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NFTs Explained! Beginner’s Guide to Non-fungible Tokens

  • By  [x]cube LABS

  • Published: Mar 17 2021

Table of contents

We’re almost at the end of 2021 and it’s probably the right time to reflect on one of the  hot topics of the year in the tech industry- NFTs. For the unacquainted, NFTs exploded  earlier this year when $69 million for a digital image file made by digital artist Mike Winkelmann aka Beeple, became the third-highest purchased artwork after Jeff Koons and David Hockney. We’ve come a long way since then. Let’s take a look at where we are now, what’s new, and what the way ahead looks like. But before that, let’s take  a quick recap of everything we know about NFTs.

NFTs- Frequently asked questions

  • What Are Non-Fungible Tokens Or NFTs?

    NFT is a unique digital certificate attached to any digital asset, be it art, music, or video, confirming its ownership to the holder, which remains public and stored on computers across the internet. When this is combined with the cryptocurrency, backed by a digital ledger platform called blockchain, the result is non-fungible tokens. NFTs are non-fungible tokens, have no standard value like money, and instead have a unique value. An original digital artwork, for instance, would be non-fungible objects.

  • Why Are NFTs Worth Millions Of Dollars?

    Each NFT is unique, characterized by its unique qualities and authenticity. These digital tokens cannot be duplicated. Authenticity plays a crucial role in the rise of NFTs. The tokens are easily verifiable and can always be traced back to their original creator.

  • How Do NFTs Work?

    When you send bitcoin to someone via blockchain, a ledger entry gets made. In the case of NFT, a ledger entry is created, which contains an address to the file to establish ownership of that NFT. When someone transfers one token to someone else, the token code also gets transferred to another person. This process makes it easy to check on the blockchain who owns the NFT. Like Bitcoin, NFTs contain ownership details for easy identification and transfer between token holders. Owners can add metadata or attributes pertaining to the asset in NFTs. Our blockchain development service is a one-stop solution to create NFTs representing digital or physical artwork on a blockchain.

    Earlier, when you buy pieces of offline art, you have to either custody it or keep it somewhere; that’s how the ownership is decided. But now, they can also be tokenized where a digital form of that art exists and whoever owns that token owns the actual art.

    Image

    NFTs are individual tokens with extra information stored in them. That additional information is the critical part, which allows them to take the form of art, music, video in the format of JPG, MP3s, videos, GIFs, and more. Because they hold value, they can be bought and sold just like other types of art – and, like with physical art, the value is primarily set by the market and by demand.

  • How Are NFTs Used?

    NFTs are being used as a means to sell exclusive items online and have the potential to be used to verify anything that would have value in proving ownership, such as original artworks, music, collectibles, domain names, even tweets can be sold as NFTs. For example, Twitter co-founder Jack Dorsey auctioned his first tweet in March 2021 for $2.5 million, converting the proceeds to Bitcoin and donating them to charity.

    Although digital items and collectibles are one of a kind, there is also value in items that might have multiple copies, such as sports trading cards. If you want to know more about sports trading cards and NFTs, register for the online event for free here.

  • Where can people buy NFTs?

    NFTs can be bought on online marketplaces. Some of the leading NFT marketplaces for digital artworks include:

    • Opensea.io, the first and largest marketplace for NFTs
    • Niftygateway.com, that teams up with top artists and brands to create and sell exclusive NFTs
    • SuperRare.com, a marketplace to collect and trade unique, single-edition digital artwork

    Lately, some traditional auction houses have also started to step up into the NFT space.

  • What is the size of the NFT market?

    According to a report by DappRadar, the NFT market crossed $10 bn in transaction volume in Q3 of 2021, which is an increase of 704% from the previous quarter. The report attributes this high growth to two reasons- investors’ belief in NFTs and their long-term value, and the social capital associated with owning an NFT.

  • What determines the price of NFTs?

    There’s no fixed parameter that decides the price at which an NFT is sold. It’s all about bidding and you sell an NFT at the highest possible price that you can get. However, factors such as the reputation of the artist, his following size, and gallery exposure play an important role in pricing.

  • How do you own an NFT?

    Buyer and seller can connect directly without the need of a middleman, similar to a traditional auction house in the case of artworks. Since it involves crypto transactions backed by a ledger, the ownership is easily verifiable. Even if it has been sold multiple times, the NFT will carry details of the original creator as well as different sellers.

  • What are the benefits of NFTs?

    NFTs offer a multitude of benefits that weren’t earlier addressed by similar tokens and currencies.

    • Ownership: NFTs are embedded with unique signatures that represent ownership rights for both digital and real-world objects.
    • No intermediaries: Since they are based on blockchain, parties can directly exchange tokens without the need for any intermediaries
    • Secure: The entire process of trading is simple and effective, making the overall experience hassle-free
    • Trading: NFTs can be easily traded for cryptocurrencies or other assets in exchanges built specifically for NFTs
    • Difficult to replicate: Each NFT has a unique signature and is backed by blockchain. This makes it impossible to create unauthorized replicas

  • What are the features of NFTs that make it so promising?

  • Tradability: The interoperability of NFT makes it possible to trade NFT in different virtual environments and marketplaces
  • Security: NFTs are bound through end-to-end encryption with Advanced Encryption Standards (AES)
  • Scarcity: Since only a specific number of rare items can be created, your asset’s uniqueness increases significantly
  • Indivisible: NFTs cannot be divided into parts, unlike usual tokens and currencies. This makes them stay unique at all times
  • Standardization: Developers can develop  common, reusable, and inheritable standards for all non-fungible tokens, thereby enabling standardization of collectibles

  • Is Investing In NFTs Worth It?

    The most apparent benefit of NFTs is market efficiency. Investing in NFTs has a lot of potential, growth, and relatively high risk. Since NFTs can’t be duplicated, it creates scarcity for the asset hence value for it. The conversion of a physical asset into a digital asset opens up many opportunities for artists and investors. Physical assets like real estate, collectibles are much easier to divide a digital asset among multiple owners than a physical one, making it one of the best NFTs investments. Some of the most popular NFT marketplaces to get you going are SuperRare, Makersplace, Rarible, and Zora.

    However, in any case, if you plan to invest in NFTs, you’ll need to dive deep into the complex world; you’ll need to think strategically, and you’ll have to do your homework.

NFTs Through The Lens Of Visionaries And Thought Leaders

Wrapping one’s head around NFTs can be enough of a challenge. As digital natives, we see this new technology really has its way of flipping our whole way of seeing things.

Creators, especially digital artists, have always struggled with copyright and plagiarism of their work. In the world of digital, it just takes a few clicks to make a copy of the media without having to compensate the creator.  NFT solves this problem by acting as a virtual certificate of authenticity that ties original artwork with the token thereby providing unique status and because this token exists on the blockchain, it allows us to verify the authenticity on a public network.

However, there are concerns about NFTs skyrocketing value being a fragile speculative bubble that could crash at any moment, bringing down the investors with it.

Even Beeple, an artist who recently sold his art for nearly $70 million using this technology said– “The cryptocurrency art boom involving non-fungible tokens (NFTs) is an “irrational exuberance bubble”.

Seth Godin, in his recent blog on why he thinks NFTs are a dangerous trap, said,” The trap, then, is that creators can get hooked on creating these. Buyers with a sunk cost get hooked on making the prices go up, unable to walk away. And so creators and buyers are then hooked in a cycle, with all of us up paying the lifetime of costs associated with an unregulated system that consumes vast amounts of precious energy for no other purpose than to create some scarce digital tokens.”

Investor Gary Vaynerchuk said, “NFTs are like the dot com bubble. A lot of people talked about the internet being a fad. In reality, the internet was this game-changing revolution of technology, but a lot of the early projects were just overpriced on the excitement.”

According to Mason Nystrom, a research analyst at Messari said that the NFT sector is caught up in massive amounts of hype right now and that as a result, a significant portion of NFT is likely to fall in price at some point. Nonetheless, even with the present risk being relatively high, he expects the market to stabilize in the longer term.

Recent Advancements and News in NFTs

As we mentioned, the Q3 of 2021 witnessed a whopping 704% increase in transaction volume from the previous quarter. A key reason for this growth is the faith in the future value of NFTs and their potential across different markets. Here are some of the recent advancements we’ve seen in the NFT market:

The Future of NFTs- Promising or Uncertain?

In the last month, billions of dollars have been invested in NFTs. OpenSea alone saw more than $3 billion in transaction volume, which, by the way, is quite less compared to previous transaction volumesThis just shows how much money flows into NFTs. CrypToads received an investment worth $100 million, MekaVerse saw a transaction volume of $130 million. Cryptoslam, too, did more than $1 million in transactions. So there’s a lot of wealth creation happening in the NFT space.

Some people may find the whole NFT space irrational, but then a question to ask here is, why are the investors taking risks? Initially, we may think that investors are awe-struck looking at the market filled with such wealth and that is what’s driving this momentum. But it could also be a result of the noise that’s coming from thousands of buyers worldwide. While investing, many investors are likely to talk about future use cases and mainstream adoption, while citing the success of projects like Axie Infinity and Top Shot, that are packaged in a more user-user friendly way to reach the mainstream. The entire concept of driving a virtual economy with NFTs seems fascinating but even after billions of dollars of investments in this space, it is too early to draw conclusions. Even after the success of platforms like Axie Infinity, we’re still speculative about what the future holds for NFTs.

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