On March 21, 2006, Jack Dorsey, Twitter’s founder, posted a message on the social networking site:
‘just setting up my twttr.’
Those five words, the world’s first-ever ‘tweet,’ began an internet revolution. To date, over 200 million people have set up their Twitter, using the platform as a means for communication, marketing, and building community.
So, whatever came of Jack’s first tweet?
He sold it for US$2.9 million as a non-fungible token, or NFT.
An NFT, in the simplest of terms, is a certificate of ownership for a digital or physical asset. A tweet. A piece of digital artwork. An audio file. A domain name. Or the source code of the World Wide Web, sold by its creator Tim Berners-Lee for around US$5.4 million.
People buy and sell these unique assets all the time, with some digital collectibles trading for millions of dollars. NFTs are sold like physical assets in the ‘real world,’ even though they have no tangible qualities. You can’t touch or smell NFTs, but they can hold as much value as a classic car or 16th-century Renaissance painting.
In this guide, you will learn more about NFTs, how they work, and the benefits and challenges that come with them.
- What Is a Non-fungible Token?
- How Do NFTs Work?
- How Do you Create an NFT?
- Current Use Cases: NFTs as Digital Art and Collectibles
- How Do You Buy an NFT?
- What Makes NFTs Valuable?
- Benefits of NFTs
- Challenges of NFTs
- Final Word
What Is a Non-Fungible Token?
First, it’s important to explain what a non-fungible token is not. An NFT is not a digital currency. Or an exchange-traded fund (ETF). Or a token in the conventional sense.
It’s a digital asset that represents physical objects like property, art, music, and videos.
Think of a cryptocurrency like Bitcoin. These digital assets are fungible because you can interchange these objects with similar items. (You trade one bitcoin for another bitcoin, for example.) NFTs differ from digital currencies because you can’t exchange them for something else. They are unique and rare. They are non-fungible.
Think of Bitcoin again. You can divide this digital currency into smaller parts. But you can’t divide an NFT because it’s a whole entity. Although there is potential for fractionalized NFTs in the future where multiple people own one collectible together.
NFTs are typically built with the same technology as a digital currency, but that’s their main similarity.
How Do NFTs Work?
Unlike cryptocurrency, NFTs represent ownership. You couldn’t have sold Jack Dorsey’s first Tweet. Only he could because he owns it. He created it.
How is this different from copying or downloading that tweet from the internet? It’s exactly that — a copy. The NFT represents the true owner of the asset.
That means you can’t download or copy a digital asset from the internet and sell it for millions of dollars. It’s not yours to sell. But let’s say you own the NFT for Jack Dorsey’s first Tweet — now you can sell it.
You can also sell a digital asset you invented. Perhaps a meme or a piece of electronic music. First, you turn that asset into an NFT on the blockchain — something called ‘minting.’ This is the process of securely recording and listing the NFT on the blockchain, for example, Ethereum or Bitcoin SV. This process makes the ownership of the NFT immutable.
How much that object sells depends on the NFT’s perceived value, determined by its rarity and popularity. (More on that later.)
How Do You Create and Sell an NFT?
First, you need an asset that you can turn into an NFT. Say you have a digital collectible, a piece of 3D art, or even a physical asset like real estate. You’ll pay a platform to ‘mint’ the asset. (Most NFTs trade on the Ethereum blockchain, but other blockchains are becoming popular for NFT minting as well.)
The rest of the process is pretty simple. Create a digital wallet, add money to that wallet, connect the wallet to the minting platform, upload your digital asset, describe your new NFT, and start an auction.
The hardest part is probably pricing your NFT. How much do you think it’s worth? How much are people willing to pay for it? Sellers often think of value in the same way as government-issued or ‘fiat’ currencies — dollars or euros, for example. But Ether isn’t traditional money, so don’t value your NFT too low. You can always increase or reduce the asking price for your NFT at any stage during the auction process.
After creating your auction, you might want to promote your NFT on social media. Or create a marketing campaign to increase awareness about your digital asset.
Once someone purchases your NFT, payment gets stored in your digital wallet. You can then withdraw these funds.
Current Use Cases: NFTs as Collectibles
Here are some other famous examples of NFTs:
Digital art is artwork created using digital technology. Although this practice dates back to the 1960s, digital art has become the most valuable type of NFT. Examples include GIFs, 3D computer graphics, photo paintings, digital mosaics, and pixel art.
- A digital artwork called ‘CryptoPunk’ sold for nearly US$11.8 million at Sotheby’s in 2021.
- The artist Grimes has sold around US$6 million of digital art on the platform Nifty Gateway since February 2021.
NFTs are becoming increasingly popular because of the buzz that surrounds them. People are fascinated about digital assets selling for enormous sums, like when the artist ‘Beeple’ sold a digital artwork for US$69 million at Christie’s — the highest price ever paid for an NFT.
Read more: Why NFT Art Is Becoming So Popular
Collectibles and Iconic Moments
Digital collectibles are photos or video clips that exist in digital form. Like digital art, collectibles are not tangible but often reflect moments from the ‘real world,’ such as sports games and music concerts.
- An NFT of LeBron James playing against the Houston Rockets sold for nearly $400,000.
- Digital collectibles from William Shatner, including digital trading cards, sold at record-breaking speed.
Other examples of iconic moments are GIFs, memes, and other internet phenomena that creators turn into NFTs.
- Nyan Cat was a popular video meme from 2010. For its 10th anniversary, the video’s creator turned the meme into an NFT and sold it for 300 ETH (around $850,000 at the time).
- An NFT of the popular meme of the dog ‘Doge’ sold for around $4 million.
Event organizers issue NFT tickets that give buyers access to sports games, music concerts, art exhibitions, and other events. For example, fans bought NFT tickets to view Beeple’s NFT artwork in a physical environment.
What Makes NFTs Valuable?
Many factors determine the value of an NFT. Firstly, there’s a difference between collector value — the price you, as a buyer, think an NFT is worth — and speculative value, the perceived value of a digital asset based on the future of the NFT market.
That’s not all. The following factors can also make an NFT less or more valuable:
- Rarity: How rare is the digital asset? For example, did a digital artist create one NFT or multiple NFTs of the same piece?
- Cultural relevance: Does the asset hold cultural significance? Was it a popular meme that circulated on the internet? Or do only a few people recognize it? Does the content represent an iconic or significant historical moment?
- Content producer/artist: Is the content creator famous or culturally significant?
- Future utility: Will the digital asset still hold value five or even ten years from now? Are there other perks that the NFT comes with, like offering early access to other NFT drops or membership to exclusive communities?
Ultimately, it all comes down to digital ownership. Jack Dorsey’s tweet sold for millions of dollars because it was an iconic moment that he created, which increased the NFT’s authenticity and value.
How Can You Buy an NFT?
To start, decide what type of NFT you’re interested in. Then, you need to find the right NFT marketplace for the type of NFT. These marketplaces include:
- Axie Marketplace.
- Top Shot Marketplace.
- FabriikX. (Launching soon. Register now.)
Some platforms require you to open a digital wallet and purchase digital currency before you can buy an NFT. Others let you pay by credit card. If the platform only accepts digital currency, you need to connect your wallet to your NFT account before purchasing an asset.
Some NFTs are available for direct purchase – that is, people can simply buy an NFT at the listed price, without going through an auction. Otherwise, the bid process rolls out like any other auction. It’s kind of like eBay, where you place a bid on an item, and the highest bidder gets the asset. A smart contract is an agreement between the two parties that ensures the buyer is then the rightful owner of the NFT. The smart contract is processed and stored on the blockchain and can’t be changed once finalized.
Benefits of NFTs
NFTs come with the following benefits for buyers:
- NFTs provide buyers with proof of ownership (through blockchains and smart contacts), eliminating the problem of counterfeit goods.
- The NFT process is a transparent and immutable one. Nobody can change the record of ownership or replicate an NFT on the blockchain.
For sellers, NFTs provides these benefits:
- The NFT process proves an artist’s ownership of their work.
- NFTs allow creators to sell their artworks, collectibles, and other digital memorabilia and generate a profit.
- An artist can also potentially profit from their NFT if it’s ever resold because everything is tracked using blockchain technology.
Challenges of NFTs
Like all new technology applications, there are concerns over the security of NFTs. Although the decentralized construct of blockchains makes them arguably more secure than a centralized ledger, hackers can still infiltrate blockchains and steal digital assets.
Then there’s the question of the environmental impact of producing or mining these digital assets. A lot of technology — and therefore a lot of energy — is needed to mint objects into NFTs, which impacts carbon emissions. So, it’s important to understand that not all blockchains are created equal when it comes to energy consumption.
According to a recent report from market research and analysis firm MNP, there is a major difference between the two top blockchain technologies — Bitcoin and Bitcoin SV (BSV) — and it has to do with how much energy they require as the size of the network increases. Bitcoin uses more energy as the size of the network increases (i.e., as more people and transactions use it). BSV is much more energy-efficient and actually requires less energy as the size of the block increases. The BSV blockchain will have less of an environmental impact as it grows in popularity.
Read more about digital assets and their environmental impact here.
Other challenges include potential tax implications when selling NFTs. The U.S. Government considers the sale of NFTs the same as that of stocks, and so are subject to capital gains tax.
NFTs have changed the world of digital art, collectibles, and other internet phenomena, providing creators with an outlet to sell their assets for profit. Although questions remain, NFTs will continue to benefit creators and the collectors that buy their work. Now you understand a little more about the NFT process, it’s time to choose a marketplace.
FabriikX is one of the first NFT marketplaces of its kind. Built on the power of the BSV blockchain, FabriikX offers expertly curated exclusive content from top creators within arts, sports, and music, as well as NFTs from the best creative minds in our community. To us, NFTs are much more than just digital collectibles – they are experiences that connect collectors with the creators and communities they care about most.
Learn more about the launch here.
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