What are NFTs? NFTs Explained for Beginners
In 2021, the NFT space has taken off in a way many never saw coming, bridging a gap between cryptocurrency and culture. But what is an NFT, and why do NFTs matter?
Now that you’ve used our beginner guide to create your crypto wallet and load it with Ethereum to buy NFTs, it’s time to talk about why NFTs are valuable forms of digital assets, what you can do with your NFTs, and what the future may hold for the NFTs you collect.
What is an NFT?
A non-fungible token (NFT) is a unique token that stores information on the blockchain, often representing real-world objects, like art, music, or videos. What is a blockchain, you may be wondering? IBM defines a blockchain as “a shared, immutable ledger for recording transactions, tracking assets and building trust.” Virtually anything of value can be tracked on the blockchain — including the tokenization of digital items.
A majority of NFTs are on the Ethereum blockchain. Ethereum is a cryptocurrency like Dogecoin and Bitcoin, but with the capabilities to also support NFTs, which use a different token standards (ERC-721) than coins. Because of the immutable ledger of transactions, the ownership of a particular NFT can be certified, tracked and authenticated on the blockchain — including the history who sold it to who and when.
What makes an NFT non-fungible?
The “non-fungible” part of NFT means that it is unique, and cannot be replaced with something else. Something fungible, for example, would be a Dogecoin — one coin is the same as another. Something non-fungible is like a sports card. You can’t trade a Michael Jordan rookie card for a Pokemon card — each of these have unique characteristics.
Because of the data stored on the blockchain with the NFT — such as unique traits or serial numbers, each is different than the next. This is what makes each NFT non-fungible.
NFTs can be digital art, music, access to social clubs, paintings, in-game items, avatars, tickets, or many other digital forms. But what they all have in common is that they are provably unique and authentic from the creator. Their history lives publicly on the blockchain, which you can always view a record of.
Can’t I just Right-Click-Save an NFT?
Many NFTs come in the format of .pngk, .jpg, or .mp4 files, which is why you see many confused about people paying thousands of dollars in Ethereum for them.
Of course, you can “right-click-save” the file to look at it, make it your profile picture, or share it. But this saved version of the image does not represent digital ownership of the token, which is authenticated via the blockchain’s ledger.
You can’t sell this saved image on NFT marketplaces, can’t use any utility of it (such as in-person events or airdrops of other NFT art), can’t be a part of the community forming around these assets, and do not own the commercial rights for it (if applicable). More on the utility of NFTs later in this article.
Anyone can buy a print of a Picasso, or take a photo of a Picasso painting at a museum, and these can be reproduced infinitely. But there’s only a finite amount of originals to go around which are verified as true Picasso works, and each is owned by a single entity. This concept is the same with NFTs, where the public ledger shows the original creator of the NFT.
Common Types of NFTs
As NFTs have emerged in 2021, thousands of new NFT projects — or Web3 start-ups — are being built every day. These are only the early days, but most of the projects released to this point can be categorized in a few ways. Here are some of the most popular types of NFT projects right now.
Profile Pictures (PFPs)
Profile picture projects are usually unique art of animals, creatures, or mythical beings, which have many traits (clothes, hats, eyes, etc.) that are randomized by a smart contract to generate thousands of possible outputs that are all unique. The NFT, meant to be used as a profile picture on social media, may have common attributes or it may be one with much rarer attributes.
PFPs are considered generative art, where each layer of the generative art is created by an artist (or artists), then layered in the minting process by a smart contract (or code) to create a unique NFT. Ultimately, whether the NFT is common or rare is based on the traits the computer assigns the NFT when it’s created.
PFP projects normally cost anywhere from free to .15 Ethereum plus gas fees to mint in the primary sale. People look to mint them because buyers wants to mint a rare combination, which can fetch premium prices on the after-market, like a gold Bored Ape (only 15 will ever exist). Once the mint has sold out (i.e. Bored Apes sold 10,000), all sales will only be through the secondary market.
What is the Value of a Profile Picture NFT?
People use profile pictures as their online identities on social media platforms like Twitter or Discord. By having a “premium” PFP NFT like a CryptoPunk or a Bored Ape, it is a “digital flex,” not unlike wearing designer clothing brands in real life — it’s ownership of a provably scarce digital asset, and an original piece of a brand that has permeated popular culture in 2021.
These assets can also provide significant social upside to holders as part of an elite social club. For example, a CryptoPunk can represent the early adoption of cryptocurrency and the ethos of decentralization. A Cool Cat can represent that a fun, loving, and welcoming attitude, and also signal that kind of community you’re interested in fostering.
Traditional and graphic artists entering the NFT space rely on 1-of-1 art pieces, which the artist can release on several NFT marketplaces. These works can consist of paintings (digital or physical), cartoons, 3D animations, landscapes, videos, or other pieces of digital art.
Artists like Beeple have drawn headlines selling his NFT art for millions. Collections like Ghxsts by Gxng Yxng have created new business models by using the 1-of-1 art pieces as the key to unlock free airdrops of other art from the artist.
When artists create and sell these pieces, they directly receive the funds for the sale, but they also set the royalties for all future sales of the item. If an artist sets a 20 percent royalty on their work, and the piece sells on the secondary market for 10 Ethereum, the artist will receive 2 Ethereum as their royalty for that sale, in perpetuity.
Algorithmically Generated Art
Algorithmically generated art is art that’s created solely by code which outputs a unique work. Artists set up a certain code, and through the minting process, the art is generated via that executed code and delivered to the collector as a unique piece.
Unlike profile pictures where each trait is drawn then layered on top of one another, this art is created entirely by the smart contract’s executed code.
Art Blocks is the most popular NFT generative art series, made up from many different artists across several collections, but many more generative art projects have made waves in 2021.
Some NFTs are treated as collectibles, although on the Ethereum blockchain, there aren’t many collectibles due to higher gas fees than alternative chains, such as Flow or Palm.
One example of digital collectible NFTs is NBA Top Shot, digital basketball highlights which can be collected on the Flow blockchain. There’s also Veve, which are comic books and other collectibles from Marvel, Disney, and many more collectibles.
Often, these digital collectibles are ways for traditional companies to connect with their audience via NFTs.
Digital Real Estate
As the metaverse becomes a reality, many collectors are buying virtual real estate on platforms like The Sandbox, Decentraland, Axie Infinity, Somnium Space, and more. Like other NFTs, each land plot is tied to the blockchain and is unique, just like a piece of land in the real world.
Collectors are looking to develop their own space to call home in the metaverse, monetize their land, rent it out, build on it for others looking for a metaverse home, or eventually sell it as more enter the metaverse.
Most of these initial land transactions don’t take place on the Ethereum blockchain, and instead are in the platform’s currency of choice — $SAND in Sandbox, $MANA in Decentraland, and so on. However, you can buy some of these metaverse lands on OpenSea in Ethereum.
Have you ever worked for days in a video game to earn a certain in-game collectible, weapon or achievement? Imagine being able to take that item around with you into other games or universes, or being able to sell it after earning it. NFTs in gaming have endless possibilities.
Axie Infinity is just one example of a game where the in-game characters are NFTs. Electronic Arts (EA) themselves have said that NFTs and play-to-earn are the future of the industry, and gaming giant Ubisoft mentioned that NFTs will be a revolution in the gaming industry. Epic Games, the founders of Fortnite, raised $1 billion earlier in 2021 to build their platform to “support creators in gaming and across the digital entertainment industry.”
Though many of these games are not on the Ethereum blockchain, there are many that have already made a name for themselves, such as Gods Unchained, DeFi Kingdoms, Battle of Guardians, Voxies and more.
With so many big players in gaming entering the NFT space, it’s quite clear where we’re heading.
Why do NFTs Matter?
The concept of decentralization is key to why NFTs matter. One example: when you use a bank or PayPal to make a transaction, they act as a trusted third party. The blockchain allows trustless smart contracts to be used for transactions, without any third-party needed.
The magic of Web 3.0 allows us to build, transact and collaborate without complete reliance on the giant third-party companies. Web 3.0 is the “next iteration” of the internet, built on concepts of openness, decentralization, and more utility for all. It also allows for shared ownership stake of platforms, where you can get in on the ground floor of a start-up company or brand.
Another benefit to digital NFT artists is that they can establish royalties, in perpetuity, whenever their creation is sold to somebody else, which is an opportunity for artists to reclaim ownership of their work. Both NFT creators and collectors benefit from the transparency and openness of the blockchain.
What is the Utility for NFTs?
Besides the NFTs already described, there are many other types of utility for NFTs, some which haven’t even been discovered yet.
DeFi and NFTs
You can use your NFTs as collateral for an Ethereum loan with services like NFTfi. That’s right — instead of selling your valuable NFTs, you can put them to work. And if someone defaults on the loan, the smart contract automatically takes care of it.
There are also services like Fractional, which allow for partial ownership of valuable NFTs. In the future, we may see items like titles or mortgages to homes become NFTs.
Events and Ticketing
NFTs can act as passes to events, including access to backstage events, digital collectibles, and more. The smart contract automatically distributes fees to the artist, DJ, lighting crew, and more, so the fees on your end are reduced substantially.
This concept was put into action by entrepreneur Gary Vaynerchuk, whose popular Veefriends NFT acts as a conference ticket to VeeCon for three years. This idea of private events for NFT holders has also been used at NFT NYC 2021 and Miami Art Basel 2021, where the NFT acts as an access pass for an exclusive event only for NFT holders.
Another example of this is the Bored Ape Yacht Club’s Ape Fest, which included a private yacht party and a private performance from Beck, The Strokes, and Lil Baby at Brooklyn Steel.
Many people plan to use digital worlds like The Sandbox, Decentraland, and digital galleries to showcase their NFT collections. People can come see your virtual art gallery and buy your NFTs right there in the digital world.
Music as NFTs
There are already many artists exploring and releasing NFT albums, as well as platforms like RCRDSHP which sell songs as NFTs and interact closely with artists. Other innovative ideas are artists sharing royalties of their albums via NFTs. When their songs stream, or are licensed, the label is cut out; instead, the fans who are invested in that artist share portions of that revenue.
Smart contracts make it easy to cut out expensive and cumbersome third parties, allowing artists to connect and collaborate more directly with their fanbase.
NFTs can be used for securing confidentiality and ownership of health records, as well as tracking the supply chain of medications. It’s possible that NFTs could be the more comprehensive patient identity management system the world has seen.
Digital properties and websites can sell NFTs which give rights to certain media placements. Additionally, brands are using their own projects or collaboration with existing projects to bring visibility to their existing brand.
For example, Stella Artois — owned by Anheuser-Busch — collaborated with the NFT horse racing game ZED RUN to bring custom Stella-branded horses and skins to ZED RUN.
Many NFTs have already tapped into the fantasy sports community, including NFT Red Zone, Sorare Fantasy Soccer, and Knights of Degen. MomentRanks Play has been extraordinarily popular, using NBA Top Shot Moments and Dapper Balance as prizes to the best fantasy teams. The team behind Own The Moment created Tournament of Champions, a fantasy football game that uses NFTs as pieces of your lineup.
Fantasy sports is a big business (see: DraftKings market valuation of almost $25 billion), and NFTs are a perfect way to add more utility to the industry.
What is an NFT? Connecting Culture and Crypto
An NFT is more than just a jpeg file that you right-click and save to your computer. It is a provably unique token that benefits collectors and creators alike, by giving communities a stake in the creators and brands they love.
They have use cases across a multitude of categories, from gaming, to business, to real estate, healthcare and more. NFTs are also a key part of Web 3.0, which embraces decentralization and openness.
MomentRanks can show the value of your entire Ethereum NFT collection for free, which will help you keep track of your collection.
This series of beginner NFT articles will continue next week, as we continue on learning about NFTs by explaining how to choose your first NFT and what to look for in an NFT project.