What is an NFT? How do I Buy one?
Why would I want to buy a digital
file that I can just copy in a second?
Is it just another bubble?
Well, stick around,
in this episode of Crypto Whiteboard
Tuesday
we’ll cover these questions and
more.
where we take complex cryptocurrency
topics, break them down
and translate them into plain
English.
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Today’s topic is NFTs.
NFT stands for Non-Fungible Token,
but what exactly is “Fungible”?
Well, you can think of something
that is fungible as interchangeable
or as having no unique properties.
For example, if I have a one-dollar
bill and ask you to trade it with me
for a different one-dollar bill
you probably won’t have any issue
with that,
since they are basically two of the
same thing.
Meaning both dollar bills are
fungible.
However, if by chance,
you happen to have a rare dollar bill
with unique markings
or a unique serial number like, say,
12345678
or a true binary serial number where
all of the digits are either 0 or 1,
you probably won’t be so inclined to
trade it.
These one-dollar bills are extremely
rare
and can be traded for up to 5000
dollars and more.
In other words, these bills are nonfungible,
they are unique and have specific
attributes
that distinguish them from the rest
of the bills.
So a nonfungible token is like a special dollar bill.
It’s a digital coin that has unique
attributes attached to it.
Fun fact, Bitcoin and many other
cryptocurrencies
are considered nonfungible in the
sense that
you can attach a specific history to
a coin. Meaning, if a particular Bitcoin was used for the illegal activity
it may be worth less than a newly
minted Bitcoin with no history, but more on that in another video.
Coming back to NFTs,
they are basically unique coins, but
what are they used for?
Well, they are used to prove
ownership of a certain digital file
or a digital certificate of
authenticity.
Confused? Don’t worry, let’s break
it down.
When we look at a piece of art, a
painting, for example,
the original painting is always much
more valuable than its copies.
And there are specific methods
you can use to validate the
authenticity of that painting.
For example, receiving a certificate
of authenticity.
But when it comes to a digital file,
how do you know what is the original
and what is a copy?
And does it even matter?
Well apparently it does.
In the same way that people collect
physical art,
digital goods are becoming very
popular.
For example, I can write an ebook
and sell the first copy of it as an NFT.
Whoever buys it from me will have
the right to say
that they own the first ever copy of
my book.
But here is where it gets tricky.
You see, it’s not that I gave the
buyer any rights to my book
or anything tangible for that
matter.
I only gave the buyer the right to
brag that he or she owns the first copy.
So unlike buying a painting in real
life and taking it home for example,
with an NFT you don’t have any power
over the goods that you’re buying.
That’s why it’s questionable as to
how valuable NFTs actually are.
I mean, an NFT is worth only as much
as the next guy is willing to pay for it.
And if it doesn’t even exist in the
physical world,
well… some people find it a hard
concept to grasp.
Now let’s talk about how an NFT is
actually created.
A creator creates a digital good,
this could be an image, a video, a
tweet, a website
or anything else that lives in the
online world.
The creator then creates a coin,v or
more accurately a token,
on a blockchain that supports smart
contracts
like Ethereum, Cardano or Solana.
This token holds within it
information about the digital goods
that are being sold.
This information includes the token
name, the token symbol
and a unique hash that proves the
authenticity of the NFT.
Keep in mind that the digital goods
themselve
aren't stored inside the token,
only attributes relating to them.
So while the NFT may point to where
the file can be found online,
anyone can use that link and it’s
not unique in any way.
Once the token is created the creator
can sell it to someone else,
and that someone will be the new
owner of that digital good.
To sum it up,
an NFT is a token on a blockchain
that acts as a digital certificate
of authenticity.
It can be verified instantly
and also show the history of its
previous owners.
Aside from being non fungible, or
unique,
NFTs are also indivisible, easily
transferable,
fraud proof and programmable.
This means that NFT creators can
decide that royalties will be paid to them
each time an NFT changes hands.
Some examples of popular NFTs
include cryptopunks -
a collection of 10,000 eight bit
style pixel art images of… well… punks,
that are sold as NFTs
and their price has already
surpassed several millions of dollars.
Another example is NBA Top Shot -
a marketplace where fans can trade
NFTs of NBA moments.
These moments are video clips
packaged as an NFT,
a bit like the trading cards we used
to have back in the day.
Using NFTs for sports highlights
is another way players can make
money by getting royalties
when a Top Shot moment that they are
highlighted in
gets sold as an NFT.
Additional popular examples include
Jack Dorsey,
the founder of Twitter, selling his
first ever Tweet as an NFT
and the artist Beeple selling an NFT
of his work for 69 million dollars.
Now that we’ve covered the theory,
let's get down to practice -
how do you actually buy an NFT?
In general there are two types of
NFT marketplaces -
centralized and decentralized.
The centralized marketplaces allow
you to sign up
and fund your account using a credit
card or other form of payment.
For example, Nifty Gateway is a
centralized NFT marketplace
owned by the exchange Gemini.
There, you can buy NFTs using your
Gemini balance.
On the other hand,
if you want to make NFT purchases
through a decentralized marketplace. You’ll need a wallet that’s compatible
with the blockchain your NFT was created on.
For example, in Ethereum’s case,
MetaMask is the most popular option.
It’s a wallet that was built as a
browser extension
and you can use it to log into decentralized
NFT marketplaces
such as OpenSEA, Rarible or
SuperRare.
We’ll leave links to all of these
Marketplaces
and to MetaMask in the description
below.
Once you fund your account or wallet
you can just buy or bid on different
NFTs in the marketplace.
In the end, an NFT is just a coin,
or token to be more precise,
that is stored on your wallet just
like any other cryptocurrency. Keep in mind that unless you’re an avid collector
you’ll also need to sell the NFT at
some point, and NFTs aren’t very liquid.
In other words,
they don’t always have a market of
people who want to buy them.
Just like it might be hard to find
someone
who’ll pay thousands of dollars for
a rare baseball or pokemon card.
As you can imagine, this market is
very hype driven.
This could lead to a situation
where a person buys an NFT for
millions of dollars
only to find out that he can’t sell
it later on
since the interest in that specific
NFT is no longer there.
So now we come to the question -
if all an NFT is basically bragging
rights about a digital file,
what can I actually do with it?
Well, most people find some creative
way to show it off.
For example, some NFTs are displayed
digitally across art galleries.
Another creative idea that’s been
getting quite popular
is to use a digital frame that can
display the NFT
and hang it up in your house.
Alternatively you can use a physical
print of the NFT
with a QR code next to it
pointing to your proof of ownership
on the blockchain.
There are also online galleries
inside virtual worlds
that are used for displaying NFTs.
As you can see,
the opportunities for displaying
your latest digital artwork are abundant.
But NFTs aren’t used only for art.
Actually, anything that is unique or
needs a proof of ownership
can be created as an NFT.
In simple terms,
an NFT is a term used for tagging
something in the digital world as your own.
So anything that requires such
tagging can benefit from the NFT technology.
For example, Decentraland is a
virtual world
where users can buy digital land
that can be sold or used for advertising.
Online games can use NFTs to prove
ownership of rare digital items
that players can then start trading
amongst themselves.
Unstoppable domains, which we’ve
covered in the past,
uses NFTs to establish ownership of
domain names.
NFTs can also be used as collateral
in DeFi instead of cryptocurrencies.
It’s the equivalent of pawning
something you own
in order to get a loan in the real
world.
NFTfi is one example of a
marketplace for NFT collateralized loans.
As you can see, the ideas are
endless.
So are NFTs the next big thing
or are they just a craze like the
2017 ICO mania?
It’s hard to say.
On the one hand, it seems like
everybody's talking about NFTs
and all the big companies are moving
into this space.
On the other hand,
it’s hard to wrap your head around
the concept of people paying
millions of dollars
for a digital proof of ownership
without any claim in the real world.
I guess only time will tell what the
future holds for NFTs.
That’s it for today’s video.
Hopefully, by now you know what NFTs
are -
cryptocurrency tokens that provide
proof of ownership for a digital item.
You may still have some questions.
If so, just leave them in the
comment section.
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