What Are NFTs?
What are NFTs? Slow your role… Let’s start with something that may be more familiar. What about blockchains? Well, a blockchain is a labyrinth of computers that implements standard rules governing sharing data within that network.
We generally call this data cryptocurrency because its essential properties – scarcity, durability, portability, divisibility, and fungibility – enable us to use it as money. The thing is, not all crypto assets need to have all of these attributes to function.
Some crypto-assets behave otherwise and offer different possibilities for traders and investors called non-fungible tokens (NFTs). NFTs are unique cryptographic tokens, which, like cryptocurrencies, can be bought, sold, and exchanged over the internet without go-betweens. One difference that sets many other cryptos apart from NFTs is that NFTs are “minted.”
What Are NFTs?
NFTs are permanent, resistant to theft, impossible to forge, and easily trackable like other crypto assets. However, they differ in that you cannot replace them with something identical.
While anyone can trade one bitcoin for any other Bitcoin without the user noticing a difference, NFTs are unique and, instead, function like trading cards or collectibles. They can be purchased, stored, exchanged, and sold, too, but each NFT accrues value independently.
NFTs can represent anything from digital trading cards to in-game items to real estate, and they offer another way for investors to allocate and build wealth in the crypto world.
Below, we will break down how NFTs work and how they could be a compelling addition to your crypto asset portfolio.
Why Use NFTs?
Simply put, NFTs offer the promise of expanding the range of available crypto assets.
Whether you are a collector looking to tokenize your existing assets (such as stamps or baseball cards), or a weekend gamer yearning for the possibility of transferring your items (weapons, skins, characters, etc.) from game to game, you may find an interest in this emerging market that seems to be going only one way (up).
Digital architects and artists may find the commonplace interesting as NFTs offer a way to protect digital ownership on the internet. In addition, having art pieces recognized on a blockchain may help artists showcase their work in a virtual space and entice buyers to purchase an original work without fear of fraud.
Some supporters of the concept speculate NFTs could even replace important paper documents detailing the ownership of everything from real estate to official records.
How do NFTs work?
First, it’s important to note that not every blockchain can support NFTs.
NFTs differ from traditional cryptocurrencies in that they are indivisible, rare, or unique, which means that a blockchain needs to enable its users to create unique tokens to offer them.
Further, most blockchains that support NFTs also utilize cryptocurrency, which serves as the medium of exchange to purchase NFTs within that ecosystem.
NFTs on Ethereum
The first and most popular interface for creating NFTs is the ERC-721 standard, which allows issuing and trading tokens on the Ethereum blockchain.
Ethereum allows developers to program smart contracts for their NFTs, containing details about the new assets they create. When users exchange an NFT, they interact with this contract, which tracks it on Ethereum.
This means the creator of the NFT can make decisions that could influence the value of their creation, such as specifying how rare an item will be.
In this way, an NFT representing a football card can have many special and unique characteristics that you get with a physical card, helping set its market price.