Updated: Feb 21
NFTs are the hottest and newest craze right now, but what exactly are they? How do they work? How can I own one? And why would I want to buy a picture from a random person on the internet for large sums of money?
Well you can get the answers to all of your burning questions right here. This is our quick and easy introduction to the world of NFTs.
What are NFTs?
Let’s take an example of a House, when you buy a house you get the deed, the deed verifies that you own this house. While the house is the actual Asset, the Deed is the legally binding document.
Similarly an NFT has two parts – the deed, which lives on the blockchain, and the asset, which can be an image, video, 3D model, a virtual plot of land, or anything within the digital realm, really.
I’m sure by now you have heard that NFT stands for Non-Fungible Token. What does it mean? It is very likely that even the person who explained it to you doesn’t know.
Keeping our house analogy going, the NFT itself is the Deed to the House. A verified bit of information stored on the blockchain.
The NFT points to a virtual asset as explained above, just like the Deed points to a specific house.
What type of assets can I buy?
Currently the most popular type of assets being sold as NFTs are Images. These can be in any format (jpg, png, etc).
However, there are so many other forms of media and other digital assets that are NFTs as well -, videos (mp4), 3D models, virtual real estate, music, and even domain names.
Where are the assets stored?
Here is where many people misunderstand NFTs.
The Assets that you own via the NFT can be stored in a variety of places. They can be stored on the Cloud (like Google Drive or OneDrive), they can be stored on someone’s personal server. This is called the Centralized web, the internet as you have known it.
It is also possible to store the asset on the blockchain itself. While this is probably the most secure, this is also not as common due to various reasons, the biggest being cost and size limitations.
Most commonly files are actually stored on the centralized web and the NFT will simply point to the image file.
The new trend is to store the assets on the decentralized web. There is a whole new world out there called the InterPlanetary File System (IPFS), where files are stored on nodes. This might sound complicated, but we can simplify it further and explain it in another post. Again tweet us if you want to read about IPFS.
How does blockchain factor in?
The biggest difference between a house’s title deed and an NFT is the Blockchain. A deed is a private document that only you and the government can see, sure you can show it to someone, but usually you don’t. Even if you do show the deed to someone, the person seeing it won’t know it’s history, for that matter, even as the deed owner, you might not know it’s history.
An NFT is public. Anyone who knows how to look it up, can see who owns the asset, and it’s entire history. History such as – who created it, who bought it, when these transactions took place, how much it sold for, etc.
This means that you as a potential buyer of an NFT can see its historical value, everything is transparent and nothing is hidden from you. Making an informed decision is much easier when you have this historical information.
Another major difference is that you might have heard of forged deeds all the time. Impersonator or grifters stealing property via fraud. Families stealing each other’s properties by faking documents or signatures etc. You would think the deed is safe, but it is a security risk.
With an NFT these security rules are built by the creator of the NFT and stored on the Blockchain. Only the person who is authorized can make changes to it. Once sold, the new owner is the authorized person. It is far safer than a physical document for proof of ownership.
This is not to say that NFTs don’t have their own security risks and flaws, they are just harder to exploit and inherently more secure.
For example, there are many fake NFT that copy the original NFT and pose as if they are the real NFT. All you have to do is be able to identify which is the real one and which isn’t.
NFT theft is also a growing problem, while it shouldn’t affect most casual users, you should always read up about the latest happening in the world of NFT and take precautions accordingly.
Can't someone just copy my asset?
Yes, just like someone can take a photo of your house and claim that they own it. Anyone can make a copy of your NFT asset and claim it to be theirs. But just like you own the house and the deed itself, the NFT and the digital asset are both yours until you sell it.
Right now there are a few ways to differentiate a verified owner to someone who just copied the image.
An example of this is the Twitter profile picture, you can get a hexagonal shaped profile picture if you verify that you own the asset.
Any more benefits?
The word “Utility” is thrown around a lot in the NFT space. But what utility does an NFT provide, it is just a picture after all?
This is why I explained what an NFT is earlier, it is not the image itself, but rather the fact that you own it. This is verified via the blockchain.
The Utility is something put in place by the creator of the NFT and differs between each NFT. In some cases you get access to an exclusive community, while others give you access to events.
There are NFTs which tie into a real world book, where you as an owner of the NFT can be involved in the decision making and/or creation.
Some have implemented a system to let you earn passively from your NFT, while others even let different NFTs interact with each other and “evolve” or “breed”.
Only someone who is verified as the owner of the NFT can claim these benefits. Thus the power of the NFTs and the blockchain is realized.
In addition to all this, you have the art/asset itself. That is also an asset that has value. There are also NFTs that do not have any other utility attached to them and the art is the primary utility.
How do I choose an NFT?
Choosing an NFT is a very personal thing. What I look for, first and foremost, is the art. Because if all else fails, I want to at least like what I own. I don’t want a pixelated banana that just looks like a yellow blob. This is obviously subjective and depends on my personal choice.
Then you look at the value that it brings. If exclusivity is your jam, then that can be a criteria. If supporting an artist is more important, then that is also a benefit. This is an implied value that really is for you to decide.
Another thing I look at is the potential to make money from the NFT. While I am not certified to give any sort of financial advice, I look for projects that have a long-term roadmap, and document ways on how to earn money via the provided utilities.
Just jumping on the NFT hype train is also a reason to choose an NFT. Don’t have FOMO. But also, not jumping on the hype train is just as good of a reason not to. No judgement either way.
Basically, you can decide why you want to get into NFTs. Hyped projects are a flipping strategy that many people use to make a fast buck.
Where can I buy NFTs?
There are many ways to buy an NFT, but before you look at where, we need to look at what Blockchain to buy NFTs on.
As you know by now, NFTs are built on blockchains. Since you are reading this, chances are you have heard of BitCoin and Ethereum. The Blockchain is the “ledger” or the transaction log for these crypto currencies, which stores all the information. Including NFTs.
Why should you care?
Well, you can buy an NFT on Ethereum or another crypto currency. This is probably the most important aspect of buying an NFT.
Ethereum is probably the easiest to get into at this point, but also the most expensive.
However, you can also get NFTs on Polygon, Tezos or Cardano, the list goes on.
You need to pick a Blockchain.
How do I do that? I hear you asking.
Well, the most popular option right now is Etherum. So chances are the NFT you end up finding is probably going to be on this Blockchain.
That is where you could start.
You could also check out Solana and Polygon, as they are, arguably, the second and third most popular Blockchains for NFTs.
Now that you have picked the Blockchain, the best bet on being able to buy your NFT is going to be finding the right marketplace.
There are many marketplaces to choose from, all with their own advantages and disadvantages. The main thing to look at is, find where the NFT you want to buy is listed. That is where you will buy it from (ok not exactly true, but this is the shortest, simplest answer).
Here are some of the most popular marketplaces:
So, how do I buy one?
Well, honestly, I wouldn't want to delve into those details, primarily because I'm not an expert at the purchasing bit, but there are various sources you can refer to, like this one on Fortune that presents a basic step-by-step guide to buying, or perhaps this Wired article.
All in all, this was meant to be a guide to knowledge, and I hope it's helped you understand the concept a little better. If it's something you want to invest in, now might be a good time since you get first mover advantage, way before it becomes mainstream.
Cover image: Freepik
Additional images: Pexels