A Simple guide to NFTs

What is an NFT?

An NFT is a non-fungible token. It is a cryptographically unique, block-chain based token that is used to demonstrate and guarantee ownership of a unique asset – usually a digital asset like digital art, music or a video game item. NFTs can also be linked to physical assets like property or collectables.

These tokens are like virtual certificates that prove you own an asset. They contain identifying information that is recorded in smart contracts which are bits of computer code that perform a set of instructions. NFTs are built on a blockchain, the same digital ledger technology used by cryptocurrencies. Usually, they sit on the Ethereum network but there are other blockchains as well, like Solana.

The information in the smart contract is what makes each NFT unique, meaning that they cannot be directly replaced by another token. ‘Non-fungible’ simply means that a token cannot be swapped like-for-like such as banknotes or bitcoins (which are fungible tokens). Non-fungible tokens are also not typically divisible, although there are some experiments taking place with this currently.

What functions do NFTs have?

Non-fungible tokens, due to their unique attributes and the highly advanced technology that supports them, offer an innovative and secure mechanism to differentiate assets, prove scarcity or value and, most importantly, prove ownership.

Currently, most of the interest in NFTs is centred around artwork, gaming and crypto-collectables. The NFT space has started to expand rapidly, with top brands like Nike, Gucci, Mcdonald’s and Coca-Cola all jumping on the NFT bandwagon to market digital branded items as NFTs. Purchasing NFTs, for use as avatars on social media platforms, has also become increasingly popular, to the extent that Twitter announced plans to verify the authenticity of user NFT avatars. NFTs are also being used to represent unique in-game items like skins, allowing trading to take place between players.

2021: The year that NFTs rose to prominence

NFTs are now one of the fastest-growing sectors in the crypto industry. There was an explosive growth of NFT sales in 2021, with trading volumes breaking the $25 billion mark, representing a 25 fold increase vs 2020. Sales were spurred on by the pandemic and accelerated by a proliferation of artists, collectors and investors jumping on board the NFT train. In August 2021, NFT marketplace OpenSea recorded a trading volume of over $75 million in a single day which was more than its entire trading volume in 2020.

There have been some remarkable transactions that have occurred over the last 12 months, including digital artist Beeple selling a single NFT artwork for $69.3 million and CryptoPunks, Bored Apes and Art Blocks trading hands for millions of dollars. Even Jack Dorsey’s first tweet was sold as an NFT for millions! Considering the amount of money changing hands in the NFT space, it did not come as a surprise to see auction houses Christie’s and Sotheby’s embracing NFTs, the latter launching its own NFT platform.

Hollywood on board

With many big-name celebrities like Snoop Dogg, Justin Bieber, Gwyneth Paltrow, Reece Witherspoon and Ashton Kutcher purchasing and promoting NFTs, it is expected that the hype around NFTs will continue to grow.

Which poses the question…is it just hype?

Digital assets have certainly skyrocketed in price and many believe that this is an unsustainable bubble destined to burst. However, to determine whether NFTs could be a potential new long-term asset class, one needs to look beyond the potentially inflated valuation of single items and the obvious novelty aspect that has driven the initial enthusiasm and buying frenzy. There are undeniable trends that point towards the birth of a new digital era, one which may change even conservative investors’ views on what fundamental value actually means. It may even blur the lines between the reality we know and a new digital reality where virtual items are just as useful or valuable as real-world items. Big corporations like Meta and Microsoft are investing heavily into this new digital future and placing big bets on the adoption of virtual worlds that combine everything from social media and gaming to blockchain applications. NFTs may just be the precursor of a much bigger revolution.

Future applications of NFTs

There is huge potential for NFT technology to be applied in the copyright and intellectual property space as well as ticketing and the sale of video games, music and movies. Further applications could include certification, software licensing and warranties to name but a few.

There has also been some noise recently around the potential of a Global Token Exchange which will allow investors to buy and sell security tokens linked to any digital or real-world asset, opening up a massive potential investment market. Non-fungible tokens open the door to the creation of security tokens, ensuring that ownership or fractional ownership of any asset is completely traceable and clear.

Most importantly, NFTs are expected to become key components of the Metaverse…

What exactly is the metaverse?

The Metaverse is the digital parallel and extension of the real world. It is a virtual realm where communication, gaming, personal profiles, commerce and NFTs are all components of a larger online experience. It represents the sum of all processes that power the emerging Web3. It is expected that a massive parallel economy is going to be created, where digital real estate becomes just as valuable as brick and mortar.

Blockchain gaming has already created a strong potential link between NFTs and the metaverse, as virtual gaming worlds are created with NFTs being the key to owning digital avatars and essential items to participate in these worlds.

It is expected that the metaverse will revolutionise social media by creating augmented experiences and platforms for connecting in virtual spaces. NFTs are expected to play a significant role in this space. It is no wonder that Facebook has changed its name to Meta in anticipation of this paradigm shift.

Metaverse platforms such as Decentraland and The Sandbox are already selling plots of virtual land as NFTs, with the next logical step being to enable users to move virtual items between different metaverse platforms.

The possibilities are endless but the key takeout is that the Metaverse is the next dominant technology to shape our future experience and NFTs are going to play a vital role.

How to create an NFT

Anyone can turn a digital asset into an NFT (or “mint” it) and sell it on an NFT marketplace. The basic minting process is as follows:

• Have a crypto wallet opened and funded (to cover computing fees for NFT creation)
• Click the “create” button within the marketplace and upload your work.
• List the NFT for sale either for a fixed price or for sale via auction.

How to buy an NFT

Marketplaces can be used to buy an NFT at a fixed price or function as a virtual auction.

To bid on these digital assets, you’ll need to open and fund a crypto wallet on an NFT marketplace. A wallet needs to be funded with the crypto needed to buy a targeted NFT. For example, an NFT built on the Ethereum blockchain technology might require its purchase in Ether tokens.

There are a variety of marketplaces that support NFT purchases. Top NFT marketplaces include OpenSea, Rarible, SuperRare, and Foundation.

How to sell an NFT

To sell an NFT you own, the item will need to be uploaded to your marketplace of choice, provided that the marketplace supports the blockchain the NFT was built on.

Then choose to list it for sale at a set price or opt for an auction-style sale.

Marketplaces charge a fee for NFT sales. These fees can fluctuate based on the blockchain network the NFT uses.

Once uploaded, the marketplace will verify the asset.

After it’s sold, the marketplace will handle the transfer of the NFT from the seller to the buyer and will also transfer crypto funds to your wallet less the listing fee and other related blockchain computing expenses.

Incorporating NFTs into your investment portfolio

NFTs have attracted a lot of attention over the past year and a lot of money has been made by those who were able to invest in the right items early on. However, purchasing NFTs as collectables is a speculative exercise and can also result in money being lost.

Some things to look for when buying include:

• The creator of the asset.
• How unique the piece is.
• The history of the asset’s ownership.
• Can the asset be used to generate income? For example, payment to view a piece or relicensing fees.

There are reasons to be cautious:

• Most NFTs represent static assets that don’t generate any income.
• The creation and verification of NFTs require a lot of energy and therefore has a high impact on the environment.
• The fees can be quite high.

If not the parts, then buy the machine

As with any new investment category, there are risks and normal investment principles should apply. NFTs remain a speculative investment for now but with significant potential upside and a very good chance of becoming more mainstream in the years to come. If you are willing to get a little immersed in the fast-moving world of blockchain and have a good eye for spotting digital artwork and other collectables that will become very popular, then explore NFTs as part of a diversified portfolio. If you are not, then consider investing in technology companies that are powering the latest trends in blockchain technology and Metaverse development.