What is NFT? How Does Non-Fungible Token Work?

What is nft? How does it work?

“NFT sector propelled to move around $800 billion by 2024: Coingecko”

“Teen becomes multimillionaire in 1 year by selling NFT art”

We’ve all read tons of such headlines in the past few months. There's so much about blockchain, crypto and metaverse buzzing in the world around us. If we want to survive the competition of tomorrow, we need to keep up with the changes of today. 

The recent hype is about non-fungible tokens. They caught the eyes of the people for fetching millions and billions of dollars. Every day some artist, a company or a brand is announcing the launch of their NFTs.

So, what is NFT (Non-Fungible Token)? Why are people paying for them? And How can you buy or sell one? If you are pondering upon such questions, keep reading. This article will find answers to many such questions about understanding NFTs. Let’s start.

What is Meant by Non-Fungible?

Before I begin with what these tokens are all about, let's begin with the name. So, fungible also means exchangeable. All our assets can be divided into two categories i.e fungible and non-fungible. 

To simplify, let's take an example of a 100 rupee note or a bitcoin. You can exchange a note for another note, and no one’s gonna give it a different value. Similarly, a bitcoin will always be equal to another bitcoin. 

Now, what if you want to exchange the Mona Lisa painting like you exchanged the note? Not possible because there is just one original. You can trade it for money, but money is a completely different object.

So, Mona Lisa is sole and unique and, therefore, a non-fungible asset. Non-fungible is nothing but an irreplaceable or rare asset. You can not find an exact replacement for it. They have their very own unique and different properties.

So What is a Non-Fungible Token (NFT)?

Non-Fungible token

Now that we understand what’s non-fungible, let’s explore these unique tokens. NFTs are the tokens that represent the ownership of unique items. They can represent real-world objects like audio, art, video, a property, ticket, essays and also digital objects. 

Most of the NFTs are a part of the Ethereum blockchain and Ethereum is a cryptocurrency just like bitcoin. To sum up, an NFT is a digital token secured by blockchain technology that represents the real world or digital assets.

Today one of the most trending NFTs are the video clips by the national basketball association (NBA). They have created a platform called “NBA top shot” where basketball fans can buy, sell and trade video clips of iconic NBA moments.

The infamous moment of LeBron James scoring against the Houston Rockets was sold for a whopping 387,600 dollars. These video clips are tokenized in the form of a digital card and sold to the fans who collect them.

Another example is set by the “Bored Ape Yacht club”. They have created 10,000 NFTs which are unique digital collectibles. It is the largest NFT avatar by market capitalization. You can also check out the NFTs launched by brands like Nike and Coca-cola.

There are tons of other great and successful artists like CryptoPunk, cool cats, Meebits, crytokitties, etc.

There is another infamous NFT sold at “Christie's”. Christie’s is the world’s leading auction house, founded in 1766. Here, a digital art NFT by Mike Winkelmann ( or Beeple) was sold for the historic amount of 69 million dollars.

The current world of NFTs has various digital artworks, sports cards, real estate, in-game items and digital collectibles. They help in removing intermediaries so artists can directly connect with their customers or their fans. 

Each NFT has a unique identity code and metadata which makes it different from other tokens. Metadata is a set of data that describes and gives information about the other data. Can't catch up with what I said? It's okay because you'll understand it as I explain the blockchain.    

Tech Behind NFT – The Blockchain

Blockchain

Let’s delve a little deeper into blockchain tech and how it supports NFTs. By definition, a blockchain is “a system in which a record of transactions made in cryptocurrencies are maintained across several computers which are linked in a peer-to-peer network.” 

The transactions made on a blockchain are ultra-transparent. This is because they are made with distributed ledger technology (DLT).

It allows simultaneous access, validation and record updating of transactions. With DLT, all the transactions are maintained and verified by miners who are linked together.  

A blockchain is a chain of multiple blocks. Each block contains data of ownership, hash and hash of the previous block. As every block carries information out of the previous block, it is very difficult to manipulate or change any information within it.

If you want to make changes in a block of the chain, you’ll have to alter all the earlier blocks in the chain as well as the ones that come after.

With blockchain technology comes the ability to verify the history, authenticity and ownership of the digital assets. The same is what makes NFTs secure and give digital bragging rights to their owners.

Can't We just Copy or Screenshot an NFT?

screenshot

Copying an NFT or simply taking a screenshot is way simpler than buying it for millions. Yes, you can surely do that. In fact, many people think the same and also do it, but there’s a twist. By clicking a picture of the Eiffel tower, you can’t own it. Similarly, a screenshot will not give you the ownership of an NFT.

When you buy an NFT, the buyer is given the token of ownership which adds to its value. And that is why just a copy or a screenshot won’t work here

Why is it Fetching Millions of Dollars?

dollar bill with NFT

It surely isn't the case that NFTs did not exist before the 2021 boom in the NFT space. So why are they popping out so late? One of the couple hundreds of reasons is the pandemic. During the pandemic, we learnt to showcase our actual presence but in a virtual manner.

This tendency inclined us towards digitisation. Coming from a finance perspective, people were looking for a decentralized form of currency or exchange and of course, crypto was a perfect fit. As the crypto world caught a trend, NFTs grabbed attention in the form of digital assets.

We heard of news like a jpeg being sold at the Christie’s auction house for a mind-boggling price of 69 million dollars. Also, many huge brands like Nike, Coca Cola, Disney, etc., were entering the space. This turned a lot of heads towards NFTs as a multi-bagger investment opportunity.

The real value of these NFTs lies in their attributes like their authenticity, finite supply, Immutability, transferability, etc.

  • Every attribute of the NFT is one of its kind and can not be duped as it is concrete on the blockchain.
  • There is a finite supply of NFTs, like only 10k of BAYC apes, which can be minted, which makes it rare.
  • The code and metadata of the NFT can’t be modified, lending it permanence.
  •  It may be resold to almost anybody around the globe, which means it has a broader pool of potential consumers.

How Can You Buy or Sell an NFT?

buy and sell NFT using cryptocurrency

Now the question that stands ahead is how to buy or sell the NFTs? To transact NFTs, the first requirement is a crypto wallet. Once you have a wallet, you need a currency in it. No brainer, you need to add Ethereum (ETH) or Solana (SOL) to the wallet as most of the digital transactions go through these blockchains.

After being ready with the basic needs you must choose an appropriate marketplace to transact an NFT. There are various platforms to trade NFTs out of which Opensea, Rarible, Foundation, and Solart are the ones that are widely preferred.

You can choose one by comparing the platform's needs, costs, and commissions.

Now simply register yourself on the platform and connect the wallet with it. You will be able to see a vast variety of images, cards, audio, videos and other things that you can buy. Simply bid on the piece you like or think that it might double up, and it can be yours.

But for selling NFTs, there are two ways to go about it. One way is that you own an NFT. Alternatively, the person selling an NFT can mint it. One can mint NFTs through sites such as OpenSea, SolSea, etc. After minting the NFT, one can list it on any of the above buying sites for sale.

Read also: How to Buy Cryptocurrency in India

Conclusion

It is still uncertain if this NFT hype is a bubble that’ll pop down or will they be a part of our future?

Nevertheless, they are making loads of money in the present and are making it easier for artists to sell their work. At least, these artists would definitely want NFTs to always be there.

So, after this article, I hope you got your answer to “what is a non-fungible token”. You have to look for many other parts before you get into actually trading or minting these. Therefore, read, explore, research, and be careful of any fraudulent transactions.

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