional works of art such as paintings are valuable because they are one of a kind. But digital files can be easily and endlessly duplicated. With NFTs, artwork can be "tokenized" to create a digital certificate of ownership that can be bought and sold. As with crypto-currency, a record of who owns what is stored on a shared ledger known as the blockchain.
The records cannot be forged because the ledger is maintained by thousands of computers around the world. NFTs can also contain smart contracts that may give the artist, for example, a cut of any future sale of the token.
Why are some NFTs worth millions?
An NFT is a new type of digital asset. Ownership is recorded on a blockchain — a digital ledger similar to the networks that underpin bitcoin and other cryptocurrencies. Each NFT is unique and can’t be duplicated. So, you can think of them as unique digital items nobody else owns. Sure, people might have an image of a piece of art you purchased as an NFT, for example, but they don’t own the original. The same as you can have a copy of van Gogh’s painting but it won't be worth millions as the original. That’s what makes NFTs enticing. And there’s the prospect that because they can be rare, you might be able to sell one later for more money. Just like you would with fine art.
But how can such things have value? Just like with any other valuable item, the value isn’t inherent to the object itself but is rather assigned by people who deem it valuable. In essence, value is a shared belief. It doesn’t really matter if it’s fiat money, precious metals, or a vehicle – these things have value because people believe they do. This is how every valuable item becomes valuable, so why not digital collectibles?
2. How do NFTs work?
There are various frameworks for the creation and issuance of NFTs. The most prominent of these is ERC-721, a standard for the issuance and trading of non-fungible assets on the Ethereum blockchain.
A more recent, improved standard is ERC-1155. It enables a single contract to contain both fungible and non-fungible tokens, opening up a whole new range of possibilities. The standardization of the issuance of NFTs allows a higher degree of interoperability, which ultimately benefits the users. It basically means that unique assets can be transferred between different applications with relative ease.
If you are looking to store and gaze upon the beauty of your NFTs, you can do that in Trust Wallet. Just like other blockchain tokens, your NFT will exist on an address. It’s worth noting that NFTs can’t be replicated or transferred without the owner’s permission – even by the issuer of the NFT.
NFTs can be traded in open marketplaces, such as OpenSea. These markets connect buyers with sellers, and the value of each token is unique. Naturally, NFTs are prone to price changes in response to market supply and demand.
What cryptocurrency got to do with NFTs?
Some think that NFT is a new kind of cryptocurrency. It’s not true!
NFTs are not cryptocurrencies. Cryptocurrencies, such as Bitcoin are the native payment currencies of a blockchain, a chain of blocks produced by miners that represents an incorruptible ledger of transactions. Many platforms allow you to buy, hold and exchange different cryptocurrencies to purchase just about anything.
However, unlike NFTs, cryptocurrencies are deemed fungible and interchangeable, like any commodity or traditional currency. On the other hand, an NFT is a unique token that is conceived, for the large majority, on the Ethereum blockchain. As such, NFTs are governed by Ethereum smart contracts, and transfers of ownership are written into the blockchain.
These smart contracts are made up of a specific code that contains all the essential information and handles all the important actions relating to an NFT such as its transfer and verification. These actions constitute the foundation of Ethereum’s ERC-721 protocol, wherein the uniqueness of an NFT is defined by the information stored within the NFT’s metadata, among which is a ‘token ID’ that points to an image, web domain, artwork, or any valuable digital resource.
What blockchain got to do with NFTs?
Blockchain is a crucial technology for creating NFTs. It uses cryptography to chain blocks into a growing list of records. Each block is locked by a cryptographic hash, or string of characters that uniquely identifies a set of data, to the previous block. The transaction records of a chain of blocks are stored in a data structure called a Merkle tree. This allows for fast retrieval of past records. To be a party in blockchain-based transactions, each user needs to create a pair of keys: a public key and a private key. This design makes it very difficult to alter transaction data stored in the blockchain.
Although blockchain was initially devised to support fungible assets like Bitcoin and other cryptocurrencies, it has evolved to enable users to create a special kind of crypto asset, one that is nonfungible, meaning provably unique. Ethereum blockchain is the basis for most of the currently offered NFTs because it supports the ERC-721 token standard, enabling NFT creators to capture information of relevance to their digital artifacts and store it as tokens on the blockchain.
When you pay for an NFT, what you get is the right to transfer the token to your digital wallet. The token proves that your copy of a digital file is the original, like owning an original painting. And just as masterpiece paintings can be copied and distributed as inexpensive posters, anyone can have a digital copy of your NFT.
Your private crypto key is proof of ownership of the original. The content creator’s public crypto key serves as a certificate of authenticity for that particular digital artifact. This pair of the creator’s public key and the owner’s private key is primarily what determines the value of any NFT token.
What is Ethereum and how it relates to NFTs?
Ethereum is a technology that lets you send cryptocurrency to anyone for a small fee. Ethereum blockchain is the basis for most of the currently offered NFTs because it supports the ERC-721 token standard, enabling NFT creators to capture information of relevance to their digital artifacts and store it as tokens on the blockchain.
Can anybody create and sell NFTs?
Yes! Everyone can sell an NFT. Anyone can create artwork, turn it into an NFT on the Blockchain, and put it up for sale on a marketplace of choice. You can even attach a commission to the file, which will pay you every time someone buys the piece.
What does an NFT collector actually buy?
Some digital-art collectors say they’re paying not just for pixels but also for digital artists’ labor–in part, the movement is an effort to economically legitimize an emerging art form.
You can take a photo of the Mona Lisa in the Louvre museum but that doesn’t mean you own the original artwork. The same can be said of the modern art form like digital art which can be downloaded from the internet and printed. The purpose of NFTs is that they can be used to trace an object’s digital provenance, allowing a select few to provide ownership. Broadly speaking, it’s a way to create authenticity and scarcity of the item.
3. How are NFTs used?
NFTs are now being used to authenticate digital assets in art, music, sports, and other popular entertainment. NFTs can be used to represent items such as photos, videos, audio, and other types of digital files. Access to any copy of the original file, however, is not restricted to the buyer of the NFT. While copies of these digital items are available for anyone to obtain, NFTs are tracked on blockchains to provide the owner with proof of ownership that is separate from copyright.
NFTs of artworks are similar to autographed items. The unique identity and ownership of an NFT is verifiable via the blockchain ledger. NFTs have metadata that is processed through a cryptographic hash function.
What are the NFTs marketplaces?
There are several marketplaces that have popped up around NFTs, which allow people to buy and sell. These include OpenSea, Rarible, and Nifty Gateway, there are plenty of others.
How do I make money with NFTs?
The most simple way to make money with the NFT is to sell NFT items on one of the marketplaces. The procedure is quite simple. So, if you want to sell your work as NFTs you have to sign up with a marketplace, then “mint” digital tokens by uploading and validating the information on a blockchain (typically the Ethereum blockchain, a rival platform to Bitcoin). Doing so usually costs anywhere from $40 to $200. You can then list their piece for auction on an NFT marketplace, similar to eBay.
How to buy NFTs?
You can shop for them online through various marketplaces. Some of the most common NFT marketplaces include OpenSea, Mintable, Nifty Gateway, and Rarible. Think of it as an online gallery where you can browse digital art, trading cards, and other collectibles. There are also niche marketplaces for more specific types of NFTs, too, such as NBA Top Shot for basketball video highlights or Valuables for auctioning tweets such as Dorsey's currently up for bid.
It works like an auction house, where you offer bids on items and hope you’re the winner, but some listings let you “Buy now” for a set price. But there are a few things to consider before buying. For instance, you'll need to decide what marketplace to buy from, what type of digital wallet is required to store it and what kind of cryptocurrency you'll need to complete the sale.
Some marketplaces charge a "gas" fee, which is the energy required to complete the transaction on the blockchain. Other fees can include the costs for converting dollars into Ethereum (the currency most commonly used to buy NFTs) and closing expenses.
How to sell NFTs?
NFTs are also sold on marketplaces and the process can vary from platform to platform. You'll essentially upload your content to a marketplace then follow the instructions to turn it into an NFT. You'll be able to include specifics such as a description of the work and suggested pricing. Most NFTs are purchased using Ethereum but can also be bought with other ERC-20 tokens such as WAX and Flow.
Are there any risks of buying/selling NFTs?
There are a few concerns about NFT, like valuations, storage and regulations. Moreover, while NFTs offer a certificate of ownership, the creator of an NFT doesn’t have to prove ownership of the original work. NFT marketplaces are already dealing with instances of stolen art and copyright violations. For example, per Yahoo, an artist known as Ashtoshi says a selfie was put up for auction on Rarible, without her consent, for over $1,051 worth of crypto.
What are the big brands that are getting into NFTs?
Brands have seized on NFTs as a way to engage with their audiences and promote their products. In recent days, brands have leaped aboard the multi-million dollar NFT bandwagon, with companies ranging from Taco Bell, Charmin, Pizza Hut, Nike, Pringles are minting their own non-fungible tokens.
4. What's next for NFTs?
NFTs have already accelerated a larger trend of digital economic innovation. NFTs have confirmed that the public is feeling increasingly favorable toward a crypto-economy and is embracing short-term risks in return for creating new business possibilities.
NFTs have already made significant inroads into the luxury and gaming industries, and have plenty of room to grow beyond these initial applications. The art sector will continue to be an important segment of the overall NFT market and is likely to gradually reach maturity over the next couple of years, although it is likely to be surpassed by other digital certificate applications like trademarks and patents, training, and upskilling certificates.
Why NFTs are so popular right now?
A lot of digital artists, fed up after years of creating content that generates visits and engagement on Big Tech platforms like Facebook and Instagram while getting almost nothing in return. Envision a future in which NFTs transform both their creative process and how the world values art, now that it’s possible to truly “own” and sell digital art for the first time.
Technologists, meanwhile, say NFTs are the latest step toward a long-promised blockchain revolution that could radically transform consumer capitalism, with major implications for everything from home loans to health care.
Are NFTs overhyped?
It’s difficult to say whether the NFTs overhyped or not. For sure, NFT is thriving right now due to its novelty and ability to create a new approach towards authenticity in digital art. There is a high chance that NFT will be used in many sectors like real estate and advertising.
We hope that the article answers your questions. If you have questions or suggestions that were not included in this article, drop a line in the comments and we will include it in this FAQ.