NFT: What is The Hype And How Does It Work?

NFTs have become a part of mainstream market in the last decade. These digital items can be used for trading, claiming ownership and protecting owners against frauds.

Non-fungible tokens (NFTs) are unique digital items that are traded for buying or selling assets. An NFT is non-fungible in nature. This means that it is unique and does not have another copy. In this article, you will learn about NFTs in detail.

“An NFT is a non-interchangeable  unit of data that is stored on blockchain”

Take the example of bitcoins. When you trade into bitcoins, you get bitcoins in exchange. This means that you are getting the same thing in exchange. Such an item is fungible in nature. On the other hand, NFT is an item that is uniquely traded. This means that an exact copy of NFT is not available. NFTs are bought and sold using blockchain technology. Photos, videos and audios are major types of NFT.

Table of Contents

1. NFT at a Glance
2. History of NFTs
3. Types of NFTs
4. Trading in NFTs
5. Applications of NFTs
6. Difference between NFT and cryptocurrencies
7. Risks associated with NFTs
8. Future of NFTS
9. Should you create an NFT

NFT At A Glance

1. An NFT cannot have another exact copy
2. The identity of the NFT owner is public and anyone can verify it
3. NFT owners do not have its copyright and the ownership remains with the creator

History of NFTs

2012-2013: Coloured Coins

• The idea for NFTs was generated from ‘Coloured Coin’ which was initially issued on the bitcoin blockchain. 
• These coins represent real assets on the blockchain and are used for proving ownership of any asset.

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2014: Quantum and Counterparty

• NFT first came into existence on May 3, 2014, when digital artist, Kevin McCoy minted Quantum which talks about the cycle of birth, death and rebirth. 
• With the introduction of Ethereum, a set of token standards was introduced. This allowed developers to create tokens.
• Counterparty, a peer-to-peer financial platform was founded. It allowed asset creation where people were able to create their own tradable currency.

2015: In-Game Assets

In April 2015, Counterparty partnered with Spell of Genesis which started offering in-game assets through blockchain.

2016: Memes

In October 2016, memes were introduced in blockchain through the Counterparty platform. People started adding assets to a meme called “Rare Pepes.” which featured a frog character.

2017: Cryptopunks

The creators of Larva Labs started creating unique characters on the Ethereum blockchain where no two characters were the same. These characters were limited to 10,000.

2018-2021: Mainstream Invasion

During the period of the last three years, NFTs have become a part of mainstream art. In 2018, artist Kevin Abosch created crypto art called ‘The Forever Rose’. Platforms like Opensea, Portion and Niftex are some of the trading platforms for NFT that have emerged over time. These platforms host both creators and collectors. 

An example of NFTs intrusion in mainstream media is the 22-year-old Sultan Gustaf Al Ghozali. He minted millions of dollars through the OpeanSea marketplace. The Indonesian creator converted 1,000 selfies into NFTs and sold them over the period of 5 years.

Types of NFTs

• Art: Many creators develop digital arts as NFTs that are sold at high prices in the market. Murat Pak is a digital artist who has become known for selling the most expensive NFT worth 91.8 million dollars. 
• Music: NFTs are also traded within the music industry. Artists sell music as NFT tokens. 
• In-game content: Many game companies sell in-game content such as characters, weapons, skins, etc. as NFTs. 
• Memes: You can also trade in memes on NFT markets. Some famous memes include Bad Luck Brian and Nyan Cat. Doge meme has been sold for a whopping 4 million dollars
• Films: Even the film industry uses scenes, music scores and artwork collections as NFTs. Quentin Tarantino, the film director of the movie Pulp Fiction, released 7 NFTs based on the movie’s uncut scenes. 
• Fashion: Even the fashion industry is making money using NFTs nowadays. In October 2021, Dolce & Gabbana made 6 million dollars through the auction of a 9-piece collection of couture and fashion NFTs. 
• Domain names: A number of people are also selling domain names as NFTs. People register certain domain names and then trade them in the NFT market.
• Online content: Other than specified categories, people also trade in miscellaneous content. Many people have traded in facebook stories, statuses, tweets and even tiktoks. 

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Why is NFT valuable?

NFTs are valuable because of the asset that it represents. An NFT points to the location of that digital asset.

Trading in NFTs

You can start trading in NFTs by buying and selling NFTs. 

• First of all, you need a marketplace to find NFTs. 
• Once you find an NFT, you need to have a digital wallet that supports NFT for transactions.
• Since most NFTs are Ethereum-based tokens, most marketplaces accept these tokens as payment. This is why you need to use a digital wallet that supports Ethereum.
• Your wallet should have a sufficient amount of relevant cryptocurrency to purchase an NFT.
• Now, connect MetaMask to an NFT marketplace where you can buy an NFT.

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Whenever you buy something using NFT, you do not physically own the item. Instead, you get a certificate of ownership of the NFT that is associated with the item. This NFT is registered on the blockchain. The files are not stored on the blockchain itself. A link to the file and the NFT is stored, as proof of ownership. You need to keep the certificate safely in a digital wallet.

Applications of NFTs

NFTs have multiple applications identified to date including the following:

1. Virtual representation of physical entities: One of the most important applications of NFT is representation. NFTs represent actual entities in the virtual world through ‘tokenizing’. This reduces the possibility of fraud.
2. Can be used as collateral: Decentralized Finance (Defi) applications allow you to borrow money by using NFTs as collateral.
3. Maintaining confidentiality: Information is accurately recorded which is extremely secure. This prevents any compromise to confidentiality. The Healthcare industry is using NFTs for securing the medical records of patients.
4. Protecting IPR: NFTs provide ownership of content through timestamps which is otherwise not possible through traditional methods such as copyright.

Difference Between NFTs and Cryptocurrencies

NFT	Cryptocurrency
Non-fungible in nature.	Fungible in nature.
Regardless of the values of NFTs, the two cannot be exchanged.	Only the equivalent value of cryptocurrencies can be exchanged.
Less volatility	High volatility

What is the relation between NFT and cryptocurrency?

Both NFT and cryptocurrency exist on blockchain that verifies the unique identity and ownership.

Risks Associated With NFTs

NFTs are new for most of us since they are still evolving. Let us try understanding the risks associated with trading in NFTs:

1. Trading in NFTs can be a little confusing since it involves technicalities. 
2. Traders may not even be fully aware of its working since it is a relatively new concept. 
3. If you own an NFT, it does not mean that you own the copyright or intellectual property rights of that digital asset. The original owner can create more NFTs of the same work. It is only proof of ownership that is different from a copyright.
4. These are bad for the environment. Computers that generate this blockchain data are high capacity machines. Researchers have found that it contributes to the emission of carbon-di-oxide.In fact, the emission is way more than the mining of gold, platinum and copper.
5. Many buyers try to trick the system by using bots to get a particular NFT. This makes the market less accessible for new investors.
6. The same file can have two or more NFTs which means that you may find NFTs with editions.
7. Other creators can take the file that you have used for your own NFT and can create one with it.

Future of NFTs

At present, companies like Twitter, Facebook, Coinbase and Nike are working on NFTs. As of now, the possibilities related to the future seem endless. 

• In terms of gaming, NFT will be used aggressively for in-game-related purchases. 
• More artists will get the opportunity to showcase their skills by creating NFTs. 
• It may also play a significant role in establishing ownership in real estate. You will be able to identify the owners of the property through NFTs. 

Should You Create An NFT?

If you only have a vague idea and are confused about making an NFT, then you should consider a few factors. First of all, think about this. Do you enjoy creating art? If you do, you can think of starting out in the field. 

The second factor is the transaction fees known as ‘gas’. Most of the NFTs are sold on the Ethereum blockchain. Each transaction on Ethereum blockchains will cost a fee called ‘gas’ that is paid to miners. The gas will vary significantly from one NFT to another. Almost every activity on the blockchain, be it minting an NFT or transferring it will cost you gas. If you are ready to pay this fee, you may consider creating NFTs.

It is important to understand that you must do proper research before investing in an NFT. It is a new concept that may stay or fade in some time. However, it is based on blockchain which is a very grounded technology that is here to stay in the long run.