But while some people have taken a full leap into this exciting new world, others still have no idea what NFTs even are.
AMA, PFP, GMI… The ecosystem is packed with slang, abbreviations, technical terms, and even intentional misspellings that drive newcomers away. On top of that, the underlying technology that supports NFTs can be a bit overwhelming.
So, we’ve put together a comprehensive guide to help you navigate the world of NFTs and become part of the conversation.
Let’s get started!
Topics We'll Cover:
- What Are NFTs?
- What’s the Difference between NFTs and Crypto?
- How Are NFTs Created?
- Can NFTs Be Destroyed?
- What’s the Point of Owning an NFT?
- How Is NFT Value Determined?
- Where Can You Buy An NFT?
- Where Are NFTs Stored?
- Are NFTs Right for You?
What Are NFTs?
NFTs are non-fungible tokens recorded on a blockchain that are linked to digital or physical assets and represent ownership of them.
Confusing, right? Let’s break it down:
Above all, NFTs are tokens, that is, digital units of metadata that represent value, assets, or rights and can be bought and sold.
Another defining feature of NFTs is that they are non-fungible, which means they are not interchangeable at parity. Fungible assets, like the U.S. dollar, can be easily interchanged for one another, and neither party loses anything. That is not the case with NFTs: they have unique features that set them apart from the rest and cannot be exchanged at equivalency.
To work their magic, NFTs rely on blockchain technology. A blockchain is a secure, decentralized, and immutable record-keeping system that enables users to make and track transactions in a safe and transparent way. The blockchain guarantees data fidelity and ensures that the records are not duplicated or altered.
Finally, and perhaps most importantly, NFTs are tied to other digital or physical assets. What does this mean? It means that NFTs represent other assets and can prove ownership of those assets in a secure and immutable manner.
So, in short, NFTs are non-fungible tokens that represent ownership of other assets and are safely recorded on a blockchain, an immutable and secure digital ledger. They are unique and cannot be replicated or altered, and they can be bought and sold like any other asset.
And anything can be an NFT. Although the current market for NFTs is centered mainly around artwork, it’s expanding fast. These tokens are making their way into other industries to represent individuals' identities, songs, real estate, clothes, and even sports highlights.
What’s the Difference between NFTs and Crypto?
NFTs and cryptocurrency are related but not the same. They are both based on blockchain technology, so it makes sense to get these concepts mixed up.
The difference between cryptocurrency and NFTs lies in two key concepts: fungibility and non-economic value.
On the one hand, cryptocurrencies are fungible —that is, interchangeable at parity—, whereas NFTs are non-fungible. On the other, cryptocurrencies have only economic value (just like any other currency), while NFTs have value beyond that: NFTs can be packed with utility, offering holders tons of perks and benefits that go beyond the economic dimension.
How Are NFTs Created?
NFTs are created through a process called minting, which refers to the process of adding, validating, and recording an NFT to a blockchain. Once an asset is recorded on the blockchain, you can say it’s been “minted.”
So, basically, to mint an NFT, you need to first choose a unique asset to link to the token, and then record it on a blockchain that supports NFTs. That record on the blockchain serves as proof of ownership of whatever asset you chose to tokenize (that is, turn into an NFT), and it can no longer be altered.
The NFT you mint can then be kept as part of your private collection, or you can sell it using NFT marketplaces and auctions.
Can NFTs Be Destroyed?
You can’t technically destroy an NFT, but you can render it unusable in the future. This is achieved through a process called burning, which involves sending an NFT to a verifiably un-spendable address (usually called “eater address” or “null address”), ultimately eliminating your NFT from the blockchain and removing it from circulation.
It’s important to note, however, that all transactions leading up to the burn will remain on the blockchain’s record.
What’s the Point of Owning an NFT?
Many people believe that NFTs are overpriced collectible images. But with so much hype, there’s got to be more to this industry than that.
At first, the value of NFTs was determined by their scarcity and uniqueness. But now, NFTs are becoming more about what’s behind them: the benefits and experiences they offer holders.
That’s when the concept of NFT utility comes into play —that is, the intrinsic value or perks that are attached to a token. And there’s a lot of room for creativity here. Creators can offer people anything they believe will add value to their NFTs or can convince potential buyers to invest.
Let’s take a look at some specific examples of NFT utility:
- Passive income. Some NFTs allow you to earn passive income through staking, that is, locking up your tokens on a given platform in exchange for rewards and other benefits. So, holders keep ownership of their NFTs, but they can make a passive income out of them.
- Special access. Some NFTs grant access to exclusive content and events. For example, last year, the Toronto Raptors launched a limited edition NFT collection that granted fans access to meet-and-greet events with players.
- Redeemability. Some NFTs allow holders to redeem their tokens for other digital or physical assets. For instance, holders of the Rebirth NFT Collection can redeem a physical bottle of whisky, and after that, their NFT transforms into an evolved image that they still own and can trade.
- Community. This is an often-overlooked type of NFT utility: owning an NFT makes you part of a closely-knit community made up of like-minded people who share your interests. You can engage with other members, participate in events, and discuss topics you share an interest in.
- Gaming. Lately, there’s been a bit of a surge in blockchain-powered games where users can interact in a digital world via NFT avatars. Some games even allow users to grow and evolve their NFTs and trade them in in-game marketplaces.
- Collectibles. Many people enjoy collecting art, cards, and other memorabilia, and NFTs make great collectibles. Nowadays, you can turn pretty much anything into an NFT (even sports highlights!), so the potential for NFT collectibles is quite limitless.
- Supporting your favorite creators. Musicians, artists, and influencers across the globe are leveraging NFTs to offer their followers value in an innovative and convenient way. By purchasing your favorite artist’s NFTs, you can show them your support and help them keep up their creativity.
The point of owning an NFT is leveraging whatever utility it has, and utility is constantly expanding. Now, NFTs are no longer about art. They are about proof of ownership, access to exclusive content, fun perks and experiences, and even human connection.
How Is NFT Value Determined?
NFTs remain in high demand, and people are spending big bucks on them. But there’s still a little confusion over how the value of NFTs is determined.
The truth is that there isn’t a widely accepted mechanism. The measures that people typically use for traditional assets or investment opportunities don’t really apply here.
Instead, in the realm of NFTs, several factors come into play when it comes to assigning value. Let’s take a look at some of the most relevant ones:
- Scarcity & Rarity. Tokens with rare and unique traits are usually scarce, and investors and collectors tend to gravitate toward them. Scarcity and high demand are two key factors driving NFT value through the roof.
- Utility. What do holders stand to gain from an NFT? The usefulness of the token in real life can impact its value, and companies and creators looking to step into the game should always keep it in mind.
- Liquidity. Liquidity refers to how easy it is to turn an asset into cash. More liquidity usually translates into more value because it means that it’s easy for holders to trade their NFT and that they won’t be stuck with it if they just don’t want it anymore.
- Community. The community built around an NFT collection is also a significant driver of value. A strong and active community serves as social proof of how great your proposition is. It builds hype and makes your project more attractive to potential investors and collectors.
- IP Rights. In general, NFTs provide value to holders in the form of IP rights, such as the right to display or modify the art, access special content, and transfer or sell their rights freely.
- Income Generation. Some NFT projects have embarked on ventures funded by their token sales and share in the profits with holders. More often than not, this type of project grants governance rights to holders, vesting them with the ability to make decisions regarding the direction of the project and offering them a sense of control over it.
There’s no one-size-fits-all formula to determine the value of an NFT. But by paying attention to these factors, investors and collectors can get an overall idea of whether a token is worth it or not.
Where Can You Buy An NFT?
In most cases, you’ll need crypto to buy an NFT. So you’ll most likely need to resort to an exchange.
An exchange is an online platform where you can buy and sell cryptocurrency. There are decentralized exchanges (DEX), which allow for peer-to-peer transactions, and centralized exchanges, where transactions go through a third party.
Once you have your crypto, you’ll need to head to an NFT marketplace to buy your token. A marketplace is an online platform where people can buy and sell NFTs, and one of the most famous ones is OpenSea.
Where Are NFTs Stored?
So, you’ve purchased the NFT. Now what?
Well, you need to keep it somewhere. A wallet is a device or program that stores your digital collectibles until you want to trade them or send them elsewhere.
There are cold wallets, which keep your tokens entirely offline, and hot wallets, which are always connected to the internet and the appropriate network. Wallets can also be non-custodial, which offers you sole control of your private keys, or custodial, whereby another party has control of your private keys.
Are NFTs Right for You?
If you’ve made it all the way to this final section, congrats! You’ve learned everything you need to know about NFTs and are ready to enter this exciting world.
One question remains, though: Should you?
It’s a hard question to answer, and it depends on many, many factors. You can get an NFT for the sake of collecting it, to become part of a community, to play an exciting new video game, or even to support your favorite artists. As you can see, this technology is incredibly multifaceted and can suit pretty much any need.
It’s really up to you, but if you do decide to join the NFT ecosystem, we hope you enjoy it as much as we do!
If you want to go beyond the basics and dig deeper into the exciting world of NFTs, you can start by exploring our blog posts.
Also, join us on LinkedIn and Instagram to get more NFT insights and be part of our community.