Non-Fungible Tokens (NFTs): 13 Frequently Asked Questions
What is an NFT?
In the crypto world, there are two types of tokens, fungible and non-fungible. Fungible tokens are like currency. One dollar is always one dollar regardless of the serial number on the specific dollar bill. A one-dollar bill can be replaced by any other one-dollar bill. On the other hand, non-fungible tokens (NFT) are unique and cannot be replaced by any other token. NFTs can be used to represent unique digital assets, such as CryptoKitties and virtual buildings on Decentraland. NFTs are interesting because their uniqueness and ownership can be verified, they can be utilized across applications developed by different companies, and they can be traded easily through secondary markets. These features open up possibilities for new use cases and business models.
NFTs has been widely discussed since it was standardized by Dapper Labs in 2017. However, adoption is disappointing. NonFungible.com estimated there are around 20,000 NFT users per month, which is 40% of the estimated number of Defi users. The primary reason is that not all NFT features are fully utilized.
NFTs allows you to buy and sell ownership of unique digital items and keep track of who owns them using the blockchain. NFT can be anything digital, including drawings, animated GIFs, songs, or items in video games. An NFT can either be one-of-a-kind, like a real-life painting, or one copy of many, like trading cards, but the blockchain keeps track of who has ownership of the file.
The value of unique online work is captured in tradeable non-fungible tokens; a relatively new asset class that artists can use to sell their work to a global audience.
Non-fungible tokens are an asset class powered majorly by the Ethereum blockchain. Although there are other blockchains supporting NFTs such as the Binance Smart Chain, Polygon, etc, Ethereum is a leader as far as NFTs are concerned.
How NFTs Could Open Doors for Creators?
The third quarter of 2021 was a massive quarter for NFT trading. According to DaapRadar, an analytics platform, the trading volume for this period reached $10.67 billion. This works out to an increase of over 700% from the previous quarter.
Mike Winkelmann, the American digital artist who goes by the name Beeple, sold his Everydays: the First 5000 Days for $69.3m in March at Christies in New York. It was a digital collage of every piece of work he had created daily since 1 May 2007 and was minted — the process of turning a digital file into an NFT on the Ethereum blockchain — at Christies, making Beeple the highest-grossing digital artist in the world.
In addition, in 2020 Nigeria traded more cryptocurrency than any other country in the world only behind the US and Russia — as reported by Africa Business. This presents an opportunity for African Artists who may be able to use tradeable non-fungible tokens (NFTs) to sell their work to a global audience. NFTs, which are mainly bought and sold with the cryptocurrency Ethereum, are used to certify that a digital asset is unique.
Another example is the first-ever Twitter post by the CEO of Twitter, Jack Dorsey on March 21, 2006, as stated below:
just setting up my twttr — jack (@jack
Despite the fact that this post has been available for more than a decade for free, it sold for more than $2m through a platform.
What does “buying” this tweet actually mean? “What you are purchasing is a digital certificate of the tweet, unique because it has been signed and verified by the creator.” In other words, you are buying an “autograph” of Jack.
This presents a whole lot of market to both traditional and digital artists/creators to market their art to a global market, removing the traditional limitations presented outside the blockchain.
NFT collectors can flaunt their digital collections at online NFT marketplaces like SuperRare or Showtime, which allows viewers to like or comment on individual pieces. Collectors are displaying their digital artwork files — jpegs, gifs, MP4s, or 3D digital models — in virtual reality platforms online or at home on HD screens uniquely designed to showcase digital art.
What country buys the most NFTs?
The Philippines has the most NFT owners (32%) out of the 20 countries compared, followed by Thailand (27%), Malaysia (24%), the UAE (23%), and Vietnam (17%). According to the report, The Philippines has 9.5% of its poll participants planning to buy NFTs and a forecast adoption of 41.5% which is the highest.
What makes an NFT Valuable?
NFT can be valued as a function of four components, and how value can be increased. NFT Value framework and Opportunities is as noted below:
Value of an NFT = Utility + Ownership History + Future Value + Liquidity Premium.
Depending on the asset that the NFT represents, value is weighted across these four components:
- Utility — Utility value is depended on how the NFT can be used. Two major categories that have high utility value are game assets and tickets. For example, a rare and powerful Crypto Space Commander battleship was sold for $45,250 in 2019, and the value of an NFT ticket is the price of an event ticket.
- Ownership history — Value depends on the identity of the issuer and previous owners of the NFT. NFTs with a high ownership history value are often created or issued by famous artists or companies with strong brands.
There are two ways to increase value.
- The first is to co-operate with companies or individuals with a strong brand to issue NFT tokens.
- The second way is to resell NFTs that were previously owned by people who are influential.
Currently, it’s challenging to find out who are the previous owners. Marketplaces and sellers can provide an easy-to-use tracking interface to increase the value of NFTs. For example, OpenSea can highlight addresses of investors who make the most money from trading NFTs and list other NFTs they own.
- Future value — The future value of an NFT is derived both from valuation changes and future cash flow. Valuation is driven by speculation and can sometimes be the main driver behind price appreciation. For example, the price of CryptoKitty #18 jumped from 9ETH to 253ETH in just three days in December 2017.
Some may argue price movement that is driven by valuation is negative to NFTs, but speculation is human nature and is a non-trivial part of the current financial system. If the right balance is made, developers can increase NFT value and attract new users.
Valuation is driven by scarcity of supply and speculation. Speculation can be guided by including price performance charts of NFT items or by highlighting NFTs that appreciate in value. The sneaker marketplace, StockX, achieves its $1 billion valuations partly because it creates a rare sneaker market by encouraging people to speculate on the price of sneakers.
Future cash flow is the interest or royalties earned by the original owner of the NFT. For example, SuperRare allows creators of NFT artworks to receive 3% royalty every time their artworks are sold subsequently on the secondary market. In the future, companies can borrow concepts from Defi innovations.
NFTs are assets and can be leased and collateralized to create additional cash flow. In a game, there is demand from players who want a specific game asset for one day to complete a mission.
- Liquidity premium — High liquidity translates to a higher value of NFT. The liquidity premium is the primary reason why tokens that are created on-chain should have a higher value than off-chain assets. ERC standard NFTs can be traded easily without friction on secondary markets with anyone who holds ETH, which increases the number of potential buyers. Investors prefer to invest in NFT categories that have a high trading volume because liquidity lowers the risk of holding the NFTs. In an extreme scenario where the NFT loses its utility value after the associated platform is closed, a highly liquid NFTs still has value as long as there are people willing to buy and sell. On the other hand, NFT standards that are not based on Ethereum suffer from a lack of liquidity, and the value of NFT created on those platforms is often discounted.
How do NFTs work?
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.
What’s the connection between NFTs and Cryptocurrency?
As stated earlier in this article, NFT is a “unique digital token” or unique digital content linked directly to the blockchain (digital database underpinning cryptocurrencies such as bitcoin and Ethereum). Unlike NFTs, those assets are fungible, meaning they can be exchanged or replaced by another identical one of the same value, like another bitcoin or dollar bill.
What sets NFTs aside is its fungibility; its irreplaceable feature, and what connects NFTs and cryptocurrencies is majorly the blockchain (which is a digital open ledger in which every transaction is open to anyone who cares to view it).
How to make an NFT?
Here’s a step-by-step guide on how to make (i.e., mint) and sell an NFT.
- Pick your item:
Let’s start with the basics. If you haven’t already done so, you’ll need to determine what unique digital asset you want to turn into an NFT. It can be a custom painting, picture, music, video game collectible, meme, GIF, or even a tweet. An NFT is a unique digital item with a sole owner. That rarity gives an NFT value.
Make sure that you own the intellectual property rights to the item you want to turn into an NFT. Creating an NFT for a digital asset you don’t own could get you into legal trouble.
- Choose your blockchain:
Once you’ve selected your unique digital asset, it’s time to start the process of minting it into an NFT. That begins by determining the blockchain technology you intend to use for your NFT. The most popular among NFT artists and creators is Ethereum. Other popular options include Tezos, Polkadot, Cosmos, and Binance Smart Chain.
- Set up your digital wallet:
If you don’t already have a digital wallet, you’ll want to set one up to create your NFT since you’ll need some cryptocurrency to fund your initial investment. The wallet will provide you with access to your digital assets. The top NFT wallets include Metamask, Math Wallet, AlphaWallet, Trust Wallet, and Coinbase Wallet.
Once you set up your digital wallet, you’ll want to buy some cryptocurrency. Most NFT platforms accept Ether, the cryptocurrency of the Ethereum blockchain platform. If you already own some cryptocurrency elsewhere, you’ll want to connect it to your digital wallet so you can use it to create and sell NFTs.
- Select your NFT marketplace:
Once you have a digital wallet and some cryptocurrency, it’s time to start creating (and, hopefully, selling) your NFT. For that, you’ll need to choose an NFT marketplace. Some of the top NFT marketplaces include OpenSea, Axie Marketplace, Larva Labs/CryptoPunks, NBA Top Shot Marketplace, Rarible, SuperRare, Foundation, Nifty Gateway, Mintable, and ThetaDrop.
You’ll need to research each NFT marketplace to find a platform that’s a good fit for your NFT. For example, Axie Marketplace is the online shop for the top NFT game Axie Infinity. Meanwhile, NBA Top Shot is a basketball-focused marketplace. It’s also important to note that some marketplaces require their own cryptocurrency. Rarible, for example, requires Rarible.
OpenSea is usually a good place to start. It allows you to mint your own NFT, and it’s a leader in NFT sales. The NFT marketplace sold $3.4 billion worth of NFTs in August 2021 alone.
After selecting your NFT marketplace, you’ll need to connect it to your digital wallet. That will allow you to pay the necessary fees to mint your NFT and hold any sales proceeds.
- Upload your file:
You’re now finally ready to mint your NFT. Your chosen NFT marketplace should have a step-by-step guide for uploading your digital file to their platform. That process will enable you to turn your digital file (a PNG, GIF, MP3, or other file types) into a marketable NFT.
- Set up the sales process:
The final stage in the NFT minting process is to decide how you want to monetize your NFT. Depending on the platform, you can:
i) Sell it at a fixed price: By setting a fixed price, you’ll allow the first person willing to meet that price to buy your NFT.
ii) Set a timed auction: A timed auction will give those interested in your NFT a time limit to submit their final bid.
iii) Start an unlimited auction: An unlimited auction doesn’t set a time limit. Instead, you have control to end the auction whenever you want.
You’ll need to determine the minimum price (if you set up an auction), set your royalties to continue cashing in on your NFT if it resells on the secondary market, and how long to hold an auction (if timed). Keep fees in mind when setting the minimum price because you could lose money on your NFT sale if you set the price too low.
How do I buy and sell my NFT?
Like cryptocurrencies, NFTs are bought and sold on specialized platforms. OpenSea is the best-known NFT marketplace. A sale does not necessarily involve the transfer of the object depicted by the token. NFTs of famous paintings have been sold, for example, but the buyer does not receive the painting.
What changes hands is a certificate of ownership of the NFT, registered on the blockchain. The certificate must be kept safe in a digital wallet, which can take various forms. The wallet might be accessed via Metamask, a free internet browser extension, or a secure physical device. It might also take the simple form of a code printed on a piece of paper.
To purchase an NFT, the wallet must contain enough of the relevant cryptocurrency — for example, ether (ETH) if the person is buying a token on the Ethereum blockchain. With a little technical know-how, it is also possible to make, or “mint”, your own NFT.
Ultimately, NFTs are digital contracts, with certain rules embedded such as the number of copies available for sale. It should also be noted that some platform accepts crypto as well as USD.
How to Validate the Authenticity of NFT?
There are various precautions you can take before buying an NFT to make sure that the artwork is authentic. Check the creator’s social media profiles to see if they have posted about the listing and to also see if they seem like a credible artist.
Search other NFT marketplaces to see if the art is being sold on other platforms. Having an NFT being sold on multiple platforms can be a red flag for fraudulent activity. If the NFT is an image, reverse-search the image on Google to see if there are any other variations of the image and how long the image possibly existed.
To perform a reverse-search, upload the image into the search engine if you’re on a desktop. For mobile users, get the link to the image and paste it into the search bar. If the auction or buy now price is too low and you know the NFT should be significantly more valuable, that’s another sign that it could be fraudulent.
How Expensive is it to mint an NFT?
The fees to mint and sell an NFT can be costly and confusing. Depending on the platform and pricing, you could pay a listing fee, an NFT minting fee, a commission on the sale, and a transaction fee to transfer money from the buyer’s wallet to yours. Fees also can fluctuate due to the volatility in cryptocurrency pricing. Because of that, it’s important to take a close look at the costs you’ll have to pay to mint and sell your NFT to make sure they’re worthwhile.
Are NFTs the future of Art and Collectibles?
The answer to this question is actually a two-way thing: Yes and No! NFTs are for artists that make digital-based art to make money for their creative art. Prior to NFTs, there was no viable way to put a price tag on an art image or digital animation that existed only on the computer. Now artists that make digital works, animations, performative videos, and GIFs can sell their work.
One of the most important aspects of it is that the artist still retains the copyright of their original while they can still get a percentage of the profit if the collector puts the creative art for re-sale. This is what could potentially change the future of art collections.
Many times, collectors will buy works of art from artists early in their career and re-sell it at auctions for much higher prices and the artist never get a royalty from that future sale. With NFTs, the artist gets a commission.
This brings up the question, does an artist always own the rights to their work? If so, why aren’t they getting a royalty every time a collector profits from their work?
Right now NFTs are in a wild run, everything digital gets thrown into that world, not just fine art.
Therefore, there’s no way to actually predict the future, but this is a good sign that NFTs can be the future of arts and collectibles, let’s see what happens to this space in the next five to ten years.
Can NFT be used as an Investment?
The sale prices of NFTs are rising as they gain in popularity. Consequently, NFT creators can make a lot of money. However, not all NFTs will even sell, let alone make their creator any money, given all the fees involved with minting and selling NFTs. Due to the costs, you need to prepare for the possibility that you could lose money on your NFT creation. The best way to avoid a loss is to make sure you sell an NFT that others will find valuable and set a minimum price that will more than offset any associated fees.
What is the Risk?
Trading NFTs involves technical processes that are sometimes misunderstood — and that can lead to investors not knowing quite what they are dealing with. Every interaction with the blockchain involves fees to pay for “mining” — the hugely energy-intensive computer calculations needed to verify each transaction.
Thousands of users might rush to buy a much-coveted NFT as it’s minted, and they have to pay the fees even if they walk away empty-handed. Some buyers use bots to try to ensure that they get their hands on a token, which makes the market even less accessible for newbie investors.
A very small group of highly sophisticated investors rake in most of the profits from NFT collecting,” blockchain data company Chainalysis said in a recent report. And it added that NFTs are often sold at a lower price to enthusiasts who have helped to create hype for the project.
“The data suggests that NFTs are far from a surefire investment,” as stated by Chainalysis.
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