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What Are NFTs? How Do NFTs Work?

Posted by Gary Henderson on Apr 7, 2021 2:15:00 PM

Historians believe that humans first used metals as money as early as 5,000 B.C. That was long, long ago.  Considering our long history with money and how it evolved, cryptocurrency is still in its infancy stage. 

The first cryptocurrency, Bitcoin, was created in 2009. The idea was to create an international, decentralized payment method without any backing from a financial institution. 

Today, we see some of the most popular brands like Tesla ready to take payments in bitcoins. Elon Musk bought $1.5 billion worth of Bitcoins. 

If we look at the most recent cryptocurrency trends, NFTs are indeed at the top. Since you’re reading this post, I assume you have heard about NFTs and how they are taking the digital art world by storm. 

You read that right: NFTs are the hottest trend in the blockchain space. 

People like content creators, influencers, and digital artists have got an opportunity to change their lives and create new revenue streams.

We have already seen an increasing number of people joining in to figure out new ways to make money and connect with their audience.

But what are NFTs, and how do they work? 

You are not alone if you are asking this question. People who are not tech-savvy or don’t know much about cryptocurrency find it hard to wrap their heads around things like NFTs. 

That’s why I am here to make things easier for you. I will use this post to describe NFTs, how they work, why they are interesting, and how you can create or sell one. 

Don’t worry, it’s not that complicated as you might think. Just stay with me! 

what are non fungible tokens?

What Is An NFT?  

Simply put, NFTs or Non-Fungible Tokens are unique digital assets or goods that hold value in the form of cryptocurrency. The ownership of these assets is managed and tracked on a blockchain, Etherum (ETH). 

You can’t duplicate or divide these items. A digital painting or a piece of music is an example of a digital asset that can be turned into an NFT. 

Didn’t get it? 

To fully grasp the concept, we need to understand the term fungibility and the difference between fungible and non-fungible assets. 

What Is Fungibility? 

If you hold a fungible asset or good, you can interchange it with other assets or goods.

For example, a $1 bill is a perfect example of a fungible asset. You can simply use it to buy something or convert it into four quarters or ten dimes. 

If you lend someone A $100 bill, it doesn’t matter to you whether you are repaid with a different $100 bill or with two $50 bills.

Why? Because two $50 bills equal $100. 

A bitcoin is another example of a fungible asset because you can trade one for another bitcoin. 

A financial instrument such as a stock or bond is a fungible asset if it can be sold or exchanged in a market. 

Some assets are considered semi-fungible, for example, gold. One gold ounce can be equivalent to another gold ounce. However, this can’t be true in all cases. 

What Is Non-Fungability? 

Non-fungibility, on the other hand, is a property of an asset that makes it unique and non-exchangeable.

A non-fungible asset or token has the following properties: 

  • Unique

  • Non-interchangeable

  • Irreplaceable 

Art, game character, real estate, and snowflakes have these properties, and, thus, they are non-fungible. Two pieces of furniture, apparently identical, are non-fungible because they are composed of different materials. 

Now, let’s get back to NFTs! 

NFTs are digital tokens that have unique metadata and identification that make them different from each other. You can’t trade them with each other like bitcoins or stocks.  

Because NFTs are based on blockchains, you can use them to remove intermediaries or for identity management. 

At this point, you might be wondering how you can create your own NFTs and sell them.

For this, you have to understand how NFTs work or are created. And that’s what led us to our next section. 

⭐Related Post: What is the creator economy?

How Do NFTs Work? 

how to create an NFT

So, what really constitutes NFTs? 

Think of some of the stuff you own: as the device, you’re using right now, anything that you could sell on Craigslist or eBay. These commodities are non-fungible and they exist in the physical world. 

Now, think of the digital stuff you own. You might own in-game items, event tickets, or domain names. We call them non-fungible digital assets, which can be incredibly valuable but they very in traceability or liquidity. 

Non-fungible digital assets exist since the beginning of the internet. 

Your NFTs are worth what someone is willing to pay for it. The worth can be a lot if a famous artist creates the NFT art and the buyer is a wealthy collector. 

You have plenty of cool digital assets. Right? But do you really own them? Can you hold or transfer them indefinitely? 

You own digital stuff, but you may or may not be able to sell it. Just try to sell a digital asset like an in-game item online, and you will find how tough it is to transfer a digital asset. 

That’s where blockchain comes into play. Blockchain is a decentralized technology that records the provenance of a digital asset. It enables you to own and manage your non-fungible digital stuff by adding unique properties to it. 

Anything you own virtually can be traded and tracked on a blockchain network. Etherum is a leading crypto blockchain available to create non-fungible tokens. 

Once you mint an artwork on the blockchain using Ethereum or another platform, it’s considered an NFT. 

But how to mint or tokenize digital artwork and assign it an eternal value? 

How to mint an NFT

Let me quickly explain how to mint an NFT! 

Minting NFT tokens is similar to the way metal coins are minted and sent to circulation. An NFT is like a virtual coin that needs to be minted to be purchased or traded in the market. 

Here is a simple definition of minting: 

Minting is a computer process of creating a new block, validating information, and recording that information into the blockchain. 

Let me simplify this!

Think of blockchain as a book of records with digital pages where only a limited amount of data can be stored. So, new pages are created regularly to store more information. 

We name these digital pages as blocks in the blockchain. The minting process controls how blocks are created and how information is added to blocks. 

I will further talk about NFTs creation later in this post. 

Why NFT’s Are Interesting 

As an artist, gamer, or content creator, you can combine NFTs with other financial building blocks on Ethereum and then own or trade them. 

For instance, if you are a photographer and want to trade your work, you can instantly make your work tradable through NFTs. 

Nonetheless, it’s not all about trading your digital stuff. NFTs allow you to lend, borrow, or support something or use them as collateral to take a loan. 

Possibilities are endless. 

Why NFTs are interesting today because it creates new opportunities for digital content creators. We know how traditional platforms swallow content creators’ profits and earning potential. 

For example, if you create videos on YouTube or any other social network, you make money for the platform by selling ads to your followers. When a platform sells your content, funds go directly to them. You will get a share, but that’s not worth your hard work. 

NFTs make it possible for you to hand ownership of your content over to other platforms. Instead, you sell your work and receive royalties automatically. Nobody can steal it from you because your address is part of your tokens’ metadata. 

Let’s take a quick look at some industries that NFTs impact! 

Gaming 

Game developers are taking a lot of interest in the NFT space because it provides records of ownership of in-game assets and helps players resell them when they are done with the game.

As a gamer, you might end up making a profit by selling your in-game items. 

As a game developer, you could earn a royalty every time someone re-sold your item. This is how NFTs create a good environment for both players and developers. 

Here is another exciting thing to consider.

If you own in-game items and the game developer stops maintaining the game, your in-game items turn into digital memorabilia with their own value outside the game. 

Steam is a popular video game platform where you can sell or buy in-game items.

Axie Infinity is a popular crypto game that is traded in NFT marketplaces such as OpenSea. The game gained immense popularity as it allows players to earn tokens from the game and make a living. 

Art 

Non-fungible tokens are not as complicated as you might think. When you attach a token to your artwork, you create a blockchain-backed proof of ownership. This means your digital art can’t be destroyed or lost. 

NFT creators are protected.

That’s precisely why an increasing number of artists and art collectors are excited about riding the NFT wave. Some artists have earned millions already through NFT sales. 

This ongoing trend is likely to transform the world of art. If you are an artist of any kind, you should consider cashing in on the NFT craze. 

Need some inspiration? 

Grimes, Elon Musk’s girlfriend, is making millions selling NFT art. As a digital creator, she sold $6 million worth of digital art. 

Chris Torres is another example. He sold his meme for $590,000. Clips of NBA star LeBron James are selling for as much as $225,000. 

These stats help us understand how NFTs have opened up art to people who have never get a chance to appreciate artists.

This NFT thing will only get bigger over time, reshaping the future of the art market. 

Music 

Kings of Leon was the first band to release their work as an NFT, introducing blockchain technology to the music industry. NFTs earned 22 million in the music industry in February 2021 alone. 

Are you wondering how someone could sell music as NFTs or as a digital good? 

Well, music can take many forms in the world of crypto tokens. For example, you can convert ticket sales for concerts or teasers of unreleased songs into NFTs. 

On top of this, you have an opportunity to cut out middlemen’s costs and monetize your work in an entirely innovative way. 

Did you know Mike Shinoda, co-founder of Linkin Park, raised $30,000 auctioning a short, 37-second teaser of an unreleased song?

Let’s talk about the possibilities and future of NFTs.

Blockchain technologies are already impacting the future of trade, while NFTs are currently very popular among young people.

But the question is whether or not this generation has the economic power to find new uses of NFTs. 

One thing is for sure: NFTs and other blockchain-based technologies are going to change the digital world.

If you are a creator, are you already reimagining how you can create and monetize your work?

Indeed, you have a chance to be valued and identified. 

Who Can Create NFTs?

We have talked about gamers, musicians, influencers, and artists so far. We heard the news of Twitter’s founder transforming the first tweet into an NFT and a New York Times column raising half a million dollars for charity. 

Who else can create NFTs? Can you own or trade NFTs? 

There is no rule dictating who can create NFTs and who cannot - Almost anyone can create NFTs: musicians, entrepreneurs, artists, brands, platforms, content creators, etc. 

However, some NFT platforms require you to be pre-approved by the community. Platforms like Rarible are open to anyone willing to create NFTs. 

The critical thing to consider is the value an NFT brings to the table. In other words, you should have something of value that fits the NFT equation. If you have unique assets that are of any value or interest, you might be able to turn them into non-fungible tokens. 

Currently, the main assets offered as NFTs include collectibles, in-game assets, virtual properties, physical art, handbags, iconic sporting moments, and rare videos. 

NFTs are even an attractive revenue stream for brands. For example, Taco Bell recently sold taco-themed GIFs and images and NFTs. 

How To Create An NFT

If you are ready to create NFTs and introduce your digital assets to the online world, here is what you need to do: 

First of all, get your media in order. NFTs support a range of formats: JPG, GIF, MP3, GLB, and more. 

The process works just like you create any other media file. For example, it’s similar to uploading a JPG photograph to your computer or creating an MP3 track using some music software. 

So, have your file ready so that you could take the primary step of uploading it to a minting platform. That’s how you tokenize your item as an NFT. 

There are a variety of NFT minting platforms around the Ethereum ecosystem. And these platforms will offer a different minting experience. 

If you want to do it yourself without hiring any professional help, you can choose platforms like: 

  • Rarible

  • Mintbase

  • InfiNFT

  • OpenSea 

Whether you own digital art or membership passes, you can easily use these platforms to mint your own NFTs. 

Some membership-only minting platforms require you to apply and be accepted before you mint through them. For example: 

  • Async Art 

  • SuperRare 

Once you have your file ready and a minting platform is chosen, the next step is to connect your Ethereum wallet and upload your file.

The process to upload your file is similar to how you upload stuff on Flicker. You also have to add a description. 

Another critical step is to determine whether you want to create an edition-based or a standalone piece and your asset’s royalty percentage.

Once everything is sorted out, you can start the minting process. 

The process requires you to pay some ETH as approval and minting fee. This fee is also called “gas.” Etherum gas refers to the amount of Ether required to perform an action on the blockchain. 

If you want to sell an NFT, you have to connect your Ethereum wallet to your minting platform. Once you have created the NFT, you will be able to click on it and select the “sell’ prompt. 

If you want to sell someone else’s NFT, you have to follow the same process. 

Note: Creating new blocks in the chain demands a lot of computing energy. That’s why blockchains are energy-intensive. 

Why Would Someone Buy An NFT? 

Earlier in this post, I mentioned a New York Times column that raised more than half a million. Remember? 

Why did someone pay $560,000 a picture of a news column?

Let me tell you the story first: 

Kevin Roose, a journalist at New York Times, wrote an article about the rise of NFTs. He turned the article itself into an NFT and put it up for auction. 

After more than 30 bids, the auction ended with a winning bid of about $560,000 or 350 Ether. 

You can buy a house, car and pay for college at that price. Why would someone spend that much money just to own a picture of a column? 

Kevin Roose recently shared this story in his article where he also shared a direct Twitter Message from the auction winner. The message reads: 

“We are already involved in art and media for a long time now. Our management team is always in cooperation with some highly knowledgeable and experienced art advisers who believe that we must grow with technological movements that help us to not only promote our business but also to support artists and the art market. Thus, we have proudly decided to dedicate sufficient funds and resources to invest in NFT as pioneers of this industry.”

 

NFT collectors think that owning prominent tokens like that New York Times column will eventually be like owning something priceless and rare. 

Let me tell you one more great NFT story: 

Digital artist Beeple is a graphic designer who produced a digital product called “Everydays: The First 5000 Days”.

He put his artwork for auction that lasted for two weeks. Surprisingly, his work was sold for $69.3 million. It's the third-highest price paid at auction for the work of a living artist. 

Paying that much money to a piece of work that doesn’t exist physically is insane. The buyer thinks it’s the most valuable work of art for this generation and will be worth more than one billion dollars one day. 

Beeple’s famous story has undoubtedly caught the attention of many artists and content producers. 

Here is another exciting story that further increased the popularity of NFTs: 

An original piece of work by famous street artist Bansky was bought, burned, and digitized by some crypto enthusiasts.  They live-streamed the event on Twitter and later created an NFT to represent that work. 

They ended up selling that burnt Bansky NFT for $380k. 

If you are interested in buying NFTs or making a NFT transaction, here are some popular platforms to consider:  

  • Rarible 

  • OpenSea 

  • Foundation 

  • Nifty Gateways 

  • Axie Marketplace

  • NFT ShowRoom 

Final Thoughts 

Whether you are a digital artist ready to sell your products online or an investor looking to invest in new things, you should get yourself prepared to ride this NFT craze. 

There will be room for you if you really have something valuable to offer. Just be creative and think about digital assets you own. It can be a letter from your grandmother or a photo of your cat. 

The more traditional artists and other professionals enter this space, the more traditional buyers and collectors follow.