NFTs Explained: What Is an NFT & How Does It Work?

If you’ve been following the current blockchain news, you might have heard about the explosion of NFTs.

But let’s be honest, with so much controversial news and information, it’s hard to even understand the basics of NFTs. So what is an NFT after all, and how do they even work? Why do people spend millions of dollars to own a digital piece?

Keep reading to discover everything you need to know about NFTs, how they work and what are they used for.

Let’s dive right in!

What is an NFT?

NFT stands for ‘non-fungible token’, meaning it’s more or less unique and can’t be replaced with something else.

For example, bitcoin is a fungible asset – you can trade one bitcoin for another bitcoin and you’ll be left with the exact same thing.

On the other hand, an art piece is non-fungible. You can trade one piece of art for another, but you won’t have the same thing as before – you’ll have a completely different piece of art.

To better understand NFTs and their value, let’s review one of the most famous examples of NFT transactions. A digital artist named Mike Winklemann, also known as “Beeple” created a composite of 5,000 daily drawings which was titled “EVERYDAYS: The First 5000 Days” which he sold for a record-breaking $69.3 million.

While you can sell original art as an NFT, many NFTs are digital creations that already exist in some form elsewhere and they may even be free to access. For instance, iconic video clips from NBA games or digital art that’s already been posted on Instagram.

Hearing this you may wonder that if anyone can view original images or videos online for free, why are people willing to spend millions of dollars? Could they not download or screenshot it?

The answer to this question is quite simple, but it may make no sense for many of you. People are willing to spend so much because NFTs allow them to own the original item. Plus, an NFT contains built-in authentication serving as proof of ownership.

After all, it’s safe to say that NFT collectors actually like to brag about having digital rights almost more than they like the item itself.

How Does an NFT Work?

NFTs exist on a blockchain – a distributed public ledger that records digital transactions, the same system that makes cryptocurrencies possible.

Even though all blockchains support NFTs, they specifically exist on the Ethereum blockchain.

Generally, an NFT is created or “minted” from digital objects representing either tangible or intangible items, such as:

●     Art

●     Music

●     GIFs

●     Videos

●     Collectibles

●     Sports highlights

●     Virtual avatars and video game skins

●     Designer sneakers

●     And more

This may be shocking to you, but even a tweet has been sold as an NFT. In fact, Twitter’s co-founder Jack Dorsey sold his very first tweet as NFT for more than $2.9 million.

Whoever buys an NFT, gets exclusive ownership rights – an NFT can have only 1 owner at a time. Thanks to blockchain technology, NFTs have unique data making it easy to verify their ownership and transfer ownership when it’s been traded.

What’s good is that you as an NFT owner or creator can also store specific information inside. For example, if you’re an artist, you can sign your artwork by including your signature in an NFT’s metadata when the NFT is created.

What Are NFTs Used for?

An NFT is a unique yet excellent way for artists and content creators to monetize their work. Blockchain technology and NFTs enable artists to sell their artwork directly to the consumer as an NFT and keep profits. No more relying on galleries or auction houses to sell art.

In addition to this, artists can opt-in for royalties so they receive a certain percentage of sales when their art is sold to a new owner. This is a huge feature of NFTs because artists generally don’t receive any money after their art is first sold.

It’s noteworthy that art isn’t the only asset you can sell with NFTs. There are more and more industries involved in NFT trades, including real estate.

Final Thoughts: Should You Jump on the NFT Train?

Knowing what an NFT is and how it works, you’re probably wondering whether it’s worth jumping on the NFT train or not.

It depends and it is a largely personal decision.

In fact, NFTs are highly risky investments because their future is still uncertain. Plus, since it’s a new thing, we don’t have much data to judge their future performance. However, it might be a good idea to invest small amounts to try it out and see how it works out for you.

If you’re considering investing in NFTs, keep in mind that an NFT’s value entirely depends on what the buyer is willing to pay for it. So demand will influence the price of an NFT rather than economical, technical, or fundamental indicators that drive stock prices.

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