These days, it's undeniable that NFTs have dominated conversations in the world of digital art, collectables, and, ultimately, Web 3. What began as a trendy buzzword is now a bonafide sector that could prove essential to the next generation of the web as we know it.
As of May 1, 2022, NFT traders and collectors have spent over $37 billion in NFT marketplaces, which does not account for transactions outside the recognized marketplaces like Opensea, Rarible and more. The performance beats the total of $40 billion spent in 2021. These figures overtake numbers for a good chunk of industries that we’ve seen around for centuries.
With that in mind, we're going to dissect what NFTs are and why you should pay attention to them, now more than ever.
What is an NFT?
NFTs, which are short for Non-Fungible Tokens are simply tokens that can be used to indicate ownership of unique items. NFTs enable a large variety of things such as art, real estate, music, and much more to be tokenized.
At any point in time, an NFT can only have one official owner and it's secured on a blockchain such as Ethereum, Solana, Tezos, and many more. The blockchain ensures that no one can modify the record of ownership or duplicate an existing NFT.
The "Non-fungible" part of the name refers to items being unique and not interchangeable, - as there are no identical, copies to facilitate this. NFTs are one of a kind and not interchangeable because they possess unique properties.
This is the direct opposite of a fungible item, such as a dollar, for instance, which can be exchanged for another dollar elsewhere. The same as digital assets like 1 LOCG or 1 ETH which is easily exchangeable and identical to another LOCG/ETH.
What makes NFTs Special?
NFTs provide a new dimension to solving plenty of issues that exist on the internet today, and they’re rightly seen as an essential part of the burgeoning web 3. Here’s why:
- Every NFT is unique - no two NFTs are the same. This does not always apply to a copy of a file such as a .jpg, .pdf, or .mp3, which can be the same as the original.
- NFTs allow for the monetization of any art, music, or writing with efficiency and freedom.
- Digital item ownership records are usually hard to verify due to the centralized nature of storage information. NFTs ownership is always publicly verifiable due to the nature of blockchain.
- Companies with digital items usually build their own infrastructure to access/manage them. Eg, a music store would build infrastructure to store mp3s. With NFTs, you get compatibility with anything built on a blockchain. The Music NFT minted on Ethereum can be traded for another NFT on any Ethereum marketplace. You could even trade the music for a jpeg!
- NFTs enable creators to retain full ownership rights over their own work and receive resale royalties.
How do NFTs Work?
This ownership is publicly trackable and verifiable by using the blockchain in which it's minted as a public ledger.
Minting of an NFT is done using smart contracts that assign ownership and manage its transferability. This ownership is managed through a unique ID and metadata that no other token can replicate - ensuring that an NFT can only have one owner at a time. When minted, NFTs can represent the ownership of digital or non-digital assets such as music, art, deeds to real estate, tickets to a real-world event, legal documents, and much more.
An NFT owner can easily prove his ownership over the digital asset, trade it on a compatible marketplace, and possibly earn royalties from any future resale. Crucially, the record of the ownership cannot be manipulated on a public blockchain.
Why do people buy or create NFTs?
Most people are incentivized to create their own NFTs or purchase NFTs due to the following benefits:
- Store of Value
NFTs are used as a store of value in a way that traditional art does.
Content creators can monetize their music, fine art, writing, and other creations quickly and more effectively using NFTs.
NFTs are used in granting secure access to vaults, events, or even video games, such as RBL Labs’ Legends of Crypto.
NFTs are used to declare ownership of numerous physical and digital files, items, or assets. E.g., domain names, land deeds, art, and more.
Speculators buy NFTs that they believe will increase in value in the future, in order to secure gains. Also, NFTs are now recognised as assets that can be used as collateral for a loan.
- Removal of barriers
NFTs enable access to markets and asset classes that might have otherwise been inaccessible to most people worldwide. E.g., investment opportunities, real estate, ownership, etc.