What are NFTs? A Complete guide

The entire world has been taken by storm as far as NFTs are concerned. Understanding these Non-Fungible Tokens is an essential aspect to grasp where this sudden interest is coming from. Digital and tokenized artwork is gaining momentum, but how long will this hype last?

Table of contents

  • The Idea Behind NFTs
  • How Do NFTs Work?
  • But I Can Copy It?!
  • Who Owns The Copyright?
  • How Much Are NFTs Really Worth?
  • Will The Bubble Pop Soon?
  • These Are Not Cryptocurrencies
  • Closing Thoughts

The Idea Behind NFTs

Depending on where one reads or hears the term first, NFTs can mean a variety of things. The most common description is how NFTs – or Non-Fungible Tokens – represent a unique piece of information on the blockchain. That piece of data can be an artwork but may equally apply to in-game items, music, and so forth. There is no limit as to what can be tokenized on public blockchains and sold to anyone else. 

Many people feel that NFTs are the digitized and modernized version of collectibles. Whether it is a painting, trading card, or virtual avatar, there will always be collectors looking to expand their collection. What makes the NFT option so interesting is how users can retain complete control over the asset they acquired. Moreover, they have the option to trade or sell it to anyone else, creating an unprecedented layer of empowerment.

This makes NFTs very different from fungible assets, such as cash. You can exchange a cash bill for a different bill with the same denomination in the same currency. That makes money fungible, whereas NFTs are designed to behave oppositely. They are non-fungible and can’t be interchanged with something else directly. Every Non-Fungible Token has unique properties and characteristics that set it apart from the rest. 

As this new type of one-of-a-kind asset emerges, there is a direct response to this latest trend. Collectors and investors alike show an interest in this market, yet no one knows whether the momentum is sustainable. Considering how most people approach this space as investing in rare collectibles for the future, the liquidity of NFTs will prove essential. That also means there will need to be a future cross-chain solution to support NFTs across multiple blockchains, something that isn’t possible yet today. 

How Do NFTs Work?

Under the hood, Non-Fungible Tokens are rather intricate. One does not simply tokenize an existing painting on the blockchain and claim it is unique. Additionally, it is crucial to remember that digital artworks can – on the surface – be duplicated endlessly. In reality, however, the situation is a bit different. There is a reason why the majority of NFTs pertain to artwork that was created digitally in the first place rather than relate to physical items.

That said, it is possible to create a digital certificate on the blockchain to claim sole ownership of a physical item. Unlike traditional documentation, no one can alter information on the blockchain in any way. Once it is recorded, it serves as proof of ownership. Holders of this certificate can transfer that ownership should they desire to do so, however. 

What makes the concept of Non-Fungible Tokens interesting is its versatility. For example, if an artist creates a unique piece, they can tokenize it on the blockchain through a smart contract. In that contract, they can add a stipulation to receive a cut of every future transfer of ownership, creating “royalties” of sorts. 

But I Can Copy It?!

That is the comment people seem to throw around a lot when it comes to NFTs. Digital art can, by default, be copied or screenshotted and claimed as one’s own. Nothing will prevent this from happening, not even blockchain technology or cryptocurrencies. However, it is always straightforward to distinguish between a copy and the original. Only one of these will grant a user true ownership of it, whereas the others are literally worthless copies and imitations. 

Every NFT that sells grants the buyer a digital token confirming the ownership of the original work. It is this token – and not necessarily the art itself – that holds speculative value to many people. Whether this token should represent such a high value is a different matter altogether. Paying millions of dollars for NFTs will always remain silly, regardless of which art piece or other creation is attached to it.

To the untrained eye, it appears as if the owner of an NFT would also own the copyright to the art. Sadly, that is not the case, as ownership of an NFT and holding the copyright claim to it is very different from another. Solving the copyright aspect of Non-Fungible Tokens will be a tall order.

How Much Are NFTs Really Worth?

That will be a tough question for some time to come. Like traditional art, there is always a particular value most people are willing to pay, and the extra mile some others will go. There is no fixed value for any creative work, although NFTs should not necessarily sell for thousands of dollars, let alone even more. 

As anyone in the world can tokenize their work on the blockchain, it seems plausible that prices will come down in the coming months. Anticipated pieces and rare drops will always be popular, as will collectibles. Whether that will see more sales worth over $60 million per piece remains unclear, yet it seems the Beeple auction was a one-off deal. 

That said, there is a long history of NFTs selling for seemingly ludicrous amounts, even before this auction drew any attention. The Nyan Cat GIF sold for over $500,000 and musician Grimes sold digital art for over $6 million. Additionally, many people forget NFTs created years ago. They sold for a few bucks in those days but would undoubtedly attract a lot more money today. Non-Fungible Tokens are not a new concept, yet only seem to gain mainstream attention today. 

Will The Bubble Pop Soon?

To this date, it remains unclear if NFTs are a bubble and, if so, whether the momentum will come to an end soon. Just because Non-Fungible Tokens are popular today does not mean they will remain so for years to come. However, it doesn’t mean this is just a fad that will disappear either. To those who are unfamiliar with the concept and the use of blockchain technology, everything in this industry seems like a bubble waiting to pop. Many people assumed Bitcoin was a bubble, yet it proves people wrong time and time again. 

Even with so much money flowing into this industry out of the blue, there doesn’t have to be a bubble by default. It is certainly possible that NFTs will reach peak hype, and the bubble will explode violently. Then again, this may only be a sign of what is yet to come for the industry. No one can predict the future, and Non-Fungible Tokens may stick around for decades, if not centuries. New technologies often struggle to remain relevant for long, yet every so often, something will stick. 

These Are Not Cryptocurrencies

Contrary to what most people may think, there is a crucial difference between NFTs and cryptocurrencies.  Unlike crypto-assets like Bitcoin and Ethereum, NFTs are not fungible and cannot be interchanged to have the same value. Moreover, you cannot exchange them on trading platforms or anything along those lines. Although owners can sell the NFT if they want to, it is not as straightforward as one may think.

This raises a few questions regarding the monetary value of NFTs and cryptocurrencies alike. As money keeps pouring into both of these segments at an accelerating rate, many people will see both of them bubbles waiting to pop. Whether that will happen or not is a different matter, but the public perception will undoubtedly shift around quite a bit.

Closing Thoughts

It is evident there is a lot of confusion and uncertainty regarding the NFTs space today. Addressing those aspects and creating a viable framework to make this industry more appealing to the masses will take months, if not years. For a niche and novel industry, providing clarity needs to be a top priority, yet it remains to be seen if and when that will be provided exactly. 

If the NFTs space is to be taken seriously, there will need to be a bit more professionalism. Achieving that goal in a decentralized environment will not come easy, as there is no central figurehead or authority to take care of this aspect. The coming months will prove crucial for this industry, yet the outcome remains uncertain. 

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