What are NFTs and how do they work?
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- Updated On:11-Jan-2022
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Short Answer
NFTs or Non-Fungible tokens represent digital forms of unique data in the form of photos, videos, or audio that are saved on the blockchain network. This provides proof of ownership and bragging rights to the owner of the NFT. These can be traded or sold to other individuals, and the transaction can be verified, as the blockchain is a public ledger.
Detailed Answer
What are NFTs?
Going by the name, an NFT is a Non-Fungible Token.
And it is perfectly fine if you didn’t understand the full form of NFT, so let me explain it to you in simple terms. The term Non-fungible basically means that the object you hold as an NFT is unique in its own way, and cannot be copied or replaced by anything else. For example, a 100-rupee currency note is fungible, because if I take 100 rupees from you and give two, 50 rupees notes to you, it will be the same. Similarly, a painting or precious artwork is not fungible. Because if you split an artwork (for example painting of Monalisa) into two halves, will it be the same?
NFTs can be in the form of digital artwork (photos), videos, audio, and more.
These NFTs are registered online on the blockchain network so that anyone can verify the present owner of an article. Each NFT also has the transaction history of buyers and sellers attached with it so that if you want to check its previous owners, you can do that easily.
How do they work?
NFTs utilize the network of cryptocurrencies such as Ethereum, Cardano, etc to get themselves registered on the blockchain network. Once it is registered, it will possess a string of unique characters which remains its identity.
For example, the way every product that is manufactured in a company is labeled with a Bar code, description and serial number. Similarly, NFTs also contain a unique code which is its proof of existence on the blockchain. You can sell it or trade it for other cryptocurrencies once the NFT is registered on the blockchain.
NFTs are not only limited to photos or videos but many games and other platforms use various other articles like Classified documents, Videos, Films, etc in the form of NFTs. This is because of the underlying security of the blockchain which makes it immutable and prevents it from getting hacked.
What is the purpose of NFTs?
The primary purpose of NFTs is to verify a piece of artwork and map its owner to it. An NFT also ensures that the underlying is digitally secure on the blockchain.
As a creator, you can upload your artwork online, in the form of NFTs to either sell them or just to preserve them. The presence on the blockchain will not only allow you to claim ownership of the article but also brag about its ownership rights.
For example, proving the ownership of a piece of paper can be difficult, as there is a slight possibility that it can be forged, copied, or stolen. But if the same contents were converted as an NFT, you can easily claim ownership of the piece of paper by your wallet address that houses it.
Likewise, a buyer can collect different artworks in the form of NFTs and support the seller of the artwork at the same time.
Some of the most popular NFTs include the First Tweet of Jack Dorsey (founder of Twitter), which was sold for $2.5 million.
Some other famous NFTs include CryptoPunks, Bored Ape, Nyan Cat, and many more.
NFTs are not only nice artworks but also can have an underlying value underneath them. For example, an NFT of the Bored Ape Club gives its owner access to prestigious and exclusive events that are conducted only for the members of the club. Similarly, NFTs are not only in the form of photos but also can be in other forms. Parcels of lands in the metaverse are also sold as NFTs.
Conclusion
Even with the uncertainties on regulation related to cryptocurrencies, NFT adoption is growing at an astronomical rate. From a mere $340 million in total sales in the year 2020, the combined value of NFT sales in 2021 has crossed $25 billion. With such a rise in popularity, numerous creators are launching their NFTs. Big multinational companies like Pepsi, Nike, Adidas, have all launched their NFTs recently. But not all NFTs have value. Therefore, you should evaluate the true intrinsic value of a particular NFT before you consider investing in it.
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Discussion (0)
NFTs represent a great way to obtain multiple benefits from the underlying digital asset like photos, videos, audio, etc. Some of the steps to own an NFT is, to research and find out good NFT projects. To select a credible NFT marketplace and get a cryptocurrency wallet along with the required cryptocurrencies to facilitate the purchase.
NFTs are digital assets that derive their value from the total supply, scarcity, ownership history, and usability. Some of the most expensive NFTs include 'The Merge' which was sold for a whopping $91.8 million. However, NFTs in common are extremely risky investments hence you should only allocate a small percentage of your overall portfolio towards them.
Decentralized autonomous organizations or DAOs are digital organizations that do not have a managing individual, instead, all the members of the corporation own and manage the operations. DAOs work on smart contracts with the help of the blockchain which makes them automated, transparent, tamper-proof, and provide equal validation to all the members.
The Metaverse represents a digital universe integrated with various factors like virtual reality, NFTs, interactive gaming, etc. Although the possibilities of a metaverse are endless, an individual can hang around anonymously, play games, earn cryptocurrencies and spend it in the real world with the help of swapping the currencies.
NFTs are digital assets in the form of photos, videos, audio, etc. These can be purchased and sold over any NFT exchange with the help of cryptocurrencies. Some of the key ways through which you can make money from NFTs are, by flipping which means buying low and selling it high. Creators of NFTs can receive royalties on the sale of their NFT. Apart from this, you can stake your NFT to obtain additional income while still owing it.
Crypto coins and tokens are digital assets that have few similarities and many differences. A token constitutes what you owns while a coin signifies what you are capable of owning. Let's get deeper into these two interesting crypto concepts.
Decentralized Autonomous Organizations or DAOs are decentralized digital companies where one can invest and get extremely returns. You will need a cryptocurrency wallet, the required cryptocurrencies to invest in a DAO. As they are built on smart contracts, the chances of a loss of capital are low, however, there are other risks involved in the process.
To buy and sell NFTs, you will require a crypto wallet and a good NFT exchange. The top 5 NFT marketplace includes Open Sea, Rarible, WazirX NFT platform, Axie Marketplace, and Nifty Gateway. As NFTs are highly speculative, you should identify your necessities and then choose a platform accordingly.
The metaverse is a blockchain-based virtual simulation universe where one can play various characters and perform any tasks. To take exposure in this space, you can invest in Metaverse cryptocurrencies, Virtual lands, NFTs, and stocks related to the metaverse.
The metaverse is set to become a virtual digital universe where multiple individuals can meet, interact, earn and perform other activities. The top cryptocurrencies to look at when considering investing in the metaverse are Decentraland, Sandbox, Axie Infinity, Enjin as well as Ethereum.