Non-Fungible Tokens 101: Understanding NFTs

Anyone who has been following the news in the crypto niche will know that non-fungible tokens (NFTs) are skyrocketing in popularity. While the NFT scene is still in its infancy, the hype around it is intense.

It has its fans who love the technology behind it… and its skeptics who think that the entire ‘NFT trend’ is unsustainable and a bubble that’s about to burst. Whichever camp you’re in, there’s no denying that millions of dollars are changing hands in the NFT scene.

The average person who’s not into cryptocurrency will struggle to make sense of these non-fungible tokens. This article will break down what non-fungible tokens are so that you’ll understand the concept behind the craze.

What are NFTs?

For starters, they’re digital assets. You cannot hold or touch an NFT. Examples of NFTs are:

  • Digital artwork
  • Domain names
  • Digital collectibles
  • Songs GIFs
  • Essays
  • Games
  • Tweets

Basically, any type of digital asset that’s deemed to have value can be sold as an NFT.

presentation of an example of non-fungible tokens on a canvas

How does an NFT have value?

This is where most people struggle to understand the concept of NFTs. Unlike physical products in the real world which have value because they can be used, NFTs have value because people deem them to have value.

This is very similar to rare paintings. The Mona Lisa is currently worth around 870 million dollars.

But the truth of the matter is that the only reason it has value is that people believe it does. Similarly, an NFT can only have value if people give it any.

If society didn’t give two hoots about the Mona Lisa, it’d be no different from palm paintings done by a kid in kindergarten… or a painting by some budding, unknown artist.

There’s a reason why so many artists are struggling. No one values their art yet. Because of that, they can’t command a decent price in the marketplace.

In a similar vein, an NFT has value because others think it does. There are countless NFTs created by people who are never sold.

Imputing a value on an NFT you’ve created does NOT necessarily mean that others will agree that it has value.

You may be wondering, “But how does one decide if an NFT has value or not?”

This brings us to the next point…

Cryptocurrency coins next to smartphone sowing the crypto market price movements

What makes an NFT valuable?

Scarcity. That’s what drives up the value of an NFT. The Mona Lisa is worth millions because there’s only ONE of its kind in the entire world. Leonardo da Vinci is not around to paint anymore.

That’s what ‘non-fungible’ means. It’s irreplaceable… like rare art.

Bitcoin is fungible because every unit of it is like every other unit. The same applies to cash. 1 US dollar is no different from another US dollar. They all have the same amount of value and are interchangeable.

NFTs, however, are unique and scarce. You can’t just exchange one NFT with another… and even if you do find someone to do a trade with, assuming that both NFTs have the same value, the digital art you end up getting will be different from the one you traded in.

The reason people invest in NFTs is because of the scarcity and the ‘collectible’ nature of the asset. It’s almost like collecting rare stamps, baseball cards, the first issue of Superman, etc.

The difference now is that these NFTs are digital assets, unlike baseball cards – and there’s only one of a kind of each asset. What’s interesting here is that a digital image of a baseball card can still be sold as an NFT if others believe it has value.

The possibilities are mind-boggling… and most laymen tend to shake their heads at the madness of it all.

A lot of cryptocurrency stickers on a table

How does the buying and selling process work?

This is a huge topic all on its own. But let’s simplify things.

NFTs are NOT cryptocurrency… BUT you’ll need to buy them with cryptocurrency, which means you’ll need a digital wallet and crypto to purchase an NFT.

Since NFTs are stored on the Ethereum blockchain, most NFTs can only be bought with Ethereum. So it’s best to have this crypto in your wallet.

Next, you’ll need to visit a popular marketplace like OpenSea, Axie Marketplace, Raible, etc. open an account there, connect your wallet and do the necessary steps… and you’ll be able to buy your very own NFT.

A record of your transaction will be stored on a public ledger which shows who sold the NFT, who owns it now and when it was sold. This is a digital certificate of authenticity and the transparency ensures that everything is above board.

Since everyone can see the details, the group verifies the legitimacy of the transaction, and no middlemen are required to keep private records.

It’s because of this level of authenticity that you cannot take a screenshot of an NFT (if it’s digital art) or create a replica of it and try to pass it off as the original.

Just like how you can’t sell a photo of a Mona Lisa and call it the real thing, you can’t replicate an NFT and give it value. It doesn’t work that way.

And for the ingenious ones reading and wondering, the answer is no… right-clicking and saving an NFT as an image doesn’t work either. The technology powering the whole ‘NFT system’ doesn’t allow for duplication.

Can I profit with NFTs?

While there’s absolutely no denying that millions can be made buying and selling NFTs, you must take into account 2 important points…

For an NFT to have value, it needs to be considered SCARCE and SIGNIFICANT.

One popular example would be Jack Dorsey’s first tweet which was sold as an NFT for 2.9 million dollars. Another example would be the NBA Top Shots NFTs.

The reason these NFTs command such staggering prices is that they’re scarce and people think that Jack Dorsey is important because he was the CEO of Twitter. The NBA is very popular too.

NFTs related to them will be deemed to have value. Since there can only be one first tweet from Jack, it’s highly valuable.

So while anyone can create their own NFTs (which is surprisingly easy), that doesn’t mean you’ll be able to profit from it.

Man smiling holding lot of crypto coins in his hands

Conclusion

Where NFTs are headed is anyone’s guess. While the technology behind it is awesome (even if it impacts the environment adversely)… the fate of NFTs remains to be seen.

You can make money with it, but you’ll need to have a strong grasp of the fundamentals and know-how to leverage the opportunities presented by these digital assets.

If you’re interested in NFTs, spend at least 2 to 3 weeks studying how it all works and do your research well before buying any tokens. Don’t go into debt just to buy supposedly ‘rare’ digital art that you believe may appreciate in value in the future.

The same advice applies if you’re planning to create and sell your own non-fungible tokens. You must understand the laws of supply and demand which still apply in the NFT marketplace. Knowledge is power here.

Do your homework and proceed cautiously.

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