What are NFTs and how do they work?

NFT means Non-Fungible Token.

If we can interchange two identical things or things of a similar kind, then the thing is said to be fungible. You can interchange one $10 note for another. A $10 note is fungible, Bitcoin is fungible.

An NFT is non-fungible. You cannot interchange one NFT for another. Every NFT is unique of some kind. NFT is a kind of digital art. An NFT can be an image, audio, video, or GIF. NFT can even represent a physical thing. NFT gives you proof of ownership of a digital item.

What is a token? A token or a cryptocurrency token is a digital asset that resides on the blockchain. The problem with any digital item is that it can be duplicated but the blockchain proves the ownership of that digital item. A blockchain is a time-stamped series of data where data is stored in blocks. Token transactions are stored on the blockchain. As blockchain is transparent, anybody can verify something that is on a blockchain.

Ethereum is the most popular blockchain that is used to create tokens. ERC-20 is the token standard for creating virtual currencies on the Ethereum blockchain. SHIBA, BAT, UNI are some examples of ERC-20 tokens. ERC-721 is the token standard for creating NFTs or digital collectibles. ERC-20 tokens are fungible(interchangeable) whereas ERC-721 tokens are non-fungible.

Is NFT just another JPEG?

A JPEG is an image of an object or it can be designed. NFTs are the tokens on the blockchain which are mapped to some JPEGs. Now, these JPEGs are called NFTs. You can download the image of an NFT and put it anywhere you want but you don't have the token. The token mapped with the JPEG has the value but not the JPEG.

NFTs are stored in cryptocurrency wallets. Metamask is the most popular Ethereum wallet for storing NFTs. Trust wallet is another popular mobile wallet. Metamask wallet is also available as a Chrome extension.

Twitter has just announced Twitter Blue where users can just connect their wallets and use their NFTs as profile pictures. NFT profile pictures are shown in a Hexagon instead of a regular circular PFPs. Users have to subscribe to Twitter Blue for $2.99 per month to avail the feature.

Why do NFTs have value?

Consider a domain name, a domain is unique, cannot be exchangeable for another. People bought and flipped domains in the early dot-com phase. Some people who bought domains thought they could sell it to someone for a higher price who might need it later. Most of them do not want to host a website but just want to sell it for a higher price. Many of us do not need those domains or we don't want to pay anything for them at all. But who thought fb.com would be bought by Facebook for $8.5 million.

The domain privatejet.com sold for $30.18 million which was costlier than a Private Jet. The buyer of the domain might have found some use with it or just speculated that someone would buy it for a much higher price. So the value of something depends on how it can benefit the person who needs it.

How do we value these NFTs? Maybe we don't know that yet. We don't even know whether most of these NFTs survive in the long run just like most of the domains which are just lying unsold. The value lies with what the collector of that NFT can do with it. Maybe we don't yet know how these NFTs are going to be used in the future.

Jack Dorsey's first tweet was sold as an NFT for $2.9 million in an auction. Maybe you should ask the collector, why he paid that price for a digital memory.

just setting up my twttr

— jack⚡️ (@jack) March 21, 2006

A 50-second video by Grimes has sold out for $388,938 as an NFT. A digital artist Mike Winkelmann, aka Beeple, sold out his artwork, The First 5000 Days for a whopping $69 million at an auction at Christie's. The collector of this NFT is known by the name Metakovan. When asked why he bid such a high price for that NFT, he told that the art would be worth $1 billion in the future and would be displayed in a digital museum in the metaverse.

Most Popular NFT Collections

An NFT collection is a group of NFTs made by a single creator or a team of creators representing a single company. Cryptopunks NFTs are the first-ever NFT collection to be created on the Ethereum blockchain. Cryptopunks collection was created in 2017 by Larva labs. There were 10,000 cryptopunks and no two cryptopunks were the same. These 10,000 cryptopunks were given out for free when they were launched and currently a single cryptopunk was trading for 85 ETH($209,210.50).

After 2017, NFT collections gained hype in 2021 and mainstream media focused on trending NFTs. Here are the most traded NFTs as of January 2022.

1. Cryptopunks

Cryptopunks are the most popular and most traded NFT collection. The all-time trading volume of Cryptopunks is about 800,000 ETH. The highest sale price for a cryptopunk NFT is 4,200 ETH which is about $7.58 million at the time of sale. There are many cryptopunks that are sold out for more than a million dollars. Visa, a financial services company has announced that they have added a Cryptopunk to their collection, which they bought for about $150,000 in ETH.

2. Bored Ape Yacht Club

Bored Ape Yacht Club stands at number 2 with an all-time trading volume of 347,000 ETH. The Bored Apes collection was launched in April 2021 by Yuga Labs. Adidas has announced its collaboration with Bored Apes and launched a tease on its social media accounts in December 2021. Many celebrities like Stephen Curry, Jimmy Fallon, Post Malone, Eminem, Snoop Dogg have collected Bored Apes for the collection for thousands of dollars. Bored Apes were launched at a price of 0.08 ETH, but right now the floor price is around 93 ETH.

3. Mutant Ape Yacht Club

Mutant Apes are another collection of Apes from Yuga Labs. Mutant Apes collection has an all-time trade volume of 211,963 ETH.

4. Meebits

Meebits are launched by the Larva labs, the creators of Cryptopunks. The all-time trade volume of Meebits is 82,600 ETH.

5. Cool Cats NFT

Cool Cats are another popular NFT collection launched in 2021. Within a short period of time, they have become popular among NFT collectors. The all-time trade volume of the Cool Cats NFT collection is about 76,882 ETH.

6. Clone X - X Takashi Murakami

Clone X collection was created by RTFKT studios in collaboration with a Japanese artist Takashi Murakami. Clone X was one of the collections created by RTFKT studios. The all-time trading volume of the Clone X collection is 75,000 ETH. Nike has acquired RTFKT studios after the launch of the Clone X collection.

NFT Marketplaces

NFTs are traded on NFT marketplaces. NFT marketplaces are decentralized applications on the Ethereum blockchain which facilitate the buying and selling of NFTs. You do not have to deposit your NFTs into these marketplaces to buy or sell your NFTs. ETH is used to trade NFTs on most of the NFT marketplaces.

Opensea is the most popular NFT marketplace on Ethereum. Opensea recorded a trading volume of $4.1 billion in the month of December 2021. Most people use Opensea because of its friendly interface. Opensea also helps you to create your own NFTs on the platform. Opensea also allows you to buy NFTs with your credit card.

Rarible, Nifty Gateway, Super Rare are some other popular NFT marketplaces.

How to Earn Money Trading NFTs?

To earn money trading NFTs, you have to choose a good NFT collection. It's not that simple though. Here are some things you need to take care of before you buy your first NFT. Some jargon you need to know before you start trading NFTs.

Floor Price - Floor price is the lowest price for which an NFT in a collection is selling. If there are 10 NFTs in a collection, and one is selling for 1 ETH and others are selling for 4 ETH each, then the floor price would be 1 ETH. After the 1 ETH NFT gets sold, the floor price gets changed to 4 ETH.

Rarity - The rarity of an NFT depends on how many unique properties an NFT in a collection has. If only 5 NFTs in a collection of 10,000 have specific traits, then those five are said to be rare. Rarer NFTs are often traded for higher prices than the floor price.

How to choose an NFT collection?

• Çheck whether the art is original. I don't prefer the NFTs that copy the theme of other NFTs
• Ensure you like the art and you are willing to hold the NFT even if the price goes lower
• An active and positive community on Discord and Twitter
• A unique roadmap defining the future of the project
• Active development by project team according to the roadmap
• Collaborations with popular artists, projects, and influencers

NFTs are quite risky because you won't be able to sell when you want to. What I mean is NFTs are not liquid. Unless you find a buyer for your NFT, you cannot sell that.

You should also take care of the gas fees that incur while buying an NFT on Opensea or any marketplace on Ethereum. The gas fee depends on the load on the Ethereum network and the fee can range from $50 to $200 in addition to the price of the NFT. Opensea also collects a 2.5% fee on every NFT trade on its marketplace.

Applications of NFTs

Currently, most of the NFTs are traded based on speculation, and artists or projects are cashing out of the hype the NFT market is currently in. But the NFT applications are far beyond trading and speculating. Here are some applications where NFTs can be used in the future.

Metaverse

Metaverse is a 3D virtual world that can be accessed by virtual reality and augmented reality headsets. If you haven't watched the movie, Ready Player One, go watch it now to imagine what a metaverse looks like. We need a digital avatar to navigate in the metaverse. Our digital avatars can exist as NFTs in the metaverse and give us a unique identity in the metaverse without revealing our personal identity. Every digital item in the metaverse can be an NFT so that it wouldn't be replicated in the metaverse.

Facebook has completely shifted its direction towards building a virtual world and was also renamed, Meta. This move made already existing metaverses like Decentraland and Sandbox more popular.

Nike, Adidas, Walmart, and Walt Disney are exploring opportunities in the metaverse and also want to launch their own metaverses.

Gaming

Gaming is a multi-billion dollar industry. NFTs can be integrated with the in-game items. For example, if you have played Call of Duty, DOTA 2, or PUBG, you would have to buy skins for your characters or weapons. Let's suppose this skin is an NFT and you are able to sell it when you don't need it. And the creators of the game can collect some commission on the sale, both players and creators would be benefitted.

Mainstream gaming companies are yet to integrate NFTs into their games. Axie Infinity is a pokemon based game. Players have their own Axies(in-game NFTs) and are used to battle to earn in-game tokens. Axies are traded on Axie Infinity marketplace. It has a daily trade volume of about $2 million.

These are two industries but there are many use cases of NFTs we can think of. NFTs can be used as tickets for a private event. Flyfish Club is the member-only private dining club where membership is purchased as an NFT. Invoices and Legal documents can also be given as an NFT which proves the ownership of something. 

NFTs for Creators

Creators are less appreciated on social media for their work. Most of the social media platforms make huge bucks while giving out less to the creators. Artists, Creators, Graphic designers can monetize their work by launching their own NFT collection. Give access to their content to those who hold their NFTs and earn royalties every time their NFTs are traded.

Many creators have launched their NFTs on Opensea. You just need to have a good design, marketing team, and community. Suppose you have 10,000 NFTs in your collection and you sold each one of them for 0.05 ETH($123), you would make a million dollars.

Conclusion

Let's end this article on whether NFTs are a bubble. The global luxury market is worth about $4B. Leonardo Davinci's art has sold for $450 million. If NFTs capture some percent of the luxury market or if they are used as status symbols, we are just at the beginning of something new. As we have seen, Cryptopunks and Bored Apes are used as profile pictures on Twitter which can give them instant visibility. The hype may not last long but the real utility is what drives the market.

It is always good to learn and embrace something new instead of missing out and FOMOing later.

Do post your favorite NFT collection in the comments below