There have been numerous headlines about NFTs in the past year. Most of these headlines are presented as downloadable files like animations, images, audio, and texts. However, despite the numerous headlines on NFTs, many people still do not understand what they are and why they have had a breakthrough year in 2021.
So what are NFTs?
NFTs, known in full as non-fungible tokens, are digital tokens that exist on the blockchain to record proof of ownership for its holder. Each token is entirely unique as it has its unique metadata that cannot be replicated or replaced for another. Bitcoin, the most popular product in the crypto market, is a fungible token. This is because each bitcoin has the same value. This goes against the basic definition of a non-fungible token. On the other hand, a CryptoPunk is a non-fungible token. Each CryptoPunk has different traits and values to another.
You can also look at a non-fungible token as a plane ticket. Each ticket has different information and characteristics that cannot be swapped with another, unlike a dollar, which can be equated to a fungible token. Each dollar has the same value and features and can be exchanged with another. This is the simplest way to explain the difference between fungible and non-fungible tokens.
Examples of NFTs
The most common types of NFTs are:
• In-game products or items
• Virtual land
• Crypto collectables like CryptoPunk
It is worth understanding that NFTs can be any virtual representation of an asset. These tokens are provably unique and non-interchangeable. This means that you cannot swap them as you would with cryptocurrencies. The primary reason why this is the case is that they are not equal and do not have the same value. The term NFT can also represent any digital or physical asset like music, movies, fine wine, and real estate, as seen in the examples above.
How are NFTs stored?
NFTs are primarily stored on a blockchain. However, it is worth mentioning that not all blockchains are equal. For instance, Bitcoin’s blockchain was built for the specific purpose of creating a deflationary cryptocurrency. This element has contributed to its rapid growth in the crypto space. This is not the case with NFTs.
NFT smart contracts are constructed on the Ethereum ERC721 standard. This means that the code for each contract is stored on the Ethereum blockchain. Meanwhile, the content linked to the smart contract is stored elsewhere. For instance, if you purchase an NFT product, the proof of your ownership will be found in the Ethereum smart contract. The details about where and when the product was minted will also be available on the blockchain. However, the JPG file associated with the contract can be stored anywhere else on the internet. This poses an issue because it could disappear at any time.
To ensure their safety, you can store your NFTs in:
• Software wallets
• Interplanetary file systems
• And hardware wallets
You can also keep them safe by following standard practices like passwords.
What makes NFTs valuable?
The NFT market is currently booming. This can be attributed to the following facts;
It’s a new market
Despite the ongoing pandemic, the global sales of NFT arts and antiquities reached more than 50 billion dollars in 2020. By the end of 2021, the sales had doubled. This shows a lot of potential for this market. People can compare this to the rapid growth of bitcoin between 2012 and 2013, which led to its current position in the crypto space. For this reason, a lot of art collectors and investors are looking to transition to NFTs and attract new users. Also, the fact that the NFT market is relatively new means that there is a lot of growth potential. Therefore, if you get into the assets on the ground floor, there is a greater chance of generating higher returns.
Proof of ownership in the digital world
NFTs also allow for proof of ownership in the digital space. Before the invention of NFTs, there was no way to prove ownership or authenticity of digital collectables, especially artwork. Blockchain technology and NFTs have created a way to do this. NFTs have introduced the principle of scarcity in the digital world. Each NFT is rare, unique, incomparable, and indivisible.
Some NFTs are attached to real-world assets
Many new people to the digital world worry about paying or investing in assets that look like JPEG files. This is why crypto assets have hard a hard time gaining international approval. Some NFTs are attached to real-world assets like music and art, making it easy for people to believe them. For instance, the British contemporary artist Damien Hirst has the first NFT collection. The collection features around ten thousand items corresponding to the same number of pieces locked in a secret vault in London. This NFT project has generated more than 26 million dollars so far. This proves that people believe more in digital products with real-world assets.
Another reason why the NFT market has gained a lot of momentum over the last two years because NFT owners get early access to other projects. They can also vet new projects more efficiently. The market seems very promising, and many people are currently looking to get all the information they can on NFTs.