NFTs seem to have emerged out of nowhere for many people and are now the most talked about thing on the internet. It seems like everyone is trying to mint and sell an NFT. But what are they? How do they work, and why should you care to know?
These are some of the questions that many are asking about NFTs. This article will explain NFTs, give examples, and hopefully give you enough of an understanding of them to enable you to participate in the NFT economy. Who knows, maybe you might be the next Mike Winkelmann. And if you don’t know who that is, don’t worry, you will know by the time you are done reading this article.
What is an NFT?
An NFT or Non-Fungible Token is a blockchain-based representation of a digital asset (Inc., 2021). The digital asset can either be tangible or intangible items like sports cards, works of art, or even a tweet. While in the past, collectibles had to exist physically, i.e., a work of art had to exist as an oil painting on canvas or something else equally tangible, NFTs help developers create virtual assets and collectibles that are unique items that can be exchanged for value.
What makes these digital collectibles unique is the distinguishing information that exists with every NFT. Information like the identity of the creator, the unique number of the NFT if it is part of a series, the previous owners, and the current owner (Inc., 2021). This ability to identify itself as a unique item is what makes NFTs good digital collectibles. They can be distinguished from each other as no two NFTs have exactly the same information, and they are also easy to verify authenticity (Conti, 2021). Some of the other characteristics of NFTs include;
Non-interoperable: An NFT cannot be used in exchange for another. You cannot use an NFT created for a specific purpose for another. What do we mean? Take a video game, for example. Certain video game DApps allow users to create and build characters and sell them as NFTs to other users. However, an NFT of a character from The Six Dragons cannot be used to play in Crusader’s Dynasty, even though they are both video game DApps that allow for the purchase of NFT game characters from one player to another.
Indivisible: NFTs are discrete assets that cannot be divided into smaller denominations like bitcoin satoshis or ether. They exist exclusively as a whole item. This is because they are designed to be stores of digital value and not value exchange items. If one wishes to exchange their NFT for value, it has to be offered as a whole in exchange for its value in cryptocurrency.
Indestructible: Because all NFT data is stored on the blockchain via smart contracts, each token cannot be destroyed, removed, or replicated. Ownership of these tokens is also immutable, which means gamers and collectors possess their NFTs, not the companies that create them. This contrasts with buying things like music from the iTunes store where users don’t own what they’re buying; they just purchase the license to listen to the music.
If the song on iTunes was sold as an NFT instead, it would have a discrete number of copies made that would be sold to specific individuals. Those individuals could also sell them to others and would seize to own a copy of the song.
Verifiable: Another benefit of storing historical ownership data on the blockchain is that items such as digital artwork, music, and other collectibles can be traced back to the original creator, which allows pieces to be authenticated without needing third-party verification. Each NFT has all the information required to authenticate it and verify its ownership.
Why are NFTs becoming popular?
For so long now, a certain question has plagued digital creatives. That question is, how do you create scarcity over something that exists only digitally and is available to the public online? Answering this question is important because you cannot have valuable digital assets without introducing an element of exclusivity and scarcity (Hogan, 2021).
Take a meme, for example. Once you create a meme and share it with ten friends, that meme is no longer yours to claim. No one that shares it is required to give you credit for your creation, and you have no say over how it is used after sharing it. That was the reality of almost all digital assets before the invention of NFTs.
NFTs can be applied in the creation of verifiable digital assets through establishing exclusivity and thus creating scarcity. They’re particularly vital for all applications that need specific digital assets like digital art, digital collectibles, and in-game assets (Sardana, 2021).
When examining the source of NFT popularity, it is important to understand the ‘non-fungible’ part of the name. Non-fungible means that an asset is not directly exchangeable for another like fiat currency or even bitcoin is. If you lend your friend fifty dollars, they don’t have to pay you back the exact same fifty-dollar bill that you lent to them because money is fungible, meaning that one fifty-dollar bill has exactly the same value as the next fifty-dollar bill. NFTs don’t work like that.
Each NFT is unique from the next one. Even for NFTs that are in a series, for example, a digital portrait that the creator made ten of. Each of those ten has a unique hash code that distinguishes it from the others and can trace its ownership down from the creator to the current owner. This ability to turn ordinary digital content into distinguishable individual assets means that people can trade and own just about everything.
Jack Dorsey, the CEO of Twitter, recently made headlines when he sold his first tweet, “Just setting up my twttr,” as an NFT for almost three million dollars (Peters, 2021). This has caused an uproar from the general public, who argue that the tweet has been up and available for viewing for as long as Twitter has been running. But that is the value of NFT technology. It can turn a generic piece of digital content and turn into an asset that can be sold to and exclusively owned by the highest bidder.
While Jack Dorsey’s tweet made big news, dozens of NFTs are getting sold every day for impressive figures, given that many of them would have been freely available and accessible to anyone before the invention of NFTs. One of the biggest players in the NFT market is NBA Top Shots, a platform that allows NBA fans to collect and own top moments in NBA history.
NBA Top Shots has sold over sixty million dollars of collectibles in the last thirty days alone. This is the power of NFT technology. It is turning anonymous strands of content that would never have been able to be priced and sold into scarce resources that can be owned.
How NFTs work: Art, Music, Gaming
We just looked at an example of how NBA Top Shots is turning special moments in the NBA into unique digital assets that can be bought and exclusively owned. But sports isn’t the only industry integrating with NFT technology. We are going to explore three other industries in which creatives are benefiting from NFT technology. These include art, music, and the gaming industry.
The Art Industry
For many years, the art industry has been cashing in on high prices charged for rare and exclusive pieces of art that sometimes sell for even hundreds of millions of dollars. However, the catch has always been that these art pieces were physical and tangible assets that could be hung up on a wall.
However, if someone were to take a photo of one of those rare and priceless pieces of art and post it online, they weren’t entitled to payment for that digital image. Similarly, digital artists that create exclusively for the digital realm weren’t able to commercialize their art.
However, that has all changed with the emergence of NFTs. Artists can sell their creations as NFTs to the highest bidders without requiring third-party verification and authentication (Hogan, 2021). They can also do this without being required to make a physical creation of the art piece. All they have to do is create a limited number of these digital pieces of art and sell them.
One artist to cash in on this new way of commercializing their art is Grimes. In February, Grimes sold a series of ten digital works of art for about six million dollars (Kastrenakes, 2021). Some of the works were one of a kind, while others had thousands of copies on offer. This is very convenient for her as an artist since artists cannot hold shows and fill galleries with potential buyers in physical attendance during the Covid-19 pandemic (Rex, 2021).
The Music Industry
Speaking of the Covid-19 pandemic, one of the most affected industries is the music industry. Artists cannot hold concerts and schedule tours which represents a big chunk of the income that musicians make. This has affected many of the revenue streams for most musicians, especially those that aren’t making a lot from online music streaming.
One way to go around that is to release music as NFTs that individual owners can buy for big sums of money. In 2020, Deadmau5 sold NFTs of virtual stickers of the band. EDM musician 3LAU sold almost twelve million dollars of NFTs of his music, including a chance to collaborate with him (Hogan, 2021). Since then, Kings of Leon, Ozuna, Mike Shinoda (of Linkin Park), and Shawn Mendes have also sold their music as NFTs.
The Gaming Industry
The industry to take the most advantage of NFTs so far has to be the gaming industry. Several online gaming platforms have included NFT functionality to their platforms in a bid to make their in-game economies and marketplaces more viable.
People have been playing video games for decades now but with little to no real-world economic return for most of them. Most games require you to use real money to get resources in the game to execute tasks, sleeves, and even appearances for your avatars. However, those in-game assets often have little to no real-world value.
However, with NFTs, gamers can buy and sell resources as well as character skins to each other across different games as NFTs. This has turned in-game assets into collectible items that the players can sell to others for money. NFTs, look set to make playing video games a viable source of income for players as they can sell unique assets and winnings from the game in the real world.
What are NFTs used for?
NFTs allow artists and content creators a unique opportunity to monetize their content, especially that content that would otherwise be accessed free of charge or at negligible prices through streaming. For example, artists no longer have to rely on galleries or auction houses to sell their art. Similarly, musicians don’t have to rely on streaming platforms and record labels to distribute their music.
Instead, the artist can sell it directly to the consumer as an NFT, which also lets them keep more of the profits as well as the rights over their creations. It is not uncommon for record labels to exploit musicians even when their songs are topping charts and being played everywhere.
Because the record labels typically own the rights to the musician’s creations and images, the artists don’t get proportional returns for their music. The record labels often argue that distribution, which they are in charge of, makes the difference between a popular hit and an anonymous one. Therefore they should make the most money from the music than the artist (Staff, 2021).
NFTs have the ability to change the music industry by making artists able to independently release music and sell it to buyers without worrying about distribution and buying airtime. On the other hand, artists can program royalties into the NFT so they’ll receive a percentage of sales whenever their art is sold to a new owner. This is an attractive feature as artists generally do not receive future proceeds after their art is first sold (Leech, 2021).
However, perhaps one of the most effective applications of NFT technology is its use in monetizing digital content that has exploded onto the scene with the internet generations. Content like GIFs and memes that didn’t exist even twenty years ago is now everywhere. However, in most cases, the creators of the GIFs and memes get no credit or monetary compensation for their creations even when they go viral.
With NFT technology, even these new-age forms of content can also be monetized. For example, everyone that likes using memes has probably seen the ‘Disaster girl’ meme. It is this ten-year-old photo of a young girl with a mischievous grin on her face while a house burns across the street.
Over the years, this photo of this girl has been edited over almost all the tragedies in known history. She has been shown smiling as the Titanic sinks, as the Hindenburg burns, and as the meteor wipes out the dinosaurs. This young lady recently sold the meme as an NFT for five hundred thousand dollars (Fazio, 2021).
This is perhaps the most significant use of NFTs. They turn memorable pieces of pop culture into discrete digital assets that can be collected. This goes for moments in movies, great moments in sport, and any other memorable event that has a digital record. It gives internet creators another incentive to create as well as a chance to earn a livelihood doing what they love.
How to make money with NFTs
As a result of their popularity and some of the insane amounts that some NFTs are going for, many people around the world are rightfully curious about how they too can make money from NFTs. While the applications of NFTs are not yet fully known, there are three major ways so far that one can make money with NFTs (Leyes, 2021). Here they are below;
1. Digital Works of Art
If profitability is all you care about, then individual NFT artworks are by far the most valuable Non-Fungible Tokens ever created. Digital artists are breaking the bank with their creations that are selling as NFTs.
On March 11, Christie’s, one of the most famous and prestigious auction houses in the world, auctioned its first-ever fully digital artwork as an NFT work of art for $69 million (Christie’s, 2021). The piece entitled “Everyday: The First 5000 Days” was created by a digital artist Mike Winkelmann, also known as Beeple. The NFT is not a single artwork but a collage of 5000 tokenized images that were created over several years.
The ability of a relatively unknown artist to create a piece of art that can sell for that much is one of the revolutionary characteristics of NFTs. Beeple was not a world-famous artist before he sold that piece. There is no reason why other artists can’t also make a living selling their art as NFTs. Also, it is not classical art only that can be sold as art via NFT. GIFs, memes, and any other digital images can also be sold as art NFTs.
2. Licensed Collectibles
Tokenizing collectibles seems like the most natural and obvious application of the Non-Fungible Token technology. Brands that were already selling physical collectibles like trading cards can now also sell the same thing in a digital form. Since NFTs have provable scarcity and verifiable ownership, the price of a digital trading card can be much higher than the price of its physical counterpart (Haselton, 2021).
That is because while a trading card might be rare in the market, there is no telling how many of them were actually made and how many remain. There is also no irrefutable way of proving ownership of a trading card.
The first NFT sports cards project let people trade licensed cards of footballers, but recently the NBA has also launched its NFT cards collection. The NBA’s collectibles which are offered via NBA Top Shots are animated moments of greatness in the sport that can be bought and owned by fans.
Sports cards are not the only type of collectibles. Any real-world collectible can be digitized and sold as an NFT.
3. NFT Video Games
The NFT-based video games could very well be the future of gaming technology. So far, none of the mainstream games on the major consoles have adopted NFT technology, but that is expected to change as games utilizing Non-Fungible Tokens gain more popularity.
Gamers are already known to spend fortunes on virtual items—world of Warcraft gold, Call of Duty loot boxes or Counter-Strike skins, and many more. However, many of these games don’t offer their virtual assets and resources as NFTs, which means that the gamers that spend money on them cannot resell them out of the game to other players or collectors.
If these mainstream games were to offer their in-game assets and rewards as NFTs, then gamers could look to make money in exchange for their playing time. If you have played a game for so long and amassed significant in-game wealth, you could sell it in NFTs and make money from your gaming.
How fast you can earn on NFTs
How quickly you can earn money from an NFT will depend on how quickly you can mint the NFT and how popular the NFT itself is. There is no specific timeframe for how quickly your NFT will be bought. Some NFTs sell out in minutes, while others take months without selling depending on their price and popularity. Some overpriced NFTs can stay in the market for really long and only get sold once the owner lowers the price of the NFT. Others just don’t get sold because no one is willing to pay what the creator is asking.
For those interesting in being pure NFT traders, buying low and selling high, there is currently no way to logically speculate how long you should hold an NFT for before it appreciates. Unlike the normal financial and stock markets, there are no fundamentals to assess the value of an NFT (Haselton, 2021).
Before a stock trader on Wall Street decides to invest in a stock, they will do a real value calculation of the stock, based on fundamentals like company profitability, quality of leadership, and brand value. This will help them decide whether it is over or undervalued. If the stock is overvalued, then the trader can decide to short the stock, or they can go long if they think it is undervalued.
Traders of NFTs can’t carry out such elaborate price analysis since NFTs have no underlying value. The value of an NFT is based on the attachment the potential buyer has to it. This is why most NFTs are auctioned and not sold at set prices.
So rather than finding out what the real market value of an NFT is, NFT traders would better be served doing market research to find out if there is someone willing to pay more than what the owner is asking for the NFT. By exploiting these inefficiencies in the market and creating arbitrage might be the only way for traders to make a profit on NFTs (Haselton, 2021).
For NFT creators, there are tactics they can deploy to make sure that their NFTs sell quickly and at a premium. According to our research, there are a few ways to make sure that your NFT sells quickly (Clark, 2021). These include;
Create an NFT of an original work: Whether it is a work of art or a piece of music, an NFT of an original creative work will sell faster than one of something generic like a GIF.
Price your NFT appropriately: Whether you are selling your NFT at a fixed price or in an auction, it is important to make sure that your starting price is reasonable for the kind of NFT you are selling.
Mint multiple copies of a creation: Rather than minting one NFT copy of your creation and selling it for an absurd amount of money, it is easier to create a series and mint multiple NFTs from one creation. This will help you sell them for much less individually, which makes them easier to sell.
Use a popular blockchain platform: Most NFTs are based on Ethereum, but there are other blockchain platforms like TRON that are also developing their own NFT protocols. If you want to sell your NFT quickly, you should host it on a popular blockchain like Ethereum.
How to buy NFTs
If you are interested in buying an NFT, there are steps you need to take in order to carry out the purchase successfully. Most NFTs are sold on decentralized platforms running on blockchain software, with the vast majority on Ethereum. This means that in order to buy an NFT, you need to have access to a decentralized platform, and you would need to have cryptocurrency to make the purchase.
NBA Top Shots allows collectors to buy NFTs using credit cards, but it is in the minority. Most platforms require you to have a digital wallet with ETH, a cryptocurrency in it. If you have never dealt with cryptocurrency before, we have prepared steps for you to follow in order to be able to buy an NFT (Clark, 2021).
Step 1: Create a digital wallet
In order to buy an NFT, you need to have a digital wallet with cryptocurrency in it. It is like an arcade that requires you to buy tokens before you can play. There are many digital wallets that you could choose from to buy cryptocurrency.
It is best to choose an Ethereum based wallet since most NFTs sit on the Ethereum blockchain. The most popular wallets include Coinbase wallet, Robinhood, Trezor One, and Metamask (Sahu, 2021). Any of these can allow you to make purchases directly with your cryptocurrency and can integrate with platforms selling NFTs.
Step 2: Buy cryptocurrency
Once you have set up your crypto wallet, then you can buy some cryptocurrency. Since most NFTs are on Ethereum, it is recommended that you buy ETH. Follow the steps laid out for you in your digital wallet in order to buy ETH.
Since you are just starting out, you should probably start small. One ETH as of May 5, 2021, is worth about USD $3,500. Since you have a crypto wallet, a good practice to learn is to regularly check the value of ETH as it changes daily. If the value drops, you should buy some more and sell when it peaks. This will also enable you to make some profits from your ETH when it goes up in value.
Step 3: Find an NFT marketplace
Once you have cryptocurrency in your crypto wallet, you are now ready to make a purchase. However, before purchasing, you need to find an NFT marketplace that sells the kinds of NFTs that you collect. Some of the most common NFT marketplaces include OpenSea, Raible, and Foundation (Conti, 2021).
The different marketplaces have different strengths and target audiences, so it is a good idea for you to do some research before finally settling on one that suits you. For example, Foundation requires buyers of NFTs to pay a gas fee, which is the amount the platform charges for processing your purchase (Hogan, 2021).
Step 4: Make a purchase
Once you have all the above in place, you are now ready to buy an NFT. The best guide to how to choose between one NFT and another is to find what means something to you. You are going to find thousands of NFTs in every marketplace, and as we discussed above, there is no objective way to evaluate the true price of an NFT, so the best approach is to find something that has some sentimental meaning to you that is equivalent to the price the creator wants for it.
The future of NFTs
Many have speculated on the future of NFTs to no end. Given that the technology is still relatively new, we can possibly begin to imagine all the applications of this technology while it is still in its dark ages. However, one thing is for sure, regardless of where this technology ends up, it has the potential to change how we view creative digital content and, as a result, digital content creators.
However, despite all that potential, many still wonder whether it is just a bubble that will blow over soon. There are some that speculate that the NFT gold rush has been caused by Covid-19 and the global lockdown of in-person services and activities. As a result of this social isolation, many creators have had to resort to solutions that were previously reserved for tiny niches in the community.
While it is true that the pandemic has resulted in more people being bolted to screens at home for long hours and more people looking for solutions to monetize their digital presence and content, it is also true that the pandemic has just accelerated a trend that was going to take over on a decades-long timeline and not a months-long one.
In an interview with Squawk Alley, Mike Winkelmann, the creator of “Everyday: The First 5000 Days,” said, “I really think this is a technology that has just so many use cases. I look at NFTs as being such a blank slate, even beyond digital art (Jbursz, 2021).”
“I think the technology and just this concept of proving digital ownership of something, it feels so inevitable, I think there’s just a lot of hype right now. I think it’s one of those things where we’re going to get past that,” he said.
“In the beginning of the internet, there was a lot of hype, too, and there was a bubble, and the bubble burst. But it didn’t kill the internet. People kept using the internet. There might be a hype, and it might wipe out a lot of projects that didn’t have real actual value. But I think the technology itself is sound enough that it’s going to outlive that, and it’s something that’s going to be around for a while here.”
On the other hand, NFTs are being blamed for the high carbon footprint associated with the Ethereum blockchain. Ethereum uses about 31 terawatt-hours (TWh) of electricity a year, about as much as the whole of Nigeria (Howson, 2021). This has made many critics weary of what the energy costs of mass adoption of this technology could be. The French digital artist Joanie Lemercier recently canceled the sale of six works after calculating the associated energy costs. The sale would use, in just ten seconds, enough electricity to power the artist’s entire studio for two years (Howson, 2021).
In conclusion, NFT technology could fundamentally disrupt a lot of industries, including gaming, the arts, collectibles, music, and many more. We don’t know the full extent of the disruption, and we don’t know how long the NFT industry will take to peak. What we know, however, is that it is set to decentralize ownership and transaction of digital content.
It is going to turn anonymous digital content into distinguishable unique assets that can be collected and stored as valuables. Whether you agree with their existence or not, they are here to stay, and they are going to mint millionaires out of the blue. The best you can do for yourself is to understand what NFTs are and how they work so when they take over the world, you are well-positioned to leverage them.
Gerald Ainomugisha is a freelance Content Solutions Provider (CSP) offering both content and copy writing services for businesses of all kinds, especially in the niches of management, marketing and technology.
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