An NFT, short for a non-fungible token, is the most recent cryptocurrency phenomenon to sweep the globe. Celebrities, musicians, and creatives making NFT art are just some of the individuals embracing the digital token trend, especially because it’s a way for them to have complete ownership over their easily replicable online content.
The beauty of NFTs, however, is that anyone can transform their digital assets into them. Whether it’s a song, video clip, drawing, or digital piece of art (NFTs can be anything digital), this merger of blockchain and creativity is an exciting prospect. So exciting that around $400 million worth of non-fungible tokens have been traded on NFT marketplaces in the last three years alone.
Is all of this a mystery to you? Not to worry! We’ve written this in-depth guide to tell you everything you need to know about non-fungible tokens, starting by explaining what they are, and how they work.
NFTs explained: what they are and how to create digital art tokens
1. What is an NFT?
An NFT is a digital asset that represents intangible (online-only), or tangible (real-world) objects such as art, music, in-game items, GIFs, designer sneakers, signatures, videos, and more.
NFTs which stand for non-fungible tokens are exclusively bought and sold online, and they are built with the same underlying software as most cryptocurrencies like Ethereum. The big difference is that cryptocurrencies, like physical money, can be traded or exchanged for one another (thus, fungible), while an NFT cannot be equally traded for another NFT, therefore making it “non-fungible”.
Ref: Johnny Harris
2. How to create NFT art
NFTs are created, or “minted” on the ERC-721 protocol on the Ethereum blockchain, which makes them unique.
When someone purchases an NFT, they have exclusive ownership rights to it, as NFTs can only have one owner at any given time. This ownership is managed through a unique ID and metadata, which cannot be replicated by any other token.
NFTs are minted through what’s known as a smart contract. These smart contracts allocate ownership and control the transferability of non-fungible tokens. When a person mints an NFT, they implement code stored in smart contracts that follow different standards, such as ERC-721. This data is then added to the blockchain through which the NFT is managed.
Additionally, the original creator or owner can store specific information within an NFT’s metadata. An artist, for example, might also include their signature within their artwork’s NFT as a method of signing their work.
When someone creates or mints an NFT, the token goes through the following steps:
- A new block is created
- Information is validated
- Information is recorded into the blockchain managing the non-fungible token
NFTs also have special qualities, which make them unique from other digital assets:
- Once minted, a non-fungible token is assigned a unique identifier that is directly linked to a single Ethereum address
- They cannot be directly interchanged with other tokens. This makes them different from cryptocurrency, for example, where 1 ETH is equal to 1 ETH
- Each NFT contains an owner, which is easy to verify
- Because they live on Ethereum, they can be purchased and sold on any Ethereum-based NFT marketplace
As an owner of an NFT:
- The ownership of an NFT’s unique token is transferred to your wallet via your public address
- This unique token proves your copy of the digital file is the original, while your private key is proof of ownership of the original
- The content creator’s public key acts as the certificate of authenticity for your NFT’s digital asset
- No one can alter or tamper with your NFT in any way
- You can choose to sell or hold onto your NFT for as long as you like
As a creator of an NFT:
- You can sell your NFT on any NFT marketplace or through peer-to-peer methods
- You earn royalties every time your NFT is sold
- You can easily prove you’re the creator through your NFT’s public creator key
- You determine how rare your NFT is either by creating only one version of it, numerous replicas of it, or multiple different variations of it, thus determining its worth
- Even if several thousand replicas of your asset exist, each NFT still has its unique identifier and ownership
The scarcity, or rarity, of an NFT, is an important element for the creator to decide. It is this scarcity that gives a non-fungible token its value.
A creator might want to mint just one version of their digital art, for example, so it remains a rare collectible piece. Alternatively, a creator might choose to mint several replicas of their digital art for circulation. Either way, each NFT would still have a unique identifier attributing it to only one owner. An NFT’s scarcity is also public information.
Many marketplaces, such as Foundation, allow royalties to be programmed into NFTs, helping creators automatically earn a specified amount as their work is sold from owner to owner. Currently, this is a developing concept, as the process can be inaccurate and tricky to set up. Royalties carry great significance for NFT creators, however, allowing them to maximize their earning potential.
3. What are NFTs used for?
NFTs are used for a wide variety of digital and non-digital assets, including digital art, gaming items, domain names, physical items, and investments and collateral.
Digital art
You might think of an NFT as our digital era’s version of a rare piece of art. Digital art is the most common way that NFTs are used in the current market. Owning an NFT means having personal ownership of an image that might often be replicated online. Common examples of non-fungible tokens include popular memes from the 2010s, as well as more recently produced digital artwork.
NFTs generate a way for creators to receive the profit and earning potential they deserve for their digital content. Platforms such as social networks take advantage of a creator’s work in exchange for exposure. However, exposure alone doesn’t pay an artist’s bills. Even after a non-fungible token is sold, the original creator can continue to receive royalties.
Though NFTs can still be replicated, ownership of the original content holds value depending on the market demand for it. Therefore, when NFT content is copied or shared, it only gains more value.
(Ref: Made on Fiverr by yogadanu)
Gaming items
Aside from content creators, NFTs have found popularity in the gaming industry, particularly with game developers.
In many games, you have the option to pay real money to buy “upgrades” or additional items to enhance your gaming experience. By introducing NFTs to this concept, you have the opportunity to resell items purchased in games once you’re finished with them.
This is appealing to game developers because, similarly to digital content creators, they can receive royalties when their creations are re-sold.
This opens up a huge new market with multiple levels that don’t stop at the height of a game’s popularity. Digital products purchased in-game can long outlive the lifespan of a game, as they have the potential to become much-beloved memorabilia that will continue to be shared and sold in the future.
(Ref: Made on Fiverr by joythestudio)
Making Ethereum addresses more memorable
The Ethereum Name Service (ENS) also uses NFTs to create an easy-to-remember digital address or domain. This can be likened to a website domain name, which allows an IP address to be more memorable.
Just like website domains, ENS domains hold value depending on how long, relevant, and easy to remember they are. Using NFTs is the ideal way to trade ENS names to transfer ownership without the requirement of a domain registry to oversee.
Physical items
This might seem counter-intuitive since NFTs are generally associated with digital products. However, the tokenization of physical items is slowly but surely developing.
Cryptocurrency is already on the rise in our society, and very soon it will be one of the most common ways to make secure, big-ticket purchases without the need for facilitation. Since NFTs are a digital record of product ownership, we will be able to attach them to our physical properties such as real estate, jewelry, and rare items. With this, you will be able to instantaneously transfer ownership of your property in exchange for a crypto payment.
Of course, this concept has not yet developed as far as digital NFTs, but recent projects show great promise that it’s on the rise.
Investments and collateral
Decentralized finance (Defi) is a new financial technology built on secure distributed ledgers like those used by cryptocurrencies. At present, you can use cryptocurrencies as collateral to borrow money with Defi applications. However, since not everyone owns large amounts of crypto required to be put down as collateral, NFT-backed loans have also come into the mix.
NFT creators can also allow others to own a portion of their digital tokens without purchasing the entire thing. Known as fractional ownership, this concept allows an NFT to have “shareholders”, thus encouraging more buyers and sellers. This gives people a greater opportunity to own and profit from items they’re passionate about.
Along with NFT marketplaces, fractionalized tokens can also be bought and sold on decentralized exchanges (DEXs). The number of fractions a digital asset has will impact its overall price.
It’s believed that in the future, decentralized autonomous organizations (DAOs) will exist for NFT shareholders, allowing them to securely coordinate and manage their shared assets.
4. How to buy an NFT
If you’re considering buying an NFT, you may be wondering where to start. Thankfully, buying NFTs isn’t as complicated as it may seem. Here are the four simple steps to buy non-fungible tokens.
- Step 1: First, you will need a crypto wallet that’s compatible with Ethereum, as well as some cryptocurrency in the form of Ether (ETH). Keep in mind many NFT platforms charge what’s known as a “gas fee” for minting a token, as well as for selling and buying NFTs. Therefore, make sure you have extra ETH to cover these fees. You can buy ETH on a crypto exchange such as Coinbase Global. To do so, you will need to download two separate apps: Coinbase, which you will use to buy your ETH, as well as Coinbase Wallet, to which you will send your ETH after purchasing it on Coinbase. Both can be downloaded from either the App Store or Google Play.
- Step 2: After downloading Coinbase Wallet (or other applicable wallets), it will provide you with a set of simple set-up instructions. This wallet is a place for you to keep your cryptocurrencies and send or receive them. Additionally, it acts as your gateway to the ever-expanding collection of crypto apps. To browse NFTs on a computer instead of your phone, simply download the Coinbase Wallet extension for Chrome.
- Step 3: Next, connect your wallet to an NFT marketplace of your choice by following the platform’s prompts. There are many NFT marketplaces to choose from, as we reveal in the next chapter.
- Step 4: Now that your wallet is set up, it’s time to browse available NFTs. The opportunities are endless, with prices ranging from essentially free to hundreds of thousands of dollars or more for a rare item. Some items are sold through an auction, while others can be brought immediately with a “buy now” button. Once you buy an NFT, you can access it via your crypto wallet. It will remain here until you decide to sell it.
Best NFT marketplaces
Let’s now take a look at the 10 best NFT marketplaces you can find:
- For those wanting to buy single-edition digital artwork, SuperRare is worth considering. This peer-to-peer marketplace is reminiscent of Instagram in the way it displays NFT art, yet it also has an online magazine feel due to its editorial style features. On this platform, all transactions are carried out in ETH (ether)
- Foundation is one of the newest NFT marketplaces on this list, having launched in February 2021. Its hosted numerous noteworthy auctions of late, including the viral internet meme Nyan Cat. Digital works are sold in an auction format and listed at the reserve price, with bids placed for up to 24 hours. The platform requires users to have a MetaMask wallet with ETH.
- Mintable is similar to eBay and allows users to buy or sell NFTs. It also requires a MetaMask wallet and focuses on free “gasless” NFTs, short-run printable series, or traditional transaction-based NFT art. Not only is Mintable built on the Ethereum blockchain, but it’s also on Zilliqa, which is described as the “next-gen high throughput blockchain platform.”
- OpenSea is another popular choice among those wanting to buy non-fungible tokens, as it claims to be “the first and largest marketplace for user-owned digital goods.” It’s home to over 300,000 users, as well as more than 34 million NFTs. The site allows a wide range of currency or payment tokens, including USD, ETH, and over 150 others. Items for purchase can be filtered by price and sales status.
- NBA Top Shot is unique in that it specializes in the buying and selling of digital “moments” from the NBA. These moments feature things such as video highlights, player stats, and box scores. It’s home to over one million users and also allows investors to display their curated sports collections.
- Axie Infinity is another unique NFT marketplace and can be likened to a Pokémon-inspired video game. Users can collect both cartoon pets and land, both of which are in the form of NFTs. Along with expanding their own kingdoms and acquiring characters, users can also battle other players within this online world.
- Nifty Gateway is named after “Nifties,” which is short for NFTs. It’s a unique marketplace because its digital tokens are released in limited-edition collections or “drops.” Both brands and artists release their digital work through the site, including Beeple, Forbes, and Playboy. These collections are usually available for a 3-week period, and once sold out, can be resold within the marketplace using U.S. dollars.
- Rarible has a layout similar to Spotify and allows users to mint, buy, or sell NFTs ranging from digital art to animated videos, GIFs, and more. Within its interface, you can find live auctions, trending collections, and top sellers. What’s special about this platform, however, is that it allows its most active buyers and sellers to participate in discussions and votes regarding upgrades or other issues.
- Larva Labs is most famous for its CryptoPunks NFT project in 2017, which saw the platform give away these digital assets for free. These days, however, CryptoPunks NFTs are considered highly valuable, with some fetching prices in the millions. Larva Labs continues to release digital art projects worth paying attention to, including Autoglyphs, Meebits, or other Ethereum blockchain-based app development projects. Meets are proving particularly popular, as they can be bought directly from Larva Labs’ built-in NFT marketplace.
- Theta Drop is a blockchain platform that uses its own blockchain technology and cryptocurrency, known as Theta Token. This marketplace is unique in that it is designed for the distribution of TV and video content over the internet. As a marketplace, it entered the NFT world in 2021 with its collection of the World Poker Tour’s digital collectibles. In fact, the World Poker Tour streams its content through the platform’s ThetaTV and was one of the first organizations to embrace the innovative service.
5. NFT FAQs
To cover any other queries you may have about the topic of NFT art, we’ve answered the most frequently asked questions below.
What does it mean to mint an NFT?
Minting an NFT is how your digital asset becomes a part of the Ethereum blockchain. Similar to how metal coins are minted before being circulated for public use, NFTs are digital tokens that get “minted” once they are made. When your digital asset is represented as an NFT, it can be bought and sold within the NFT market as a non-fungible token. Its trading history can also be digitally tracked, including when it is sold to another owner or collected again down the track.
How are NFTs valued?
An NFT’s value can differ greatly depending on the digital asset available. Because NFTs are becoming a popular method for obtaining and selling digital artwork, their value relies on the demand for that artist, as well as the past sales of relevant NFTs.
How are NFTs taxed?
NFTs are primarily taxed at the Internal Revenue Service’s (IRS) collectibles rate. Therefore, digital artwork acquired for less than a year is taxed up to 37%, while those held onto for longer than this period are levied at a minimum rate of 28%. Furthermore, if an NFT is purchased using cryptocurrency, the buyer will be charged capital gains taxes on the profits made on their digital coins.
What is Ethereum?
Ethereum is an open-source blockchain network that enables users to create, publish, monetize, and use business, financial services, and entertainment applications on the platform. It uses its own cryptocurrency, called Ether (ETH), and is second to Bitcoin in market value.
The Ethereum platform is home to numerous decentralized apps, known as dApps, which cater to a variety of purposes. Due to its distributed nature, the Ethereum blockchain is considered a very secure platform. Furthermore, a vital component of Ethererum is Smart Contracts, a concept that originated within the network. These Smart Contracts are self-executing contracts. They contain the terms of the agreement between a buyer and a seller directly written within the lines of code. It is this unparalleled security that allows ETH to continue to harness value.
What is a crypto wallet?
Crypto wallets enable users to send, receive, and spend cryptocurrencies such as Ethereum and Bitcoin. They keep your cryptocurrency access passwords (known as private keys) safe yet accessible. A crypto wallet itself doesn’t hold money in the way that a normal wallet does, however. Technically, your cryptocurrency holdings exist on the blockchain. Instead, your crypto wallet serves to hold your private keys, which act as proof of ownership and enable you to access your currency. Crypto wallets can come in physical or digital form, such as hardware or mobile apps.
The exciting future of NFTs
NFTs are the new kid on the blockchain, but there’s more to their meteoric rise than meets the eye. While cryptocurrency trends have come and gone, experts predict NFTs are firmly here to stay.
As you’ve learned in this guide, NFTs have taken the simple concept of cryptocurrency and allowed it to evolve. They present a step forward in the reinvention of our traditional financial systems, combining the digital representations of physical assets with the benefits of a tamper-resistant blockchain.
The conversion of a physical asset into a digital one simplifies processes and removes the need for middlemen. As NFTs become more sophisticated and are incorporated within our financial infrastructure, there’s no end to how they will transform the way we create, acquire, and sell goods.
