Non-fungible tokens — or NFTs — are causing a paradigm shift as one of the most significant contemporary innovations in tech and finance. But having turned into a cultural phenomena in 2021, it’s become very easy to get lost in the hype surrounding the NFT space.
While blockchain technology can be complicated at times, NFTs are far easier to understand than most people think. This guide is a living document that aims to demystify NFTs, so you’ll come away with a basic understanding of what non-fungible tokens are, what they do, and (most importantly) why they matter.
What Is an NFT?
Even those outside the crypto community are likely to have learned a bit about NFTs at some point during 2021. Given a satirical spin by Saturday Night Live, between the memes and one-liners, the skit actually did a halfway decent job of explaining what an NFT can be.
NFTs are a new type of digital asset with an importance placed on its non-fungibility. If we asked you to let us borrow $1, you most likely wouldn’t open your wallet and say, “Which bill do you want?” This is because the U.S. dollar is fungible. Each $1 bill has the same value as every other $1 bill.
NFTs, on the other hand, are non-fungible in the sense that no two are the same. Each NFT is a unique asset that cannot be replaced by an identical version because there is no identical version.
An NFT can be a piece of digital art, a song, a poem, a baseball card, an entry ticket and so much more. Think of it as a digital collectible that lives on the blockchain. But what’s special about an NFT, as opposed to the art in your home or your old Pokemon cards, is that an NFT is created (or “minted”) on a blockchain, thus making it completely digital, trackable and immutable.
When something is minted on a blockchain, it — and all of its attributes — will live there forever. This means that an NFT can be purchased, sold, gifted, etc., and its history and value will forever be recorded on the blockchain.
Because of this, non-fungible tokens are the perfect medium for scarce assets such as art and collectibles, as their provenance and paper trail is open for anyone to see at any time. Similarly, they can never be torn, damaged, bent or broken. Unlike in most traditional art markets, many NFT marketplaces also enable 10% or more secondary sales royalties for creators in perpetuity, meaning artists continue to profit as their work increases in value!
NFTs enable true ownership of a digital asset in a way that wasn’t possible prior. Although some argue that they could simply download a JPEG image of an NFT and save it, this action would be akin to taking a picture of a painting and saying you now own that piece. You may be in possession of its likeness, but ownership and control of the actual asset is easily confirmed on the blockchain. Everyone can see it, but only one can own it.
Can you imagine if the Mona Lisa, subject to years of travel, trade and duplication, which some speculate isn’t actually the original painting, was an NFT? There would be no questions in that case.
The NFT Boom
The first non-fungible token was minted in 2014, but the creation and adoption of NFTs began to truly pick up in 2017. Around this time, the first NFT collections were launched on the Ethereum blockchain.
While the very first NFTs (such as Rare Pepes) were launched on Bitcoin, Ethereum soon emerged as the leading choice for building NFT infrastructure and economies, as its smart contracts functionality enabled token creation, programming and storage built directly into the blockchain itself.
One of these early Ethereum projects was CryptoPunks, a collection launched by Larva Labs that has become synonymous with early NFT history and seen its individual pieces sell for millions. While NFT tech is now available on quite a few blockchains such as Solana, Tezos and Flow, Ethereum has achieved a network effect and remains the leading blockchain by far.
While mainstream awareness of NFTs was slowly increasing prior to 2021, two catalysts arguably helped speed things up. The first was the COVID-19 pandemic, which forced many people to be more digitally-native and connect with each other on platforms like Twitter and Clubhouse, where the NFT community has built a strong presence. The second was the rise of Beeple, the longtime digital artist turned NFT pioneer who became the first artist to sell an NFT with a major auction house. When the Christie’s auction for his “Everydays—The First 5000 Days” collage came to a close on March 11 at an eye-popping $69 million, NFTs could no longer be ignored.
While digital art and collectibles have largely propelled 2021’s market boom, there are countless additional applications of NFT technology — from metaverse virtual worlds such as Decentraland and CryptoVoxels to blockchain gaming including Axie Infinity and Zed Run.
As adoption has increased, so have the sales volumes and prices for successful projects. While “flipping” NFTs has become increasingly popular, this form of trading should always be considered a gamble. Just because you own an NFT doesn’t mean it will make you rich. Rarity, artistry, utility, community and cultural significance all go into defining the value of an NFT. Never invest more than you can afford to lose!
How to Get an NFT
There are numerous ways to become a part of the NFT community. Some platforms such as Nifty Gateway and MakersPlace make it easy for consumers to buy and sell NFTs using credit cards and other traditional payment methods. Others like MAWNFT, Foundation and the world’s largest secondary marketplace, OpenSea, allow users to bid and purchase using only cryptocurrency.
The preferred currency used to purchase NFTs on the Ethereum blockchain is Ether (ETH or Ξ). ETH can be purchased a few different ways. Some services, such as major trading platforms Coinbase and Gemini, allow users to buy ETH with a bank account or credit card. Similarly, most services also let users swap one type of coin for another (i.e., converting some Bitcoin into Ethereum).
You’ll then want to set up a MetaMask wallet that plugs into your desktop or mobile web browser and allows you to log in and transact on many NFT platforms. Be sure to follow all the instruction prompts when setting it up, and write down your seed recovery phrase in a safe place. Important: Never share your seed phrase or private keys with anyone, or they will be able to access your funds!
It’s also a good idea to purchase a hardware wallet to ensure additional security in case your computer is compromised. Trezor and Ledger are two of the most trusted hardware wallet brands on the market.
After you’ve purchased ETH and transferred it to your new MetaMask wallet address, you’re ready to start shopping on the platforms listed above! Whether you collect using USD or ETH, once you obtain an NFT, that token is now yours. It will stay in your Ethereum wallet or site account until you’re ready to sell or transfer it.
The Future of NFTs
In 2021, NFTs are still in their infancy. With the possible applications of the technology seemingly limitless, mainstream adoption is still quite a ways off. It’s anyone’s guess where NFTs go from here, but there have been some fascinating use-case examples this early in the game:
- Nonprofit Noora Health raised 1337 ETH (nearly $4.4 million) to “save thousands of lives” by funding their programs to teach families simple, low-risk health skills to help improve health outcomes for themselves and their communities.
- Entrepreneur Gary Vaynerchuk is poised to launch the first NFT restaurant in the fall of 2022. This endeavor will give holders of a specific token access to the restaurant/lounge.
- NFTs have and continue to be used as tickets for events and concerts. There are even companies that help integrate NFTs into traditional ticketing systems.
- Hedera Hashgraph is currently developing a platform for medical consent agreements and transactions to be secured on a blockchain as NFTs.
- An NFT project called Bored Ape Yacht Club has essentially acted as a crowdfund among its community and raised/donated 382 ETH to various charities and animal organizations.
- Multinational financial services corporation Visa became the first major payment network to settle transactions using crypto — and are doing so using the Ethereum blockchain. The company also purchased a CryptoPunk, acknowledging NFTs as a “historic commerce artifact.”
In the near future, we’re sure to see NFT games, collectibles, events, shows and more fill out the market. With commercial and institutional interest growing monthly, the speed at which projects and endeavors can be produced and launched has increased exponentially.
Often described as a watershed moment akin to the invention of the internet, NFT technology will undoubtedly go through different stages of development. The ecosystem seems to be in the early adoption stage, with years of innovation ahead to broaden the horizons for the world of non-fungibles. The good news? You’re still early. Buckle up and enjoy the ride!
Do you have questions about NFTs?