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Non-Fungible Tokens: What They Are and How They Function

Non-Fungible Tokens: What They Are and How They Function

Buckle up for a wild ride through the thrilling, slightly baffling, and occasionally bonkers universe of Non-Fungible Tokens (NFTs). Come grapple with their unique value and satisfy your burning questions.

So, are non-fungible tokens the pinnacle of human achievement or a ridiculous fad built on artificial scarcity and hype? Let’s find out.

It's been a few short years since NFTs popped like a champagne cork in the art world, and things have only become more of a delightful tangle. Yes, portraits of our primate cousins are now fetching the price of small islands, and cyberpunks are flying off the virtual shelf like hot cakes. WTH, right?

Sitting there, you might be scratching your head, asking: What on earth is an NFT anyway?

Well, strap in, because here's a quick crash course so you can show off your smarts at the next inevitable NFT-themed shindig.

👉 TL;DR: NFTs, you see, are sort of like digitized versions of stuff, verified via blockchain technology and bought with crypto. They're the digital snowflakes of the asset world — each one unique, and not one can be swapped for another. Some folks see NFTs as the next big thing, while others think they're just a flash in the pan. As for us? Well, we prefer to park ourselves right in the middle — that's always the safest spot, isn't it?

NFT Meaning

So, we've now got these things called non-fungible tokens (NFTs), which are basically digital bragging rights for owning unique stuff — could be a pixelated cat, a tweet, a digital masterpiece, or even a piece of the moon. All this made possible by our good friend, blockchain technology.

Just like you'd buy your morning latte with a dollar, you buy these NFTs with cryptocurrency. But here's the catch: while your dollar's as good as my dollar, your NFT is a whole different story. Each NFT is a one-of-a-kind snowflake in the blizzard of the digital world, which makes them unswappable on an equal basis.

If we break it down Barney-style, think of it like this: all fiat currencies are interchangeable — a dollar is a dollar is a dollar. Same goes for bitcoin. But NFTs? Not so much. They're the divas of the digital world, each demanding its unique spotlight.

👉 To paint you a picture, imagine a digital version of Raphael's “Sistine Madonna” standing toe-to-toe with a digital version of Da Vinci's “La Gioconda.” They might both be digital, but they're as different as chalk and cheese. And that's the charm of NFTs; they're as unique as Theodore Roosevelt's boxing gloves or Lady Gaga's meat dress.

On a practical level, NFTs are like shiny digital certificates of ownership that you can trade, buy, or sell. As the big cheese of OpenSea, Devin Finzer, puts it, "[NFTs] have similar property rights that you would associate with physical things." But let's not get carried away. If you think owning an NFT of a Van Gogh gets you the actual painting, well, we might need to talk.

And before we get too starry-eyed about NFTs, it's worth remembering that they come with some serious baggage. Specifically, the environmental kind. The energy guzzling of blockchain tech is stirring up quite the storm, so don't forget to plant a tree or two if you're going to get in on the NFT game.

How Does NFT Work?

In the simplest terms — NFTs are living it up on a blockchain, a distributed public ledger; and while NFTs can flit about on various blockchains, they seem to have a soft spot for Ethereum.

They're "minted" from a bizarrely wonderful range of digital objects, such as graphic art, gifs, videos, virtual avatars, skins, designer sneakers, collectibles, music, you get the idea.

In essence, NFTs are like your grandma's cherished stamp collection, but instead of dusty old stamps, you're collecting digital files. And these aren't just any files — they come with exclusive rights. Each NFT has a single, solitary owner, and thanks to the magic of blockchain, it's a cinch to check who that is and to pass the token from one owner to another.

👉Now, here's where things get interesting. In this digital age, you can copy virtually any file, including the digital art that's all wrapped up with an NFT.  But here's the catch: NFTs are crafted to give you something that can't be duplicated — ownership of the work. The artist still holds onto the copyright and reproduction rights, much like with a physical piece of art. To put it in real-world terms: anyone can grab a copy of a Basquiat masterpiece from their local print shop. But the original? There can only be one lucky owner.

As an added bonus, the creator can embed all sorts of information into an NFT's metadata. For example, an artist can leave a digital autograph on their art, making it the ultimate 21st-century collector's item.

NFT Functionality: NFT Use Cases

Now, let's take a closer look at the notable sectors where NFTs have carved out a niche.

Digital Art

As a digital artist, NFTs are like your knight in shining armor, helping prove authorship or ownership of your work and ensuring you get your just royalties. All of this is recorded in a nifty little smart contract. An example that catapulted into the limelight is Mike Winkelmann, or Beeple, who sold his digital artwork, “Everydays: The First 5000 Days,” for a jaw-dropping $69 million via Nifty Gateway. Other bustling NFT marketplaces include Rarible, SuperRare, and KnownOrigin.

Pic. 1. One of Beeple’s “Everydays.”
Pic. 1. One of Beeple’s “Everydays.”

Video Games

NFTs are turning in-game items into tradable assets, making ownership and transfer rights as easy as beating level one. What's even cooler is that these digital items can be programmed to evolve and enhance over time. So, not only can you use them in-game, but you can also trade them as crypto collectibles. The brave new world of NFT gaming includes titles like Axie Infinity, Sorare, CryptoKitties, Gods Unchained, and Decentraland.

Pic. 2. CryptoKitties.
Pic. 2. CryptoKitties.

Collectibles

The collecting world is getting a digital makeover, thanks to NFTs. These tokens can represent unique virtual assets or even be tied to physical objects, like rare books or sports trading cards. NBA Top Shot, a brainchild of Dapper Labs and the NBA, is a prime example, letting fans buy and sell short clips of match highlights.

Pic. 3. NBA Top Shots.

Virtual Worlds

Tokenization in virtual worlds is a complex beast. It can include anything from virtual lands and buildings to items like virtual clothes or cars. Imagine buying a building to use as a gallery for your digital art collection. In these realms, every object is unique, much like NFTs themselves. Some popular blockchain-based virtual worlds include The Sandbox and Terra Virtua.

Pic. 4. Sandbox.

All in all, NFTs are blurring the lines between the tangible and the virtual, reshaping the way we perceive ownership and value in the digital age.

NFT Technology: Technical Aspects of Creating an NFT

Among the myriad of blockchains, Ethereum (ETH) has become the darling for creating NFTs, thanks to its fondness for smart contracts. In the simplest of terms, non-fungible tokens are smart contracts that bestow a digital asset with a unique identity, setting it apart from its countless twins. When you create an NFT, it's like wrapping your artwork in a contract and planting it on a blockchain, proclaiming to the world, "Yes, I made this!"

Now, here's where it gets interesting. Each piece of content is bound to a unique token, tucked away in a smart contract that keeps a meticulous record of all its transactions. It's like a personal diary that records every exchange the piece has ever had. And since it's all on the blockchain, you can trace the entire transaction history, no detective skills needed.

"But where on Earth are NFTs stored?" you might be wondering. Well, an NFT is essentially a record lounging on a blockchain, like Ethereum. But mind you, storing heaps of data, including artworks and other items, directly on the blockchain can burn a hole in your wallet. So often, the blockchain record is like a cryptic treasure map, containing only the address of where the associated content is hiding elsewhere on the internet.

So, in essence, an NFT is like a signpost pointing to where the real content is chilling at the time it was minted. This means the token and the content live separate lives, and the creators can't really vouch for the reliability of the storage site. The content could be tampered with or even deliberately deleted, throwing a wrench into efforts to prove its association with a specific NFT.

But fear not, the industry bigwigs are on it, working tirelessly to maximize the decentralization of media storage. The current options on the table include:

  • On-chain storage: It's like storing your media and metadata right inside the blockchain, making it accessible to all parties. It's as secure as it gets but a tad trickier to create.
  • Partial on-chain storage (or the half-and-half NFTs): Here, only the critical data of your content is stored in the blockchain, which could come in handy for restoring the media, if need be.
  • InterPlanetary File System (IPFS) storage: This distributed file system spreads data across a vast network of computers. When you upload your media to IPFS, it creates a unique hash code that is recorded in the NFT's smart contract. IPFS, while a leap towards decentralization, doesn't promise permanence. If the original uploader decides to stop "pinning" the file (or in layman's terms, keeping it available), the file could vanish from IPFS. To tackle this, solutions like Filecoin are stepping up to the plate, offering incentives for others to store the file.

In a nutshell, tokenization bestows assets with superhero-like properties such as ownership and inalienability, all thanks to decentralization, liquidity, versatility, and programmability. But, as we’ve discovered, it's not without its unique set of plot twists and challenges.

How Do I Buy NFT?

So, you've decided to dip your toes into the NFT pool? Excellent choice! Here's your starter kit:

Step one, you'll need to get your hands on a digital wallet. Think of it as your personal safe that can hold NFTs and cryptocurrencies.

Next, you'll probably need to fill it with some cryptocurrency, like Ether, depending on the payment methods your NFT marketplace accepts.

Where to buy crypto, you ask? Well, exchanges like Coinbase, Kraken, and Binance are all great options. Even PayPal and Robinhood have jumped onto the crypto bandwagon. You can buy crypto there using a credit card and then shunt it from the exchange to your chosen wallet.

👉 Did you know that Bitsgap is breaking the mold by letting you connect not one, not two, but a whopping 17 crypto exchanges and trade on all of them through a single, swanky interface. But hold your horses, Bitsgap has even more tricks up its sleeve. By anchoring your exchanges to Bitsgap, you not only get a smart trading terminal with all the bells and whistles — smart orders, trailing, hedging, you name it — but also a whole army of automated trading bots. And these aren't your ordinary bots — they're ready to gather profits whether the market is doing the sideways, taking a nosedive, or shooting for the stars. So why not give it a go and see for yourself?

Once your digital wallet is up and running, and stocked with funds, you're all set to embark on your NFT shopping spree. There's a wealth of NFT marketplaces ready for your exploration, and topping the list are three standout platforms like OpenSea.io, Rarible, and Foundation.

But does it make sense to jump in? That's another story altogether. NFTs are a bit like riding a rollercoaster in the dark — their future is foggy, and we don't have much history to predict their performance.

Since NFTs are fresher than a farmer's market tomato, dabbling with small amounts could be your best bet if you're itching to get started. Got some extra cash lying around? Found a piece that tugs at your heartstrings? Maybe it's worth a shot. But remember, an NFT's value is as unpredictable as a cat on a keyboard — it all hinges on what someone else is willing to fork out for it. Unlike stocks and bitcoin, where you have some fundamental, technical or economic indicators as lifeboats, with NFTs, it's just you and the demand, in a dance where the music can stop anytime.

Ah, and let's not forget about our old friend, taxes. Just like when you sell crypto at a profit, Uncle Sam wants a piece of your NFT gains too. Since they're considered collectibles, they might not get the same tax treatment as your beloved stocks and could even be slapped with a higher collectibles tax rate. The IRS, however, is still scratching its head on how to categorize NFTs for tax purposes.

And the plot thickens! If the cryptocurrencies used to snap up the NFT have grown since you bought them, they could also be taxed. So, before you add NFTs to your financial portfolio, you might want to have a chat with a tax professional. Because, as they say, in this world nothing can be said to be certain, except death and taxes.

FAQs

What Does NFT Stand For?

NFT is an acronym for non-fungible token. "Non-fungible" essentially implies that the item is singular and irreplaceable. To illustrate, consider a bitcoin, which is fungible — if you exchange one bitcoin for another, you end up with the exact same thing. On the other hand, a unique trading card is non-fungible. If you swapped it for another card, you'd get something entirely different.

What’s the Most Expensive NFT?

'The Merge' continues to hold the record as the priciest NFT ever sold. In December 2021, it fetched a staggering $91.8 million at sale.

What’s Donald Trump NFT?

In December 2022, Trump unveiled his debut NFT collection with all the flair of a circus ringmaster. These digital "trading cards" featured him in an array of animated alter egos, each more heroic and outlandish than the last. In a twist worthy of a reality TV finale, the series of 45,000 NFTs flew off the virtual shelves in less than a day.

Where Can I Look at NFT Artworks?

The NFT landscape is bustling with a variety of marketplaces, such as OpenSea, Foundation, Rarible, DraftKings, Axie Marketplace, Sotheby’s Metaverse.

Is There an NFT App?

Yes, there are some NFT apps for mobile such as OpenSea, NFT LaunchPad, Crypto.com, Binance NFT, Rarible, Foundation, and Nifty Gateway among others.

What’s NFT Art Generator?

An NFT generator is essentially a tool engineered to swiftly create unique NFT artwork using foundational art. You can find these miracle workers online or download them as software — because who doesn't love another app cluttering their desktop? Some of the usual suspects in this lineup include the likes of Hotpot.ai, Filmora, Fotor, UniqMyNFT, and Onemint's NFT Art Generator.

What's the Amazon NFT Marketplace?

Word on the street is that Amazon has been cooking up its own NFT marketplace. But given the constant postponements over the past year and this one, it's anyone's guess whether it will ever see the light of day. That said, the e-commerce behemoth isn't entirely on the sidelines of the NFT game. Through its Prime Gaming portal, it has been dishing out NFTs completely free of charge to subscribers. So why not give it a whirl and see if it's your cup of tea?

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