The World of Digital Assets and Non-Fungible Tokens
NFTs are all the hype these days. I understood what they were but didn't necessarily understand how they got value and why. Some pieces of art are simple and sometimes downright ugly. Why would anyone want to spend thousands of dollars on an ugly piece of art? As my curious mind wanted to understand, I dove into the rabbit hole of NFTs. In this series, I will share what I learned, what I found exciting, what I bought, and how it turned out. I think it would be fun to share my learnings, so anyone can jump into the space if they choose, but also, knowing like anything, there are risks from a financial perspective.
What are Non-fungible Tokens (NFTs)
Before diving into the details of the NFT world, we must define the word.
A Non-Fungible Token is like a certificate of authenticity. For example, if we made a unique piece of art with only 1/1 made in the world, there are no others like it. Therefore it cannot be traded with another asset. Non-fungible means it's not interchangeable. No two are the same. Another example would be selling a dollar. In return, you get a rock. It doesn't make much sense to execute that trade.
Non-fungible tokens are used to create verifiable digital scarcity. If an NFT is only printed a handful of times, it becomes scarce, contributing to its value. If enough people deem it valuable, then it's worth more. On the other end of the spectrum, a Fungible asset is interchangeable with the same asset class. A prime example is a dollar for dollar, or in the digital realm, Bitcoin can be exchanged for other Bitcoin.
How do NFTs work?
Remember, we can assign a token to anything we create digitally. That token can be applied to Photographs, Music, Art etc. By assigning each NFT with its very own certificate of authenticity and place that item on a marketplace like opensea.io where we can buy, sell, or trade these assets. Each token can be stored on an open and distributed blockchain, Etherium (ETH) in this case, meaning their metadata and transaction history can be verified by anyone with an internet connection.
We can see which wallets own what at any given time. This ensures transparency within the community, building trust and hence more value.
Creating digital art, I can create a photo and upload it to any website that anyone can copy, making it worthless technically speaking. I have the rights to the photo, but it would be impossible to try and stop anymore from using it online. However, in the NFT digital art space, I can mint this image turning in into an NFT. Minting is another term for applying the appropriate computer functions which enable a certificate of authenticity to be generated and applied to this photo. This NFT now exists on the Ethirum blockchain and can be verified by anyone on Etherscan, a site anyone can use to verify the metadata. A point to remember is anyone can still take a photo and use it anywhere even though it's an NFT. However, the critical distinction is that I, the owner, physically own the data, which enables me to say "I own" this piece of art.
But if people can still copy and download it - why is it still valuable? - Because if I own that image, I hold the actual value. Everyone who copies it doesn't, but they contribute to sharing the image, hopefully making it viral.. but remember, I hold its actual value.
Breaking Down NFT Value
- Unique - one of a kind token verified by blockchain
- Copyright - if you choose to, the token can be verified on the blockchain, and you'd have complete copyright to use the 'thing.'
- Rare - in terms of a limited amount made
- Collectible - price will rise due to scarcity, and the item itself is hard to dilute.
- Downloadable - the owner of the NFT can download the content
- Immutable - can not change the metadata of the token.
- Forever - data doesn't change on the blockchain. You can HDOL or sell it in the future.
- Resealable - like any other collectible, it can always be resold.
Niftygateway - fast-growing, daily drops, visual artists, celebrities involved
Zora - low fees, invite-only
Foundation - reserved bidding, 24-hour auctions, invite-only
Makersplace - invite-only, Ethiruim and fiat currency
KnownOrigin- art platform, weekly drops accepted Etherium
Opensea - most common anything goes
SuperRare 1-of-1 edition NFTs - gold standard
Rarible open and permissionless
As we forge ahead with new ventures, new arising marketplaces will emerge. The marketplace list is not exhaustive; there are many more. These are just a few from the top of my mind.
To be continued in Part 2 - My first NFT purchase, researching, community importance, and more.