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What Is an NFT & How do They Work? 2021 Guide

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NFT is short for non-fungible token. While it’s a mouthful, the concept is actually fairly simple. An NFT is a digital asset with a single verified owner. NFTs have grabbed headlines with works fetching price tags well into the millions. While most NFT news has been about artwork, the concept could apply to any digital product, including music, video, or any other digital file. Let’s take a deeper look at what NFTs are, how NFTs work and whether or not you should buy an NFT yourself.

What Is an NFT?

An NFT is a unit of data stored on blockchain (a digital ledger) and represents a digital asset. It’s basically a digital file that tracks ownership of a digital item, such as a JPEG (photo file) or MPEG (video file).

For this article, we will use NFT when we discuss the digital item, but keep in mind that the NFT is actually the proof of ownership of that item.

Short for non-fungible tokens, NFTs are growing in popularity as a way to buy, hold, sell and collect digital assets. As a fairly new and unique way to buy and own something, it’s important to understand how they work and the risks involved.

NFTs are best known for their role in the art world. These are not just small dollar goods. The NFT economy is serious business. The record sale for an NFT took place March 11, 2021, when someone paid more than $69 million for an NFT artwork through the British auction house, Christie’s. In the first two months of 2021 alone, more than $300 million in NFT transactions took place.

You may be wondering, why someone would pay for what is basically just a computer file. Can’t you just make a copy of that file? The answer is yes, sort of. Anyone can make a copy of that $69 million artwork to look at, but there’s only one true “owner” who controls the file in their digital wallet.

In a later section, we’ll get into the mechanics of how that works. But for now, just know that the file behind an NFT can be replicated, but ownership can’t be duplicated thanks to blockchain technology.

What Can You Buy With NFTs?

Buy with NFTWe’ve mentioned a couple of times that the most popular types of NFTs are typically visual artworks. While most won’t fetch an eight-figure price tag, there are plenty of NFTs that have sold for thousands or millions of dollars. According to Artnet, at least ten such works have sold for $500,000 or more.

In the music world, well-known artists like Kings of Leon, Aphex Twin, Mike Shinoda of Linkin Park, 3lau, Deadumau5, Grimes, Shawn Mendes, and Ja Rule have thrown their hats into the NFT ring.

You can also buy digital basketball cards, trading game properties and even shares of stock as NFTs.

How Does NFT Relate to Crypto?

We’ve mentioned the term blockchain, and that probably has you wondering if NFTs are a kind of cryptocurrency. They work in a similar way, using the same underlying technology. The digital wallet that holds your cryptocurrencies could also hold NFTs.

Like a transaction using bitcoin, ether, lumens, or dogecoin, NFT transactions are tracked by many people using a blockchain.

For example, when someone buys an NFT, a combination of private and public keys allows the seller to hand over the asset to the buyer. When the handover happens, a large network of computers verifies the transaction and the new owner.

The asset is recorded as belonging to a specific wallet, which may be anonymous. As long as you have the public and private keys to your wallet, you’re in control of its contents.

That’s why it’s crucial to keep your wallet information and private keys safe if you’re involved in cryptocurrency or NFTs. If you lose your keys, you essentially lose the underlying NFT.

What Is a Non-fungible Token?

NFTsA non-fungible token (NFT) is the digital representation of the asset. Every NFT, like every cryptocurrency coin, has a unique identifier that anyone can use to track its ownership history on a public blockchain.

If you go back to the $69 million artwork, you can view the origin wallet address and the NFT’s smart contract address:

  • Wallet address: 0xc6b0562605D35eE710138402B878ffe6F2E23807
  • Smart contract address: 0x2a46f2ffd99e19a89476e2f62270e0a35bbf0756

If you know what you’re doing, you can use that information to find the NFT and the wallet that owns it today. Unlike the underlying image file, the smart contract address can’t be replicated and can exist only once on the blockchain.

What Are NFT Stocks?

NFT stocks provide a buying and selling feature similar to shares of stock. But instead of going through a traditional stockbroker and exchange, NFT stocks are a type of decentralized finance. Anyone in the world with an internet connection and cryptocurrency wallet can buy and sell shares to each other directly without a company in the middle vying for a commission or other revenue.

Just as a digital smart contract address can represent an artwork, it could represent a share of stock. In fact, the New York Stock Exchange has recently launched First Trade NFTs to represent the first true trade of a number of public companies, including Spotify, DoorDash and Coupang.

Cryptocurrency exchange Binance earns the first mover award here, as it already offers tokenized stocks for a select list of companies. However, it’s not currently allowed if you live in the U.S. But that doesn’t mean it won’t be coming to this side of the pond in the coming months or years.

Stock tokens have a unique opportunity to revolutionize how we trade and hold stock investments.

How Have NFTs Changed the Art World?

Non-fungible TokenNFTs don’t change what we view as beautiful art, but it does change how we measure ownership and value. While there’s no debate of who owns the Mona Lisa or other famous physical artworks, we never had such a system for digital ownership.

With NFTs, we can now verify who owns digital work.

Some skeptics say that this form of ownership is worthless as anyone can make an unlimited number of copies of the JPG, GIF or other file represented by the NFT. It’s up to you to decide where you land on that debate and if you think NFTs are good long-term investments or a fad that will go the way of the Beanie Baby and Pet Rock.

How Do You Buy or Sell an NFT?

You can buy or sell an NFT on any major NFT platform. There are a few popular ones, including OpenSea and Rarible. Using these platforms, you can create your own NFT or buy and sell other NFTs. Some speculators have made a fortune doing this, but there are certainly risks involved.

1. Choose a Platform

First, you need to choose which platform you want to use. These platforms are essentially auction houses. Keep in mind that not all NFTs are available on all platforms. For example, if you want to buy an NBA Top Shot, you need to create an account with NBA Top Shot.

Each platform has different requirements for purchase, such as paying with cryptocurrency or fiat currency.

As an example, we will go into a bit more detail for buying an NFT from OpenSea, which is one of the more popular NFT platforms.

2. Create a Digital Wallet

Once you choose your platform and create an account, you need to create a digital wallet for your cryptocurrency. OpenSea accepts ether (a type of cryptocurrency), among other types of digital coins. And OpenSea accepts coins from various wallets.

3. Buy a Cryptocurrency Such as Ether

Once you have a wallet, you can buy ether (or another cryptocurrency). There are a number of ways to buy ether, including through Coinbase or localbitcoins.com. It’s usually easy to buy a cryptocurrency like ether and it’s similar to buying a stock. You will need to use a platform that lets you buy ether, then find the ticker and put in a buy request.

4. Buy (or Sell) an NFT

Once you own ether and have stored it in your wallet, you can buy an NFT on OpenSea. Browse the site to see what’s for sale. If you see something you like, place a bid (if it’s an auction) or click Buy Now. Then go to the checkout, pay the fees and viola! you own an NFT.

But what if you decide you don’t actually want to own the NFT you bought? You can easily sell it on the OpenSea platform. You may also be able to sell it on another platform, but the details of how to do so may vary so check with other platforms before you proceed.

It’s pretty simple really:

  1. Create a listing and upload the digital file.
  2. State the price you want to sell it for.
  3. Enter the name and description.
  4. You can also set a royalty price, so you’ll continue to get paid if it sells on the secondary market.
  5. Connect it with your wallet, pay any associated fees to list and you’re done.

How Do You Make an NFT?

Making an NFT is fairly easy for anyone with computer skills. You don’t need to know a lot about cryptocurrencies or blockchain to start. You should however think about which cryptocurrency you want to sell your NFT in. Keep in mind that you can sell your NFT only on platforms that support the crypto you choose.

Just as when you buy an NFT, you need a digital wallet. If you choose to sell on OpenSea, you can use the same wallet you set up to buy NFTs. You need to connect it to your account and digitally sign in to confirm it’s you.

Then all you need to do is create a digital file of your artwork or other items you wish to sell. It can be a photo, a song or even a Tweet.

Once you have your digital file, upload it as described in #4 above. You can even create special traits in the background that only the buyer will be able to see, to add to the uniqueness of the NFT. Click done, and you have your first NFT!

Besides Money, Do the Sellers Get Anything From an NFT?

The main thing sellers get is money, but they may also gain a reputation. Breaking through and becoming a famous artist is difficult in any situation. NFTs democratize the art world by allowing anyone to create and sell art in a public marketplace.

Artist Beeple, the creator of that $69 million NFT, already had some name recognition before selling this record-breaking NFT. In addition to having enough money to buy a private island, Beeple now ranks among very few living artists who have fetched this high price for a single artwork.

Other artists may find their works launch them to fame and even more fortune if their art stands out and resonates with collectors.

What Are the Risks of NFTs?

nft risksIt’s important to emphasize the risk of investing in NFTs. While it’s a fun fad today, there’s no knowing what the future holds for NFTs. The market may crash and these expensive purchases become worthless.

The ability to effectively duplicate them is also a huge risk, as people may ultimately decide that “owning” something through a digital wallet doesn’t matter all that much. After all, you can save almost any image file from the internet to your computer and make as many copies as you want using keyboard shortcuts or your home printer.

Real-life Examples of NFTs

If you don’t have tens of millions of dollars to buy NFTs from famous artists, you’re not out of luck. There are plenty of cheaper examples of NFTs you can buy to get started.

  • Art: Artworks are the main focus of NFTs today. Some digital images may be worth tens of millions of dollars, but you can buy others for just a few dollars.
  • Music: Music albums and other audio creations are sometimes released and sold as NFTs.
  • Stock: Some investors can buy shares of companies like Tesla as an NFT.
  • NBA Top Shot: NBA Top Shot is a video trading card collecting game where rare “cards” often list with six-figure price tags.
  • Upland: Upland is a property trading game. And it’s surprisingly fun.

Have Cautious Fun With NFTs

If you’re ready to buy your first NFT, you need a crypto wallet funded with a currency to make your purchase. Ether is a good choice for buying NFTs.

But if you’re getting started, take care not to invest more than you can afford to lose. NFTs may become more and more valuable over time, but the market could flop as well. Only time will tell the future of NFTs.

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