What Exactly Is an NFT?
Non-fungible tokens (NFT) are encrypted digital assets, each containing uniquely identifiable metadata and codes. Their data is stored on the blockchain, ensuring it cannot be duplicated or falsified.
Tokens act as representations, such as IOU, both for digital and tangible elements. For example, one can create NFTs that represent digital artwork, virtual real estate in the game, collectable Pokémon cards, or even someone's personal identification information.
The majority of the NFT market currently focuses on acquisitions such as sports cards and digital arts. But there are also other expensive NFTs on the market, such as a token version of the first-ever tweet, created by Twitter CEO Jack Dorsey.
Let's delve into the details about how NFT works, what it's important, and what makes it valuable.
What are NFTs Used For?
The concept of digital representations of material items is not new. But adding blockchain technology makes NFTs important. As part of the blockchain, NFTs can be easily verified and unique, and each one can be traced to the original source.
NFTs revolutionized the gaming, arts and collectibles market. They also can convert real estate, travel and identity management. Millions of dollars have been spent on NFTs over the past few years, and are growing in popularity among both coin collectors and cryptocurrency traders.
NFTs and Gaming
For the first time, immutable ownership and efficient sale of collectible and in-game items became possible. This opens up many opportunities for online games and creating the world. For example, in virtual worlds like Decentraland and The Sandbox, players can create any business one might create offline - designing and selling hats, creating avatars or selling theme park tickets. Players can also create in-game coins to sell to other users.
NFTs and Art
NFTs revolutionize the art world. Using the NFT exchange, artists can sell digital art directly to buyers, eliminating the need for a gallery or auction house. Typically, brokers can get a large percentage of the sales profits, which means artists may be able to increase their profits using NFT. Artists can even earn royalties every time their artwork or music is sold. The most expensive digital art sold to date was a collection of NFTs created by Beeple that sold for more than $69 million.
NFTs and Identity Management
There are also cases of the use of NFTs in identity management. People currently travel around the world with physical passports, which can easily be lost, stolen, and even imitated or forged. Storing identity information on the blockchain has the potential to eliminate these risks and may make one-day travel processing more efficient.
NFTs and Real Estate
Another use case for NFTs is real estate. Splitting property is difficult, but splitting digital real estate is easy. Many people can invest and share property if it is digitized. This principle can also be applied to other physical assets.
NFTs and Supply Chain
NFTs can also help improve and verify supply chains. For example, a coffee company can prove that its pills are fair trade. The wine company can create NFT for each bottle of wine to track every step of its production.
NFT Standards
Most NFT tokens are currently created using one of the Ethereum tokens, ERC-721 or ERC-1155 protocols. These are basically blueprints for symbols created by the Ethereum team. The chart creates a model for certain information that should be included in any new NFT, such as security and ownership information. By standardizing the way this information is created, NFTs are easily distributed and exchanged.
Starting with the scheme, software developers can create NFTs that are compatible with large public exchanges and NFT portfolios such as MyEtherWallet and MetaMask. This ensures that people can buy and sell NFT and keep it in their personal wallets.
Other blockchain networks such as Tron, Neo, and Eos also build symbolic NFT standards. Each one has different symbolic functions, so software developers can choose the best platform for the code they create.
What Makes NFTs Valuable?
As with any type of asset, supply and demand pay the price of NFTs. Because there are too many of each group of individual NFTs or NFTs, this can make the demand for them too high.
One may wonder what the value is in having a representation of a limited version element rather than the real thing. NFTs can be easily verified and completely unique. This makes it easily tradable online. Their code is also useful because all NFT can be tracked, including transactions before that token. This provides security and transparency and prevents the sale of fraudulent items.
Players, investors and collectors flock to the NFT market because they see the potential for market growth and significant profits.
In some online games, for example, real estate is considered valuable property. If one owns a plot of land on a major road in a virtual world where you can open a casino, this has the potential to make a lot of money. So this piece of land is very valuable.
Are NFTs Cryptocurrencies?
Cryptocurrencies, such as physical money, are fungible assets, which can be replaced and used in financial transactions because they are identical to each other. For example, the U.S. dollar is always equal in value against another U.S. dollar. Although NFTs are built on blockchain technology, they are not like cryptocurrencies, as they cannot be exchanged with each other. Think of NFT as a passport or ticket to an event. Each one is unique.
An NFT card representing a baseball card cannot be replaced directly with a card representing a digital piece of art. Even the NFT, which represents one baseball card, cannot be replaced by a card representing a different baseball card. The reason for this is that each NFT is unique and contains specific identifying information.
However, NFTs are similar to cryptocurrencies in that they have attributes and descriptive data that make them easily convertible and identifiable.
Key Characteristics of NFTs
Many NFTs properties make them different from other types of assets that attract investors. They are:
- Indivisible: Unlike Bitcoin or other forms of cryptocurrencies, NFT can only be bought and sold in its entirety. Cannot be divided into smaller parts.
- Non-interoperable: Just as NFT cannot be replaced by each other, one type of NFT cannot be used in another NFT system or group. NFTs used in online games, for example, is similar to a playing card or toy piece. Just as a monopoly cannot be used in Life, the owner of CryptoKitties NFT cannot use NFT in gods unchained.
- Indestructible: Token information is safely stored on blockchain using smart contracts. This means that NFT files cannot be scanned or copied.
- Immutable: An important feature of NFTs is that the person who buys one already owns it. They can sell them or keep them. It is not owned by a company in the way iTunes keeps music and licenses users to listen to it.
- Verifiable: NFTs' construction, transactions and identification information can be tracked and verified without a third party. This allows anyone interested in purchasing NFT to verify their legitimacy and conduct their own audit before purchasing. Prevents the creation and sale of fraudulent codes.
- Extensible: Two NFTs can be integrated to create a new and unique NFT.
- Capable of storing metadata: NFT creators and owners can add metadata to NFTs. For example, an artist can sign his digital artwork.
Should you buy NFTs?
Just because you can buy NFTs, does that mean you should?
"NFTs are risky because their future is uncertain, and we don't have much history to judge their performance," she notes. "Because NFTs are very new, it might be useful to invest small amounts to try them out right now."
In other words, investing in NFTs is a largely personal decision. If you have the money to spare, it may be useful to think about it, especially if the piece has meaning for you.
But keep in mind that the NFT value depends entirely on what someone else wants to pay for it. Therefore, demand will drive the price instead of basic, technical or economic indicators, which usually affect stock prices and generally form at least the basis of investor demand.
All this means that NFT may resell for less than it paid for it. Or you may not be able to resell it at all if no one wants to.
NFTs are also subject to capital gains taxes - just as they sell shares at a profit. Since they are considered collectibles, however, they may not receive the long-term preferential capital gains rates that stocks receive and may be taxed at a higher collection tax rate, although the IRS has not yet ruled what NFTs consider to be for tax purposes. Keep in mind that cryptocurrencies used to purchase NFT may also be taxed if they increase in value since you buy them, which means you may want to check in with a tax specialist when considering adding NFT to your wallet.
Having said that, treat NFTs just as you do with any investment: do your research, understand the risks - including you may lose all your investment money - and if you decide to take the lead, follow up with a healthy dose of caution.
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