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What are NFTs? Understanding Non-Fungible Tokens

If you've been following the tech news lately, you've probably come across terms like Bitcoin, blockchain, and, more recently, non-fungible tokens (NFTs). Stories of multi-million dollar auctions for digital assets have piqued the interest of artists and collectors alike. However, what exactly are NFTs? And how do they operate?
AllCode Stephenson Snow Crash NFT

If you’ve been following the tech news lately, you’ve probably come across the term NFT, and wondered to yourself, “What the hell is an NFT?” Stories of multi-million dollar auctions for digital assets that reside on the blockchain may have piqued your curiosity. However, what exactly are NFTs? How do they operate? Why would I buy one? How do I build one? 

The following sections cover the fundamentals of Non-Fungible Tokens, as well as the technology that underpins them and their applications in everyday life. We’ll also go over some of the abilities and knowledge you’ll need to be successful in your endeavors with them.

Defining NFTs
A Non-Fungible Token (NFT) is a type of token that resides on the blockchain that is unique. Unlike Bitcoin or Ether where each piece of BTC or Eth is the same and, more importantly, worth the same, each NFT is different because it typically maps to a unique digital asset, and can be worth whatever someone is willing to pay for the NFT on OpenSea or Rarible.

The general idea is that in the Metaverse if you own the NFT, then you own its digital representation in  the Metaverse, e.g. Decentraland or Axie Infinity. You may have noticed that when I linked to Metaverse, I linked to Neal Stephenson’s Snow Crash. Oddly enough, Stephenson created the concept of the Metaverse in Snow Crash back in 1992. Yes, that’s right, 1992.  In Snow Crash, some hackers who were former pizza delivery drivers lived in a storage unit but spent most of their time in the Metaverse because they had purchased some real estate right off the main strip of the Metaverse. Unbeknownst to Stephenson at the time, the real estate that resides right off the strip would in today’s world be an NFT that represents the deed to the property. 🙂  

Art, music, in-game items, and videos are all examples of digital assets that represent real-world objects. They are generally encoded using the same underlying software as many other cryptos and are generally purchased and sold online in exchange for cryptocurrency. However, even though they have been around since 2014, NFTs are gaining in popularity because they are becoming an increasingly popular way to buy and sell digital art. Since November 2017, an incredible $174 million has been spent on NFT platforms. Aside from that, NFTs are usually unique, or at the very least one of a very limited run, and they are identified by unique identifying code. According to Arry Yu, chair of the Cascadia Blockchain Council of the Washington Technology Industry Association and managing director of Yellow Umbrella Ventures, “in essence, NFTs create digital scarcity.”

Compared to most digital creations, which are almost always available in an infinite supply, this is a significant difference. If a given asset is in high demand, cutting off the supply of that asset should theoretically increase its value. In reality, many NFTs have been digital creations that already exist in some form in other places, such as iconic video clips from NBA games or securitized versions of digital art that are already floating around on Instagram, at least in the early stages.

Individual images—or even the entire collage of images—can be viewed for free on the internet by anyone. In light of these facts, why are people prepared to spend millions of dollars on something they could easily screenshot or download? For the buyer to be able to claim ownership of the original item, an NFT must be completed. It also has built-in authentication, which serves as proof of ownership, in addition to the other features mentioned. It is almost as valuable as the item itself to collectors for them to have those “digital bragging rights”.

How to Build NFTs?

Let’s cut to the chase. AllCode has done a number of NFT projects on Flow and Polygon. We really like Flow, but realize that the decision as to what NFT your project should reside upon largely is based upon your community.

What Is the Difference Between an NFT and a Cryptocurrency?

It is possible to trade or exchange physical money and cryptocurrencies for one another because both are “fungible.” Aside from that, they are also equal in value: one dollar is always equal to another dollar, and one Bitcoin is equal to another Bitcoin at any given time. Because of crypto’s fungibility, it is a reliable method of conducting transactions on a blockchain network. NFTs, on the other hand, are distinct from conventional semiconductors. A unique digital signature protects each NFT, making it impossible for them to be exchanged for or equated in any way with one another in any manner (hence, non-fungible). Because they are both NFTs, one NBA Top Shot clip, for example, is not equivalent to another everyday clip.

An NFT’s Function

It is possible to store NFTs on a blockchain, which is a decentralized public ledger that keeps track of transactional information. Bitcoin and Ethereum are two cryptocurrencies that you’re probably most familiar with because blockchain is the underlying technology that allows them to function. In particular, NFTs are typically stored on the Ethereum blockchain, although they can be stored on other blockchains as well. An NFT is created, or “minted,” from digital objects that represent both tangible and intangible items, such as the items listed below.
• The visual arts
• GIFs (Graphics Interchange Formats)
• Videos and highlights from sporting events
• Antiques and collectibles
• Virtual avatars and video game skins are becoming increasingly popular.
• Designer sneakers are available.
• Music is a must-have.
Even Twitter messages are taken into consideration. Twitter co-founder Jack Dorsey sold his first-ever tweet as an NFT for more than $2.9 million, making him the richest person on the planet. In essence, NFTs are similar to physical collector’s items, except they are digital. Rather than receiving an actual oil painting to hang on the wall, the buyer receives a digital file of the painting.
Additionally, they are granted exclusive ownership rights. That’s correct: NFTs can only have a single owner at a time. Because each NFT has a unique ID, it is simple to verify ownership and transfer tokens between owners. Additionally, the owner or creator can store specific information within them. For example, artists can sign their work by including their signature in the metadata of an NFT platform.

What Are the Uses of NFTs?

Because of blockchain technology and non-fungible tokens list, artisans and content creators now have an unprecedented opportunity to monetize their work. When it comes to selling their work, artists no longer have to rely on galleries or auction houses. An NFT, on the other hand, is something the artist can sell directly to the customer and retain more of the profits. Apart from that, when the artwork is sold, artists can program in royalties so that they will receive a percentage of the sale proceeds. This is a significant advantage. The fact that artists generally do not receive future proceeds after their art has been sold is an appealing feature.
Not only can artists make money with NFTs via artwork, but they can also make money in other ways. NFT art has been auctioned off by companies such as Charmin and Taco Bell for charitable purposes. When this was written, the highest bids came in at 1.5 Wrapped Ether (WETH), which is equal to $3,723.83 at the current exchange rate. Charmin dubbed its offering “NFTP” (non-fungible toilet paper), and Taco Bell’s NFT art sold out in minutes. A growing number of celebrities, including Snoop Dogg and Lindsay Lohan, are hopping on the NFT bandwagon and issuing securitized NFT platforms that contain unique memories, artwork, and moments.

How to Purchase NFTs?

To begin your NFT collection, you’ll need to acquire several essential items, which are as follows:
It is necessary to first obtain a digital wallet that will allow you to store NFTs as well as for cryptocurrencies. Depending on which currencies your NFT provider accepts, you may be required to purchase some cryptocurrency, such as Ether. Platforms such as Coinbase, Kraken, eToro, and even PayPal and Robinhood are now accepting credit card payments for cryptocurrency purchases. It’ll then be possible to transfer it into your wallet of choice. When researching your options, keep in mind that there are fees involved. A percentage of your transaction is charged by the majority of cryptocurrency exchanges when you buy cryptocurrency.

NFT Marketplaces
The number of NFT sites to choose from is virtually limitless once you’ve created and funded your wallet. In terms of NFT marketplaces, the following are the largest:
It describes itself as a seller of “rare digital items and collectibles” on its website.
• OpenSea.io: This peer-to-peer marketplace advertises itself as a seller of “rare digital items and collectibles.” To begin browsing the NFT collections, you must first register for an account. For a more in-depth look at artists, you can sort pieces by sales volume.
In the same vein as OpenSea, Raible is a democratic, open marketplace that allows artists and creators to issue and sell non-fungible tokens (“NFTs”). It is possible to influence features such as fees and community rules by holding RARI tokens issued on the platform.
• To post their artwork on the Foundation, artists must first receive “upvotes” or an invitation from other creators. Its exclusivity and high barrier to entry (artists must also purchase “gas” to mint NFTs) allow it to attract higher-quality artwork. The NFT, for example, was sold on the Foundation platform by Nyan Cat creator Chris Torres. The result may be higher prices, which is not necessarily a bad thing for artists and collectors looking to profit from the situation, provided that the demand for NFTs remains at current levels or even increases over time. Be sure to conduct thorough research before making a purchase, even though these platforms and others are home to thousands of NFT creators and collectors. Several artists have fallen victim to forgers who have listed and sold their work without their knowledge or permission.

The verification processes for creators and NFT listings are also inconsistent across platforms, with some being more rigorous than others. NFT listings on sites such as OpenSea and Raible, for example, are not subject to owner verification requirements. When it comes to buying NFTs, buyer protections appear to be minimal at best, so it may be best to remember the adage “caveat emptor” (let the buyer beware) when shopping.

Should You Invest in NFTs?
Is it necessary to purchase NFTs simply because they are available? Yu explains that it is dependent on the situation.
According to her, the future of new financial technologies is uncertain, and we don’t yet have a large amount of historical data to judge their performance,” she says.” “Because NFTs are so new, it may be worthwhile to invest small amounts to test them out for the time being.” In other words, deciding to invest in NFTs is largely a personal one. A piece that has sentimental value to you may be worth purchasing if you have the money to do so. But keep in mind that the value of an NFT is entirely dependent on how much someone else is willing to pay for it. In this case, demand will drive the price rather than fundamental, technical, or economic indicators, which typically influence stock prices and, at the very least, serve as the basis for investor demand in the traditional sense.
An NFT may therefore be resold for less than you originally paid for it. Even if no one is interested in buying it, you may be unable to resell it together. Similar to when you sell stocks at a profit, NFTs are subject to capital gains tax as well. As collectibles, however, they may not qualify for the preferential long-term capital gains rates that apply to stocks, and they may even be subject to a higher collectibles tax rate, though the IRS has not yet determined what constitutes a non-fungible token (NFT). Keep in mind that the cryptocurrencies used to purchase the NFT may also be subject to taxation if their value has increased since you purchased them, so you should consult with a tax professional before adding NFTs to your investment portfolio.
For the rest of us, we should treat NFTs as we would any other type of investment: do your research, understand the risks (which include the possibility of losing all of your investment dollars), and, if we do decide to invest, proceed with an appropriate level of caution.

Jacob Murphy
Jacob Murphy

Jake is a writer and marketing associate for AllCode with a wealth of experience in a variety of industries.

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