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What are NFTs (Non-Fungible Tokens)?

You’ve probably heard that the hot new ticket in town is the hard to pin down ‘NFT’. If you’re confused about what an NFT is and why you should care, you’re not alone.

What are NFTs (Non-Fungible Tokens)?
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NFTs

So, let’s shed some light on the blockchain’s newest spawn – the non-fungible token!

Are they art? Are they a new mode of ownership? Are they a type of cryptocurrency? Are they a platform or a new technology? Should I buy one?

What in the world is an NFT?

All excellent questions. Let’s cut through the fog and uncover this fresh phenomenon.

What are non-fungible tokens?

An NFT (non-fungible token) is essentially a unique digital asset, such as digital art, that lives on the blockchain.

‘Fungible’ means that something can be swapped for equal assets (such as swapping one bitcoin or one dollar for another). However, an NFT is a unique digital asset, with an exclusive digital signature, which makes it impossible to be swapped for a ‘like’ asset - not unlike an original artwork. Thus. they are ‘non-fungible’.

Many NFTs represent real world or digital objects such as artworks, music, videos, and games, that you can buy and possess and can only have one owner.

Represent is the key word here. Curiously, even though you might purchase the NFT of a painting – you don’t own the painting. You don’t have any copyrights, legal rights, or physical rights to the real-world item, just the digital asset.

How do NFTs work?

the vast majority of NFTs live on the same blockchain that the cryptocurrency Ethereum lives on. Although in theory, they could live on any blockchain, such as bitcoin.

As mentioned, many, if not the majority of NFTs are representative of a digital artwork, image, video, or similar. When you buy an NFT, you own a unique digital version of that asset.

The idea of value in an NFT revolves around the scarcity and sole ownership of that NFT. As with many commodities, scarcity is the driver of selling and purchasing NFTs.

NFT examples

As an example of NFTs, ‘Nyan Cat’ is a well-loved video meme from around 2010. In 2020, its creator turned the digital art into an NFT and auctioned it. It sold for 300 ETH, which equates to £266,383 GBP at the time of writing. Far out.

Digital artist 'beeple' continued the trend and made ludicrous amounts of money with his NFT exclusive collage called "Everydays - The First 5000 Days". It recently sold through famed auction house Christies for £56,546,694 GBP.

So yeah, it’s hot property.

So what’s the actual purpose of an NFT?

The purpose of an NFT, for the buyer, is to own a one off ‘collector’s item’ in digital form as opposed to a physical asset. Therein lies its appeal and value to many purchasers – exclusivity.

Many buyers hold hope that their NFT will increase in value, to serve as an investment. The seller of the NFT shares this aspiration. In this way it’s an extremely faith based prospecting endevour.

As for the seller, many NFTs start life from the ambition of an artist to monetise their work. Artists can usually only sell their physical artwork as either prints and copies, or the original itself.

Now, artists can instead sell their work directly to consumers as an NFT, broadening their methods of obtaining remuneration for their work and allowing for increased profits.

So what’s the difference between an NFT and cryptocurrency?

While NFTS and cryptocurrencies are both stored, recorded, and traded on a blockchain, that’s where the similarity ends.

The difference between them would be the difference between storing an original Picasso in a safe next to a pile of cash. They both live in the safe, but a Picasso is not cash, and cash is not a Picasso. Even though you could buy a Picasso for cash, they are not the same thing.

As mentioned, physical money and cryptocurrency have a ‘fungible’ status that entails the possibility to exchange them equally. A dollar is worth another dollar, and a bitcoin equals a different bitcoin. You can exchange like-for-like and there is no difference between them.

An NFT is different. While NFTs exists on a blockchain to catalogue ownership and lay out a secure database framework for selling and buying, they are not equally exchangeable and they are not currency.

This is because each NFT is unique, there are no others like it and their value is up to the market.

Why are non-fungible tokens important?

Interesting question. While you could say that in and of themselves, they are not particularly important and assume a rather curious niche-like status in the broader world of finance and blockchain technology.

However, when you look at them in a broader context, with a future mindset, they become more interesting.

Modern finance systems consist of sophisticated trading and lending systems based on various asset types. Providing digitised representations of physical assets is a step forward in evolving the digital economy infrastructure and philosophy, much like crypto did.

We are essentially witnessing the birth and negotiation of new ways to trade, record, create and store value. It could be conceived of as an experiment in the emerging global economy.

The concept of physical assets being digitally represented isn't new, nor does it require unique identification. But when such concepts are combined, in conjunction with the security and decentralisation of blockchain technology, then it becomes a powerful force to influence change.

How can I buy NFTs?

To create an online NFT collection, you’ll have to buy a digital wallet that stores NFT or cryptocurrencies. It'll be necessary to get a bit of cryptocurrency such as Ethereum, depending on how the service provider accepts payment.

Cryptocurrencies can be obtained by paying by credit card on sites such as Coinbase, Kraken, eTORO and PayPal. Then, you can send them back to your preferred wallet. You must also consider fees while looking at possible crypto purchasing options.

Once you have coins in your wallet, you then find an NFT marketplace or auction to make a purchase or undertake NFT transactions.

 

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