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Non-Fungible Token (NFT): What is NFT and How it Works?

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Digital currency is making a splash in the market, which started only after 2014 when digital currencies came into existence but, In recent years, there has been a growing buzz around Non-Fungible Token (NFT) in the world of digital assets. From artwork and music to virtual real estate, NFT Digital Assets have gained so much popularity as a new way to buy, sell, and own unique digital items. Non-Fungible Token (NFT) came into existence when many popular companies started accepting cryptocurrencies and people made a lot of money through NFTs. But what exactly is an NFT, and how does it work? In this article, we will explore the concept of NFTs and provide a clear understanding of their functionality.

In this rapidly changing world of digital assets and blockchain technology, Non-Fungible Tokens (NFTs) have appeared as a groundbreaking concept. NFTs have gained attention due to their unique properties and the potential they hold for revolutionizing various industries. This article will provide a complete guide to understanding what NFTs are and how they work.

NFT means non-fungible tokens (NFTs), In simple terms these cryptographic assets are based on blockchain technology which are generally created by programming same as used for cryptocurrencies. They cannot be exchanged or traded equivalently like other cryptographic assets. Like Bitcoin or Ethereum. The term Non-Fungible Token (NFT) clearly represents it can neither be replaced nor interchanged because it has unique properties. Physical currency and NFT Cryptocurrency are fungible, which means that they can be traded or exchanged for one another.

What is an NFT (Non-Fungible Token)? – Understanding NFTs

An NFT, commonly referred to as a Non-Fungible Token, is a unique digital currency that is secured by blockchain technology and cannot be duplicated. These tokens are purchased and sold online, frequently using NFT Cryptocurrency, and they are typically encoded with the same software similar to many cryptos each Non-Fungible Token (NFT) has a unique identification code and metadata. NFTs are usually considered the same as cryptocurrencies but aren’t as unlike crypto, NFTs cannot be exchanged for another and are not fungible. Many claims suggest that NFT provides a public certificate of authenticity or proof of ownership of any digital asset.

Essential Points to Keep in Mind Regarding NFTs:

  • NFTs represents individuals’ identities, property rights, and more.
  • NFTs are based on “Blockchain Technology“.
  • NFTs are unique digital assets that cannot be exchanged with others.
  • NFTs can represent digital (video clip, a music album and in-game item) or real-world items like artwork and real estate.

History of NFTs

NFTs, or Non-Fungible Tokens, started in 2014. They were a new kind of digital item that people could own and trade. But it was in 2021 when they really became famous and everyone started talking about them. They became popular in art, tech, and money matters. The total worth of all NFTs even reached $41 billion in 2021. This shows how important NFTs could be for the future of owning and investing in digital things.

“The first NFT that was sold in 2014 was called “Quantum.” It was made and turned into an NFT by Kevin McKoy.”

How NFT Works – Blockchain and NFT

NFT Technology: NFTs are based on the blockchain. Due to their unique construction, each NFT can be used for multiple applications. NFTs are considered best for digitally representing physical assets like artwork and real estate, a digital asset management platform. As NFTs are built on blockchains, they can bridge the gap between artists and audiences, remove intermediaries, and also function as identity management platforms. NFTs have the potential to eliminate middlemen and speed up transactions. Videos and sports highlights.

The only difference between NFTs and physical purchases is that NFTs cannot be used in person; however, they do come with an ownership certificate that owners can exchange with one another. Additionally, an NFT’s unique data makes ownership verification simple, enables the owner to store or modify information, and even permits a digital signature in the metadata.

The Role of Smart Contracts in NFTs

Smart contracts play a crucial role in NFTs by automating the execution of transactions and defining the rules and conditions for ownership transfer. Smart contracts enable creators to earn royalties automatically whenever their NFTs are resold on secondary markets. They also ensure transparency and eliminate the need for intermediaries in the buying and selling process.

The Technology behind NFTs

NFT Technology are built on blockchain platforms, with Ethereum being the most common choice due to its smart contract functionality. Ethereum’s blockchain allows developers to create and deploy decentralized applications (DApps) that interact with NFTs. The ERC-721 and ERC-1155 standards define the technical specifications for NFTs on the Ethereum network.

Examples of NFT (Non-Fungible Token)

There are a lot of NFTs up to the market that you can digitally acquire, and one of the best examples of an NFT is the crypto kitties, which launched in 2017, soon after its launch crypto kitties managed to develop a huge fanbase. People spent more than 20 million USD within weeks on the purchase of crypto kitties.

Similarly, there are many other NFTs such as Bored Ape Yacht Club (BAYC), VeeFriends, Cryptopunks, Moonbirds, etc that became quite popular in a short period.

  • Photography: Photographers have the option to turn their work into NFTs and sell either full or partial ownership. For instance, a user named erubes1 on Open Sea has a collection called “Ocean Intersection” featuring stunning ocean and surfing photos that have been sold to several owners.
  • Sports: There are NFT collections that feature digital art based on famous people and sports stars.
  • NFT Trading cards: These are digital trading cards that have been turned into NFTs. Some are collectable items, while others can be traded in video games.
  • Utility: These NFTs can represent the membership or provide special benefits.
  • Virtual worlds: These NFTs give you ownership of various things in virtual worlds, like digital property or avatar accessories.
  • Art: This is a broad category of NFTs that includes all kinds of art, from pixel art to abstract pieces.
  • Collectables: Some examples of NFTs in this category are Bored Ape Yacht Club, Crypto Punks, and Pudgy Panda.
  • Domain names: These NFTs represent ownership of website domain names.
  • Music: Musicians can turn their music into NFTs, giving buyers the rights that the artist wants them to have.

Real-World Applications of NFTs

NFTs extend beyond art, gaming, and music, finding applications in various real-world sectors. They can be utilized for tokenizing real estate, enabling fractional ownership and streamlined property transactions. NFTs also have potential use cases in identity verification, supply chain management, ticketing systems, and more, offering enhanced transparency, security, and efficiency.

Here are some of the real-world applications of NFTs:

  • Art and collectibles: NFTs enable the buying and selling of digital art and collectibles, including record-breaking sales like Beeple’s $69.3 million auctioned collage.
  • Gaming: NFTs represent in-game items, fostering ownership, trade, and unique gaming experiences.
  • Ticketing: NFTs provide secure and fraud-resistant tickets to events, offering additional perks and access to exclusive content.
  • Supply chain: NFTs track ownership and authenticity of physical goods, verifying luxury item provenance and ensuring food safety.
  • Decentralized finance (DeFi): NFTs can also be used in DeFi applications, such as lending and borrowing. This could allow people to collateralize their NFTs to obtain loans, or to earn interest on their NFT holdings.
  • Web3 identity: NFTs enable decentralized identities, granting individuals control over personal data and facilitating online identity verification.

Also Read: Difference Between NFT and DeFi

Creating and Owning NFTs

Here are the steps on how to create and own NFTs:

  • Step 1: Decide on the type of NFT you want to create and its potential value for others.
  • Step 2: Choose a blockchain suitable for your NFT creation, such as Ethereum, Solana, or Flow.
  • Step 3: Set up a compatible crypto wallet like MetaMask, Coinbase Wallet, or Trust Wallet.
  • Step 4: Purchase the necessary NFT Cryptocurrency to cover gas fees for minting the NFT.
  • Step 5: Connect your crypto wallet to an NFT marketplace like OpenSea, Rarible, or Foundation.
  • Step 6: Follow the specific process of the chosen marketplace to create your NFT, including uploading the file and setting its properties.
  • Step 7: Pay the required gas fee to mint your NFT and secure its storage on the blockchain.
  • Step 8: List your newly minted NFT for sale on the chosen marketplace, setting the price and sales method.

Here are some additional tips for creating and owning NFTs:

  • Do your research: Research and understand the risks associated with NFTs before creating or buying.
  • Choose a reputable NFT marketplace: Choose a reputable and secure NFT marketplace for your transactions.
  • Set a fair price: Set a fair price for your NFT to maximize potential sales.
  • Promote your NFT: Promote your NFT through social media and online channels to increase visibility.
  • Be patient: Be patient and persistent in selling your NFT, as it may take time to find the right buyer.

Also Read: What is Blockchain Wallet?

How can I buy NFT? – NFT Market

An NFT purchase is different from any other online purchase as there are only a few payment modes acceptable. Once an NFT is created, it’s completely up to the user whether he wants to sell an NFT in any particular market, trade it with someone or give it away for free. However, on whichever marketplace you purchase an NFT, you’ll require a crypto wallet to store your NFT. As soon as you buy an NFT it gets transferred from its current owner to your crypto wallet, then you can keep it with you or can sell it to someone else. Also, it’s advisable to store crypto wallets offline, as it’s more secure than storing them online.

Here are the steps on how to buy an NFT:

  • Step 1: Choose an NFT marketplace- Choose a popular NFT marketplace like OpenSea, Rarible, or Foundation based on your interests.
  • Step 2: Set up a crypto wallet- Set up a user-friendly and compatible crypto wallet such as MetaMask, Coinbase Wallet, or Trust Wallet.
  • Step 3: Buy cryptocurrency- Purchase NFT Cryptocurrency (e.g., Ethereum, Solana, or Flow) on a reputable exchange like Coinbase or Binance.
  • Step 4: Connect your crypto wallet to the NFT marketplace- Connect your crypto wallet to the chosen NFT marketplace by scanning a QR code or copying a wallet address.
  • Step 5: Find the NFT you want to buy- Browse and search for NFTs by category, keyword, or creator on the marketplace.
  • Step 5: Make an offer or buy now- Make an offer or buy the desired NFT immediately, depending on the seller’s options.
  • Step 6: Store your NFT in your crypto wallet- Safely store your purchased NFT in your crypto wallet’s “NFTs” tab for easy access and viewing.

Also Read: What to Look For in Good NFT Project?

NFT (Non-Fungible Token) Marketplaces –

NFT marketplaces serve as NFT Platforms for creators and collectors to buy, sell, and trade NFTs. Nifty Gateway and NBA Top Shot are considered to be one of the best NFT marketplaces for the purchase of an NFT, as it also accepts credit as a payment method. While other NFT marketplaces only accept NFT Cryptocurrency as a payment mode. However, there are many other good NFT marketplaces too.

Here are some of the most popular NFT marketplaces:

  • Wazirx
  • Open sea
  • Binance
  • Jupiter meta
  • Rarible 
  • Cyptokitties
  • SuperRare
  • Sandbox

These are just a few of the many NFT marketplaces that exist. The NFT market is constantly evolving, so new marketplaces are being launched all the time.

What Does Non-Fungible Mean?

Cryptocurrencies like Bitcoin or Ethereum are fungible, meaning each unit is interchangeable, NFTs are non-fungible and have unique features that differentiate them. Cryptocurrencies are primarily used as a medium of exchange, while NFTs are designed to represent ownership of a specific asset. NFTs have opened up new possibilities for creators and collectors, enabling them to tokenize and trade digital and physical assets easily.

Are NFTs Safe?

Non-fungible tokens, which use blockchain technology like cryptocurrency, are generally impossible to hack. However, the weak link in all blockchains is the key to your NFT. The software that stores the keys can be hacked, and the devices you hold the keys on can be lost or destroyed—so the blockchain mantra “not your keys, not your coin” applies to NFTs as well as cryptocurrency. NFTs are safe as long as your keys are properly secured.

Here are some tips for staying safe when buying or selling NFTs:

  • Only buy NFTs from reputable creators or sellers: Ensure the credibility of the creators or sellers by checking their reputation on social media or review platforms.
  • Double-check the NFT’s metadata: Verify the accuracy of the NFT’s metadata, including creator information, title, and description.
  • Store your NFTs in a secure wallet: Safely store your NFTs in a controlled and secure wallet, avoiding storage in untrusted or hot wallets.
  • Be careful about clicking on links: Exercise caution when clicking on links, particularly those from unfamiliar sources, to avoid phishing attacks.
  • Keep your software up to date: Maintain up-to-date software, including crypto wallet software, to protect against potential security vulnerabilities.

By following these tips, you can help to stay safe when buying or selling NFTs.

Use Cases of NFTs

An NFT is mainly used by content creators and artists to collect and sell their artwork using NFT’s blockchain technology. Apart from this, it’s also used by crypto-traders and by many other people too:

  • Digital Content: Content creators have got a unique opportunity to monetize their products with the help of NFT. As NFT provides creators with ownership of their content, it also allows an artist to sell their creations directly to the customer through blockchain.
  • Domain names: You can also purchase easy-to-remember domain names for your online business through NFT, it works the same as any other domain company that provides domain names.
  • In-app purchases and gaming items: NFTs have been found very helpful for gamers, especially online gamers, as it allows you to sell and purchase in-game characters and other in-app purchases. Also, when you’re done using NFTs, you can get your money back by selling them.

Benefits of NFTs

Here are some of the benefits of NFTs:

  • Provenance verification: NFTs provide a transparent and immutable record of ownership, ensuring the authenticity and provenance of digital assets.
  • Increased accessibility: NFTs democratize the art and collectables market, allowing wider access for creators and collectors from around the world.
  • New revenue streams: NFTs offer creators novel opportunities to monetize their work through direct sales, royalties, and auctions.
  • Enhanced ownership rights: NFTs provide users with greater control and ownership over their digital assets, enabling them to transfer, sell, or license their NFTs as desired.
  • Scarcity: The limited supply of NFTs can make them valuable. This is especially true for NFTs that are associated with popular artists or brands
  • Programmable: NFTs can be programmed to include certain features, such as royalties or licensing terms. This makes them versatile and can be used for a variety of purposes.

Risks and Future Considerations – NFT Investment

Before engaging with NFTs, it is essential to consider the risks involved. Market volatility, potential scams, legal and regulatory uncertainties, and the environmental impact of blockchain technology are factors to be mindful of. Conducting thorough research, understanding the terms and conditions, and being cautious with investments can help mitigate these risks.

Here are some of the risks and future considerations of NFTs:

  • Risk of fraud: Due to the novelty of NFTs, there is a risk of fraudulent transactions and misrepresented ownership claims.
  • Risk of volatility: NFT prices can fluctuate significantly, posing investment risks with potential losses.
  • Risk of environmental impact: The energy-intensive nature of blockchain technology used in NFTs contributes to environmental concerns.
  • Future considerations: Standardization, regulation, security, and scalability are crucial aspects that need to be addressed for the future growth and stability of the NFT market.

Should you invest in an NFT? Pros and Cons

Pros:

  • Investing in NFTs is quite simple and anyone can invest in it, also the ownership token can be easily transferred between people around the globe.
  • NFTs provide individual investors to learn more about blockchain technology which can help them further diversify their portfolios.
  • All the NFT transactions are secured by blockchain technology, thus an investor’s ownership details are more transparent.

Cons:

  • NFTs are new in the market and many people are still aware of and don’t know how it works, thus investing in NFTs without prior knowledge can be risky.
  • NFTs are not considered in the asset class as it only provides technological ownership. Also, the value of NFT tokens is very volatile. 
  • Many types of research also show that NFT generation consumes a lot of electricity, as it works on the Ethereum blockchain technology, which uses proof of work. A study shows that a single NFT transaction a day can increase your electricity bill by several times.

Related Articles on NFTs:

FAQs on NFTs (Non-Fungible Tokens)

Q1. Is NFT legal in India?

In India, there isn’t a clear law against NFTs yet but because regulations are lacking, it’s uncertain how they’re categorized (as securities, commodities, or digital assets).

Q2. Is an NFT a Bitcoin?

No, an NFT is not a Bitcoin. Bitcoin is a cryptocurrency, a medium of exchange like digital cash. NFTs, on the other hand, are unique digital tokens attached to specific assets, representing ownership of those assets.

Q3. Can we sell NFT in India?

There’s no legal barrier to selling NFTs in India. However, due to the uncertainty surrounding their regulations, potential tax implications, and the nascent stage of the market, it’s crucial to proceed with caution.

Q4. What is the most expensive NFT ever sold?

“Everydays: The First 5000 Days” by Beeple holds the record for the most expensive NFT ever sold, at $69.3 million.

Q5. What is the full form of NFT?

NFT stands for Non-Fungible Token. “Non-fungible” means that each NFT is unique and irreplaceable, unlike fungible assets like dollars or bitcoins, which are interchangeable.



Last Updated : 03 Jan, 2024
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