What are NFTs, and How Do They Work?
NFT written on dice
You’ve likely heard people throw around the term NFTs nonchalantly recently. Or perhaps you’ve come across the word while surfing the internet. Chances are you’ve probably come across it recently, provided you haven’t been living under a rock. NFTs are the latest phenomenon taking over the world by storm.
A quick search online will leave you confused. What do NFTs mean? It seems like they have something to do with images, audio, or videos in digital form. Well, the good news is you’re almost there, sort of anyway.
What Are NFTs?
NFTs are an abbreviation for non-fungible tokens. Of course, that doesn’t provide much context or clear your confusion. Basically, non-fungible refers to something unique and irreplaceable. Let’s use Bitcoin as an example to illustrate. Bitcoins are fungible because you can trade one Bitcoin for another without noticing any difference. That’s because each Bitcoin is standardized and exactly the same. Each Bitcoin holds the same value as any other Bitcoin worldwide.
That’s not the case for NFTs because each piece is unique, whether it’s a trading card, image, video, music file, or something entirely different. In short, NFTs are digital assets people own.
Naturally, this raises the question: why purchase digital collections instead of buying a physical version of them? The answer is straightforward. Each NFT contains distinguishing information that separates it from other NFTs. In addition, this data also makes it verifiable, meaning if you wanted to sell your NFT to someone, they could cross-check the data to assess its authenticity.
To better understand NFTs, let’s compare NFTs to a limited edition watch. Let’s assume Patek Phillipe announces the production of a new watch. The only catch is they’ll make 250 units. Naturally, each watch will have an engraving within the dial or on the back, signifying the unit number. NFTs contain similar information digitally stored within them for verification and authentication. As a result, each NFT is unique and distinct. However, more importantly, it means that forgery isn’t possible with NFTs.
NFT
How Do NFTs Work?
Generally, most NFTs utilize the Ethereum blockchain. While other blockchains can also have NFT collections like Solana, Ethereum remains the most popular. NFTs use the blockchain to store extra information about their uniqueness.
You can buy and sell NFTs on various online exchanges. People can often bid or buy NFTs outright. Currently, you can purchase NFTs with cryptocurrency, most often Ethereum, since most NFTs are on Ethereum’s blockchain technology.
NFT illustration
Key Characteristics of NFTs
Here are some key characteristics of NFTs. They include:
Indivisible
You can’t divide NFTs into smaller denominations. While that might be the case for cryptocurrencies like Bitcoin, Ethereum, and others, the same principle doesn’t apply to NFTs. NFTs are non-divisible, meaning you have to own each unit completely.
Indestructible
NFTs utilize blockchain networks to store data. Therefore, you can forget about destroying or removing any NFTs from existence. Most NFTs use smart contracts, and as a result, their information is stored on the blockchain eternally. In addition, you’ll also want to note that NFT ownership is immutable, meaning the buyer possesses and owns all rights for the NFTs. That means companies and creators lose control and ownership of an NFT once they sell them. Immutability is something distinct to NFTs because when you purchase music from iTunes, you’re not buying the music itself. Instead, you’re purchasing the right to listen to it.
Verifiable
Verifiability is one of the primary benefits of NFTs. You can trace each NFT to the original creator since their information is stored on the blockchain. As a result, buyers and sellers can authenticate NFTs without third-party assistance.
Non-Interoperable
You’ll often see NFTs sold for trading-card games. You’ll want to note that each NFT is non-interoperable. To illustrate, let’s assume you buy Pokémon NFTs. You can’t use Pokémon NFTs in a different trading card game.
Why Are NFTs Important and What Value Do They Hold?
Given that NFTs are taking the world by storm, you might be wondering why they’ve become so popular. Likewise, you’re also probably questioning their importance and if they hold any value. Research shows people have spent over $16 billion on NFTs since 2017. This number is likely to grow as the NFT craze continues.
For starters, NFTs have significance because they enable people to own a digital collectible that’s unique and distinct. However, more importantly, it allows artists, creators, and organizations to profit from their artistic ventures. Artists can sell their artwork digitally to a global audience. Likewise, musicians, authors, and other creators can do the same. Selling their artistic product online enables creators to cut out middle-men like galleries, art houses, publishing houses, record labels, and more. In exchange, it enables them to keep a larger chunk of profits. In addition, they also keep the creative rights to their artistic product, including copyrights. That’s why you’ll find many creatives championing NFTs because it enables them to retain ownership of their work.
So, this leads us to the question: what value do NFTs hold? The answer is that NFTs hold as much value as the market dictates. Like most other assets, the forces of supply and demand govern the price for NFTs. Given that NFTs are scarce and buyers are aplenty, it makes sense for NFTs to become more valuable. Buyers are prepared to pay extravagant sums for valuable NFTs, evidenced by some of the NFTs sold. For example, the most expensive NFT ever sold was The Merge by Pak. According to statistics, almost 30,000 collectors purchased the NFT for $91.8 million by pooling their resources.
Ethereum emblem
Join the NFT Bandwagon Today with Crystal Ball Markets
Given that most NFTs today use the Ethereum blockchain, you’ll need to purchase Ethereum or Solana to buy NFTs. However, you’ll also find some other NFTs on different blockchains. Regardless, you’ll need cryptocurrency to purchase NFTs in most instances.
Crystal Ball Markets is a cryptocurrency trading platform. If you’re looking to start trading cryptocurrencies, you’ll need an online trading platform. You’re unlikely to find a better online crypto broker than Crystal Ball Markets. Visit our website today for more information. Alternatively, you can register with us today to get started.