NFTs for beginners in 5 minutes

Photo by Markus Winkler from Pexels

I was awe-struck the day I learned Jack Dorsey’s very first tweet, was sold for $2.9 million as an NFT. After hearing the news, I jumped out of bed and started searching for my very first tweet. Although it probably won’t sell for that much, who knows what’s going to happen in the future? One day I might become well-known, and by the time you wanted to buy it, a wealthy Saudi prince would have already purchased it and framed it in a gigantic 1000-inch MicroLED display by Samsung or something equally excessively affluent.

If you’re under 50, you’ve probably noticed how your social media feed has been overrun with pictures of cartoon apes dressed in various clothes. If you type “NFTs” into the Google search bar, you will likely get these apes as 70% of the results. If you’re unaware, that is the Bored Ape NFT collection, produced by The Bored Ape Yacht Club.

You might be wondering what the earth an NFT is and how to convert your preschool macaroni art into one after seeing all the money floating around.

Let’s get started and find out what the hype is about!

What is an NFT?

The abbreviation “NFT” stands for “non-fungible token.” That does not make it any easier to understand so let me break it down.

When something is non-fungible, it suggests that two objects are distinct in their specifications and those individual components cannot be exchanged for one another. Let me use two simple analogies Investopedia used to explain this: Individual diamonds differ in their cuts, hues, sizes, and grades; as a result, they cannot be considered fungible. Also, real estate is never fungible. Even on a street with identical homes, each residence is non-fungible because it is subject to variable amounts of noise and traffic, is in varying states of repair, and has a distinct view of the neighborhood.

In layman’s terms, an NFT is a digital asset that acts as a substitute for a physical representation of things such as music, games, or artwork, and is authenticated by the blockchain technology that powers cryptocurrencies. If you do not understand what a blockchain is, I have written an article in this linked Medium article that you can read and then come back to continue with this article.

How exactly do NFTs work?

As mentioned above, NFTs are powered by the blockchain; particularly the Ethereum blockchain. In a nutshell, NFTs are physical memorabilia or collectibles that are digitalized or already in a digital format. This could range from a research paper to a Pepe the frog meme. This means that rather than having a physical copy of the item, anyone who purchases an NFT is going to receive a digital file. To ensure that the item you have purchased is original, the creator will embed unique and key information in the file. This information or metadata (a set of data that gives information about the NFT) could be a signature or specific data that signifies its originality and integrity. And since NFTs can only have one sole owner at a time, this means that upon acquiring it, you will have the sole right of possession to it. From a security angle, NFT ownership is easily verified because it runs on the blockchain. We can also track the transfer of tokens between owners, creating a transparent, open, and traceable transaction.

What are NFTs used for?

NFTs create an environment where creators can generate revenue from their works or product and keep a larger percentage of the revenue or profit. As an example rather than going through several publications and mediums(pun intended) to gain revenue from your writing or work, you can sell a copy straight to the consumers and keep a larger portion of the revenue generated. Another awesome thing about selling your work as an NFT is that, you can encode royalties into your work! This means every time your work is sold to a new buyer, you earn a share of the revenue generated. Since most creators do not earn more after an initial sale, this is a game-changing feature.

Where can you buy an NFT?

1. OpenSea

OpenSea is the most popular marketplace on this list and prides itself in stating that it is the world’s first and largest web3 marketplace for NFTs and crypto collectibles.

2. Rarible

Rarible is an Ethereum-based platform that facilitates the creation, sale, and purchase of ownership rights to digital works of art via non-fungible tokens (NFTs).

3. Foundation

Foundation is a decentralized platform that facilitates live auctions of non-fungible tokens (NFT), specifically, artists’ digital artwork. To do so, it uses the Ethereum blockchain and smart contracts.

Should you jump on the hype train?

As with anything that’s novel, it’s always better to treat it with a bit of skepticism. At the same time, some of the features of NFTs are quite beneficial and this means they could be rewarding to try out with shrewd investments.

Ultimately the decision to invest in NFTs is a personal one. Demand will determine the price rather than economic or technical factors which affect prices of goods and services or at least serve as a basis for merchant demand.

In the current landscape of NFT transactions, most are art. The buyers of these works buy them with the vision or hope that their value will appreciate over time like their physical counterparts(this has not been the case for the most expensive purchases so far). For example in 2021, the Youtuber, Logan Paul purchased an NFT from the Azuki collection that was worth $623,000. As of the time of this writing, the said piece is now worth $10. That is why I do mention above that it could be rewarding but you will have to be clever about it. Before you invest; do your research, understand the risks and benefits, and exercise good judgment.

From a creator’s perspective, the upside seems boundless; you can sell your work without a middleman, you keep a larger share of profits, you can encode your work with royalties and if your work is really good, it’s purchase can cause a ripple effect on some of your other works being valued higher. And as a bonus, you are also shot to fame. The catch-22 here is that, since the value of your work is determined by demand, if no one is interested in it you would be unable to exchange it for any kind of revenue.

An article from Forbes also highlights the tax aspect of NFTs. The author of the article states that although tax authorities have not yet determined what NFTs are classified under for tax purposes since they are collectibles, they might not be eligible for the advantageous long-term capital gains rates that apply to equities and might even be taxed at a higher collectors tax rate. For this reason, you might wish to consult a tax expert.

Having said that, treat NFTs as you would any investment: do your homework, understand the dangers, including the possibility that you may lose all of your investment money, and if you decide to proceed, exercise good judgment.

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P.S: If you believe anything stated here is factually wrong please do not hesitate to reach me via a comment.

Thank you for reading all the way through. Go little rockstar.

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