NFTs Explained

NFT was a buzzword in the cryptocurrency circles not so long ago. People often used to associate NFTs with instant wealth. People used to suspect that NFT creators and buyers would become wealthy quickly. Wonder why. Perhaps, because they knew how to “token” up the cash and “mint” their own success.

The words token and minting are closely linked to NFTs. You will find out how they are related. After reading this article, you will also understand how NFTs work and how they are different from cryptocurrencies. We will also cover the benefits of NFTs and explain what non-fungible or the “NF” in NFT is.

For all the popularity and buzz around NFTs, the concept remains a mystery to many. We hope to demystify NFTs and help you better understand their impact and where things might go in the future.

What Is NFT?

NFT stands for non-fungible token. It is a digital identifier that certifies the ownership of some asset, physical or digital. Owners who wish to sell their assets can tokenize them via a blockchain-powered process that involves the creation of NFTs.

Each NFT is unique as it has a specific set of ownership data. Because all the information is recorded on a blockchain, anyone can check the details of the NFTs issued. For the holders of NFTs, there is transparency and security in the fact that their ownership of the tokens is verifiable.

NFTs have some intrinsic value and can be traded for money or cryptocurrencies. There are a variety of assets that can be tokenized into NFTs. Real estate, art, music, videos, and in-game items are some examples of assets that have been tokenized in the past.

Since every NFT is a unique cryptographic token, it cannot be replicated and is non-fungible. We will talk more about the non-fungible part later on.

NFTs are also compatible with smart contracts that can be used to execute certain transactions after the NFTs have been minted. For example, smart contracts can be used to automatically process royalty payments or trigger payments if the NFT is sold by its holder. Specific conditions that trigger transactions can be executed using smart contracts.

How Do NFTs Work?

NFTs are powered by blockchain technology. Blockchain is a digital ledger system that is decentralized and not controlled by a central authority. The process of creating NFTs is called minting.

In minting, a new block in a blockchain is created. Each token is then assigned to a blockchain address. Each token is associated with one owner. The information of that owner including his/her address is recorded in the block. The token resides in that address. All of the NFT information is finally validated and the block is closed.

The information stored in the block is publicly available for anyone to verify. An NFT minting process can involve any number of NFT tokens. The key is that each token will have a unique identifier associated with it and that is what makes the tokens non-fungible.

How Are NFTs Different From Cryptocurrencies

The non-fungibility aspect is the difference between NFTs and cryptocurrencies. If there are two bitcoins, they are treated the same by their holders or transactors. One coin can be exchanged for another. The value of one bitcoin is the same as another bitcoin on an exchange. Different exchanges may have different values for Bitcoin, but the value of one exchange stays the same.

However, each NFT is unique and has a unique identifier. One cannot be exchanged with another. Each NFT token is irreplaceable. Each token is almost like an identity card or a passport. NFTs are also extensible, meaning that two NFTs can be combined to create a third unique NFT.

Benefits of NFTs

NFTs offer several benefits that other forms of value-transferring vehicles don’t. 

Efficiency: The most direct benefit is that of efficiency. NFTs help cut out intermediaries and allow asset owners or sellers to link up directly with their target audience. Perhaps, the only intermediaries involved would be those that are adept at hosting NFTs securely. If an asset owner/seller knows how to do that, then there would be no intermediaries. Artists and asset owners have greater control over their work and investments.

Security: The use of blockchain ensures that records are immutable and holders of NFTs can be confident that their ownership is unique, genuine, and can potentially appreciate over time. The record of ownership and certain personal information cannot easily be tampered with.

Fractionalizing: NFTs can democratize investing in large assets like real estate or high-end art. Investing in a physical asset like real estate can be out of reach of smaller investors due to the large ticket size. 

However, NFT tokens can fractionalize the asset and offer access to smaller investors. This fractional ownership can also be transferred from one owner to another. If more people can purchase an expensive painting, the pool of buyers grows and liquidity also increases. Imagine trying to sell something where the pool of buyers is really small.

What Does The Future Hold?

The first NFT is believed to have been minted and sold back in 2021. The NFT was called Quantum and it was minted on the Namecoin blockchain. The concept of tokenizing assets goes even back further to 2010.

NFTs initially grew in popularity as the general public learned about them and the concept gained traction. Art sales done through NFTs were popular and NFT marketplaces also attracted a lot of attention.

However, after an initial surge, the popularity of NFTs appears to be waning. Celebrity endorsements of NFTs and famous personalities using NFTs to generate income are sustaining the popularity of NFTs.

The sceptics of NFTs point to some of the disadvantages of NFTs. The first one is about environmental issues arising out of the mining process in blockchain-based systems. Cryptocurrencies also get a bad rep for this issue because mining farms can consume a lot of energy.

Secondly, the NFT industry isn’t a regulated one and small investors can fall prey to scams. The decentralized form of a blockchain-based system also makes it difficult to ascertain fraudulent activity or copyright infringements.

Lastly, NFTs can be highly volatile just like cryptocurrencies. Values can fluctuate wildly and those who don’t have a risk management system in place could face significant losses.

If NFTs gain traction from institutional investors, they could become a more mainstream asset class. Any solution to environmental concerns can lead to NFTs getting integrated more with industries like music, arts, gaming, and real estate.

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