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You Down with NFT? Here's a Primer on Non-Fungible Tokens

March 22, 2021LeAnne Gault

If you’ve been online in the past few weeks, you may have heard about something called NFTs, or non-fungible tokens. They seem to be everywhere — as both the topic of serious discussion and the subject of memes (which can also be NFTs apparently). 

Even though they've been around since 2012, NFTs are suddenly everywhere. Recently, social media users have been going wild for NBA Top Shots, which in its simplest explanation, is an online forum for trading virtual basketball cards. Last week, a digital artist who goes by the name Beeples became one of the top three living artists in the world after a collection of 5000 pieces of his digital art (NFTs) sold for $69 million at Christie's Auction House. Twitter CEO, Jack Dorsey is auctioning off his first tweet (so far bidding is over $2.5 million). Musicians, Kings of Leon, released their latest album as an NFT. And Elon Musk announced he would sell a song about NFTs as an NFT, but then decided against it. Even Time Magazine has jumped on the bandwagon and is selling 3 collectible covers. 

So what is an NFT?

NFT stands for non-fungible token – a digital token that's a type of cryptocurrency, much like Bitcoin or Ethereum, and an NFT presents the rare opportunity to truly own a digital asset.

Cryptocurrencies can be fungible, meaning all the currency's units (i.e., tokens) are the same and equal, like dollars. They are unique and can't be replicated.

Non-fungible tokens are the opposite. They can be used for many things, even certain types of currencies. But the current NFT craze is mostly fueled by digital art and collectibles. People have decided that a unique, digital object can be very cool and can even have a significant monetary value. And those people have helped NFTs explode. 

What makes an NFT special?

Crypto coins are different from an NFT because the file stores extra information, which elevates it above pure currency and makes it super versatile. NFT types are varied, but they could take the form of a piece of digital art or a music file, or a sports card – anything unique that could be stored digitally and be thought of to hold value. Essentially, they are like any other physical collector's item, but instead of receiving an oil painting on canvas to hang on your wall, for example, you get a JPG file. 

NFTs are part of the Ethereum blockchain so they are individual tokens with extra information stored in them. That extra information is the important part. It allows them to take the form of art, music, video (and so on), in the form of JPGS, MP3s, videos, GIFs and more. Because they hold value, they can be bought and sold just like other types of art – and, like with physical art, the value is largely set by the market and by demand.

That's not to say there's only one digital version of an NFT art available on the marketplace, though. In much the same way as art prints of an original are made, used, bought and sold, copies of an NFT are still valid parts of the blockchain – but they will not hold the same value as the original.

How do NFTs work?

The vast majority of NFTs are created on Ethereum's blockchain, which is fixed and cannot be altered. No one can undo your ownership of an NFT or re-create that exact same one. They're also "permissionless," so anyone can create, buy, or sell an NFT without asking for permission. Finally, every NFT is unique and can be viewed by anyone. 

It is like a collectible work of art in an always-open museum that anyone can admire, but only one person (or cryptocurrency wallet, to be exact) can own at any given time.

Typically an NFT is represented by a digital artwork, like an image or meme. The image can be easily replicated, but its existence as a digital object on the blockchain is what makes it unique. 

Why do NFTs have value?

In some ways, many NFTs are simply digital images that you can easily right-click and save to your computer. But NFTs because they reside on the blockchain, it transparently tells you who created the NFT. So if a famous artist says: "Yes, that's my Ethereum address that created this digital image of a soup can." Then that can be verified on the blockchain. 

NFTs are a developing market, and there's already a lot of craziness and scamming happening. Seeing all of these NFTs selling for millions, you might think that it will be easy to buy something for a few dollars and become rich selling it to someone later on. It can happen, but it's rare. And like most markets, it can be manipulated. A cryptocurrency whale (a person who owns tons of crypto money) can buy many NFTs and then "sell" them himself for millions, artificially inflating the price. So just be careful. 

Are NFTs a good investment?

Buying an NFT because you like it, want to support digital art, or hope to sell it for more later is one thing. But investing in NFTs is another. Even a painting by Picasso or a rare baseball card required some passage of time before becoming very valuable. The artist Beeple created a piece of art a day for 13.5 years to create the work that sold for $69 million. 

Given the digital nature of NFTs, it's hard to compare them to traditional works of art like statues and paintings. However, we now live in a world where one Bitcoin can be worth thousands and thousands of dollars, so digital items can certainly be very valuable and even sustain that value over longer periods. 

In any case, if you plan to invest in NFTs, you need to do some real research into this complex world because each NFT market is slightly different. Also, it is not cheap — trading on Ethereum can be quite costly as the network's recent congestion is causing fees to rise. Finally, you'll need to think strategically and follow the often rapidly changing cryptocurrency trends. 

In short, it's possible to earn money by investing in NFTs, but you'll have to do your homework. 

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