NFTs are the hottest craze right now, but what exactly are they? How do they work? How can I own one? And why would I want to buy a picture from a random person on the internet for large sums of money?
Well you can get the answers to all of your burning questions right here. This is our quick and easy introduction to the world of NFTs.
What are NFTs?
Let’s take an example of a House, when you buy a house you get the deed, the deed verifies that you own this house. While the house is the actual Asset, the Deed is the legally binding document.
Similarly an NFT has two parts — the deed, which lives on the blockchain, and the asset, which can be an image, video, 3D model, a virtual plot of land, or anything within the digital realm, really.
Terminology
I’m sure by now you have heard that NFT stands for Non-Fungible Token. What does it mean? It is very likely that even the person who explained it to you doesn’t know.
Keeping our house analogy going, the NFT itself is the Deed to the House. A verified bit of information stored on the blockchain.
The NFT points to a virtual asset as explained above, just like the Deed points to a specific house.
To be specific: Non-Fungible means that the value of each token is unique and no tokens are the same. Just like the value of two houses are never the same. Fungible on the other hand is like an euro note. Each 10€ note is essentially the same, even if one has a different serial number or unique fold marks.
What types of Assets can I buy?
Currently the most popular type of assets being sold as NFTs are Images. These can be in any format (jpg, png, etc).
However, there are so many other types of digital assets that can be NFTs. Such as videos (mp4, mov, etc.), 3D models, virtual real estate, music, and even domain names.
Seriously, anything can be the asset.
Where are the Assets Stored?
Here is where many people misunderstand NFTs.
The Assets that you own via the NFT can be stored in a variety of places.
The assets can be stored on someone’s personal server at home, or the Cloud (like Google Drive or OneDrive), or anywhere on the internet. This is called the Centralised web, the internet as you have known it.
It is also possible to store the asset on the blockchain itself. While this is probably the most secure, this is also not as common due to various reasons, the biggest being cost and size limitations.
The current trend is to store the assets on the decentralised web. There is a whole new world out there called the InterPlanetary File System (IPFS), where files are stored on nodes. This might sound complicated, but we can simplify it further and explain it in another post.
Most commonly, files are actually stored on the decentralised web and the NFT will simply point to the image file.
Why the Blockchain?
The biggest difference between a house’s title deed and an NFT, is the Blockchain. A deed is a private document that only you and the government can see, sure you can show it to someone, but usually you don’t. Even if you do show the deed to someone, the person seeing it won’t know it’s history, for that matter, even as the deed owner, you might not know it’s history.
An NFT is public. Anyone who knows how to look it up, can see who owns the asset, and it’s entire history. History such as — who created it, who bought it, when these transactions took place, how much it sold for, etc.
This means that you as a potential buyer of an NFT can see its historical value, everything is transparent and nothing is hidden from you. Making an informed decision is much easier when you have this historical information.
Another major difference is that you might have heard of forged deeds all the time. Impersonator or grifters stealing property via fraud. Families stealing each other’s properties by faking documents or signatures etc. You would think the deed is safe, but it’s a security risk.
With an NFT these security rules are built by the creator of the NFT and stored on the Blockchain. Only the person who is authorised can make changes to it. Once sold, the new owner is the authorised person. It is far safer than a physical document for proof of ownership.
This is not to say that NFTs don’t have their own security risks and flaws, they are just harder to exploit and inherently more secure.
For example, there are many fake NFT that copy the original NFT and pose as the real one. All you have to do is be able to identify which is the real one and which isn’t.
NFT theft is also a growing problem, while it shouldn’t affect most casual users, you should always read up about the latest happening in the world of NFT and take precautions accordingly.
Lastly you have the issue of false promises and fake-outs. This is something called “Rug Pulls” and we will discuss more about this in another post.
Why should I NFT?
The Art and Value
Since the most popular and financially rewarding NFTs are currently linked to art. This is your starting point, i.e. NFT collections.
You can find a variety of NFT collections, some of which speak to you, others might offend your eyes. Some popular ones are BAYC or Karafuru. Two wildly different projects and art styles.
Art is very subjective. This makes it quite hard to value art. Thus with NFTs one great way to value the NFT is by checking the following:
- How many art pieces are in the collection?
- Who else owns an NFT from the collection?
- Do you like the art itself?
- What are the goals and objectives of the project?
From here you can see if the value linked to the NFT is correct in your eyes. Because when starting with NFTs if you don’t connect with the project you will loose interest soon, and we don’t want that.
Rarity
With projects like the ones mentioned above, you can look into rarity.
For such projects, the NFTs have an element of uniqueness to them. The rarer the elements are, the higher the rarity of an NFT. And in the world of “collectables” rarity is king!
Let’s take the example of Karafuru #1196, if you go into the properties of the NFT you can see the various attributes and their %. You can use tools to understand how rare a particular NFT is. All this can add value to your NFT.
If you want to learn about how these rarities are created or what is generated art, we will talk more about this in a future post.
What other Benefits are there?
The word “Utility” is thrown around a lot in the NFT space. But what utility does an NFT provide, it is just a picture after all?
This is why I explained what an NFT is earlier, it is not the image itself, but rather the fact that you own it. This is verified via the blockchain.
The Utility is something put in place by the creator of the NFT and differs between each NFT project. In some cases you get access to an exclusive community, while others give you access to events.
Utilities are usually highlighted in the roadmap or updated via the NFT collection’s community channels, which is usually on Discord.
There are NFTs which tie into a real world book, where you as an owner of the NFT can be involved in the decision making and/or creation.
Some have implemented a system to let you earn passively from your NFT, while others even let different NFTs interact with each other and “evolve” or “breed”.
With domain NFTs you can building your web3 presence.
Only someone who is verified as the owner of the NFT can claim these benefits. Thus the power of the NFTs and the blockchain is realised.
In addition to all this, you have the art/asset itself. That is also an asset that has value. There are also NFTs that do not have any other utility attached to them and the art is the primary utility.
Can’t someone just copy the Asset?
Yes, just like someone can take a photo of your house and claim that they own it. Anyone can make a copy of your NFT asset and claim it to be theirs.
But thanks to the deed only you get to live in the house, rent it out or sell it. Similarly, the NFT, it’s utility and the digital asset are yours until you sell/transfer it.
Right now there are a few ways to differentiate a verified owner to someone who just copied the image, other than looking it up on the blockchain.
An example of this is the Twitter profile picture, you can get a hexagonal shaped profile picture if you verify that you own the asset.
How do I choose an NFT?
Choosing an NFT is a very personal thing. What we look for, first and foremost, is the art. Because if all else fails, we want to at least like what we own. We don’t want a pixelated banana that just looks like a yellow blob. This is obviously subjective and depends on your personal choice.
Then you look at the value that it brings. If exclusivity is your jam, then that can be a criteria. If supporting an artist is more important, then that is also a benefit. This is an implied value that really is for you to decide.
Another thing we look at is the potential to make money from the NFT. While we’re not certified to give any sort of financial advice, we look for projects that have a long-term roadmap, and document ways on how to earn money via the provided utilities.
Just jumping on the NFT hype train is also a reason to choose an NFT. Don’t have FOMO. But also, not jumping on the hype train is just as good of a reason not to. No judgement either way.
Basically, you can decide why you want to get into NFTs. Hyped projects are a flipping strategy that many people use to make a fast buck.
How can I get an NFT?
Looks like your ready to get your feet wet. Yes? We are glad to hear that.
We will be writing another article very soon about how to get yourself an NFT you can love or flip. Check back here or subscribe to get updates when we publish content.
Want more?
Do you want to get into NFTs?
Is it still complicated?
Do you want to know some cool NFT projects to support?
Keep an eye on this space as we talk more about NFTs over time. And you can always get in touch with us on Twitter if you want to discuss more.
This article was originally written on another platform by TJ (TMT Labs Co-Founder). This is a modification of that article.
