Non-Fungible Tokens (NFTs) – Deep Dive

We have heard of stories such as the Beeple work of art ‘EVERYDAY: THE FIRST 5000 DAYS’, which sold for more than $69 million at a Christie’s auction, Twitter’s ex-CEO Jack Dorsey’s sale of his first tweet for $2.9 million, and Digital artist Pak’s creation, The Merge, which sold for US$91.8 million on Nifty Gateway – all via NFTs.

What does Fungible and Non-Fungible means?

First, let’s understand what does Fungible and Non-Fungible means.

Fungible: If an item is fungible, then it can be substituted or exchanged for any similar item. Fiat currencies, like the US dollars, contain fungible units. A one-dollar bill can be exchanged for any other dollar bill.

Non-Fungible: The item is unique, irreplaceable, and non-interchangeable

Now, let’s look at fungible tokens, which are units of goods or commodities that are interchangeable and identical, for example bitcoins. The NFT is a special type of digital asset or token that has the property of being unique and cannot be used interchangeably with other digital assets. Due to this reason, it is known as a ‘non-fungible token’. Using cryptography, NFTs can prove the authenticity, as well as ownership of such assets and goods.

What is a Non-Fungible Token (NFT)?

A non-fungible token (NFT) is a digital certificate of ownership:

  • built on blockchain technology, that contains the source details, the history, and all activities surrounding a digital asset.
  • the activities can be viewed by the public as it is on the blockchain  
  • it cannot be forged due to its immutable nature

An NFT is minted from digital objects as a representation of digital or non-digital assets. For example, an NFT could represent:

There can only be one owner of an NFT at a time. Ownership is managed by uniqueID and metadata, which cannot be replicated by other tokens. A smart contract manages the ownership and transferability of NFTs. NFTs are created or minted by executing code stored in smart contracts that comply with different standards, such as ERC-721. The information is put on the blockchain where the NFT is managed. From a high level, the minting process involves the following steps:

Most NFTs are stored on the Ethereum blockchain. You can view the transaction history of any Ethereum NFT on Etherscan.

NFTs are also available on other blockchains. Solana and Flow blockchains are two other popular ones for NFT applications.

Why are Non-Fungible Token (NFTs) so expensive?

If we want to understand why NFTs are so expensive, we need to understand the science behind collecting rare and unique items. There is an interesting psychological reason why we collect things. From pure enjoyment to investment, expanding our social circles, preserving the past, a way to distinguish ourselves, and simply the thrill of the hunt, collecting can bring us satisfaction.

There are four factors that determine the value of an NFT art – how expensive it becomes.

  1. Market-driven value- determines the value based on speculation about the artist’s future resale value and popularity.
  2. Subjective value – It involves the political or moral message conveyed by the art – its emotional impact.
  3. Objective value – the value is determined by the experience and technical skills of the creator.
  4. Historical value -the piece of digital art has.

Popular Use Cases of Non-Fungible Token (NFTs)

Can I create my NFT? How much does it cost to create NFTs?

Creating an NFT is known as minting. Anyone can create NFTs and sell them, whether it’s an artist, gamer, brand, musician, or even you. You can list their item on the digital marketplace of their choice after creating it.

Every time someone purchases a piece of the artist’s work, he or she gets paid a commission.

A seller benefits from every purchase because the transaction costs and gas or energy required to complete that transaction are quite high. These costs can also vary by the marketplace.

Here are some Marketplaces to Mint and NFT for Free.

Where do I buy Non-Fungible Token (NFTs)?

If you want to buy NFT, you need cryptocurrency (mostly Ethereum or ETH). Some exchange platforms allow users to convert dollars to ether, such as Gemini, Kraken, and Coinbase.

Axie Marketplace, OpenSea, Rarible, and NBA Top Shot Marketplace are just a few of the best marketplaces where you can get NFTs.

Are Non-Fungible Token (NFTs) a good investment?

NFTs are considered High Risk, High Reward investments. NFT fever is rapidly catching everyone’s attention. However, there are some major risks associated with them that you might not be aware of.

  1. NFT marketplace is new
  2. No price history of NFTs to determine the price-performance
  3. Ownership rights could be for a limited period
  4. The threat of fraudulent NFTs sale
  5. No regulator to monitor compliance
  6. Possibility of losing the asset or your blockchain wallet

As with any investment, conduct research, understand the risks, and proceed with caution when investing in NFTs.

Non-Fungible Token (NFTs): Conclusion

The future of NFTs is uncertain, just as it is with any new asset class. Despite NFT’s great potential, it is still too early to talk about its mainstream adoption. Many experts estimate that it will take several years to make NFT mainstream. Yet others predict earlier adoption. Only time will tell who was right.

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