Since the evolution of the internet in the 90’s the virtual community has kept evolving. Over the years, how we value the things is shifting because of technology. People’s desire on owning the digital assets over the physical assets just getting bigger.
In last year (2021), The first tweet ever tweeted in the history of Twitter by Jack Dorsey, one of the co-founders of Twitter, was purchased for around 3 million dollars. A jpeg image was sold for 69 million dollars and many such digital things.
People are purchasing all sorts of digital items for a lot of money and you might wonder why people are throwing money to buy these items, when we can easily download a copy of the same. To understand what’s going on here you need to understand NFT.
What is NFT?
NFT stands for Non Fungible Token. Fungible simply means replaceable or interchangeable. They are not unique. Currency is a best example for fungible thing, a 100₹ note can be replaced by an another 100₹ note or two 50₹ notes.
Non Fungible means the things that cannot be interchangeable or replaceable, for example the Mona Lisa art by Leonardo da Vinci, Anyone can buy a Mona Lisa drawing but only one person in the planet can own the original. Since the non fungible items are unique, it has more value than the fungible items.
Anything that can be converted into digital form can be turned into an NFT. Drawings, photos, music, videos, gif or even a tweet can be turned into NFT.
You might wonder how a digital asset like images and videos are non fungible because a single image or video can be copied multiple times and we don’t know who is the owner of the original digital file.
So how do you make a digital asset unique and identify the ownership of the asset?, that’s where the blockchain technology comes into the picture. We know that the blockchain which makes the cryptocurrencies possible stores everything in a distributed public ledger that records every transactions. So with the help of blockchain and cryptography we could make unique digital assets which cannot be replicated and records the ownership of the asset, and that’s how the NFTs were born.
If anyone converts its digital asset into an NFT he/she will get the proof of ownership powered by blockchain. People can buy/sell the NFTs in an NFT marketplace in exchange of cryptocurrencies.
While both Cryptocurrency & NFTs are based on blockchain technology, the main difference is that cryptocurrencies like Bitcoin, Ethereum etc. are fungible or interchangeable, they all worth the same amount. Your one Bitcoin has the same value as my one Bitcoin.
However, NFTs are non-fungible, meaning that an NFT cannot be exchanged for another since each one is unique. Precisely, this uniqueness enables the use of NFTs to authenticate ownership of digital assets. Furthermore, each NFT is stored on a public and transparent blockchain (often Ethereum’s). Thus, NFTs are decentralized applications with high levels of traceability and tamper resistance.
You need to have a crypto wallet with cryptocurrencies in order to purchase an NFT. Majority of the NFTs are stored in Ethereum blockchain, so you need ether(Ethereum cryptocurrency) to purchase an NFT.
Although selling digital files isn’t a new thing, the ability of an NFT to guarantee yourself as the original creator is the most important aspect. Since NFTs exist on a blockchain the owner of the NFT is recorded in the public ledger. They can have only one owner at a time, no one can modify the record of ownership.
Any digital item like digital-art, music, videos, images etc. can be converted into an NFT. The process of creating an NFT is called minting. The creators can then sell the NFT in the NFT marketplace and earn money in the form of cryptocurrencies.
The NFT creators can control the royalties for their digital assets. Royalties from NFTs give the original owner a percentage of the sale price each time the NFT is sold on a marketplace. The creators can choose the royalty percentage during the minting process.
Typically the royalty ranges from 5-10% of the original price of the NFT.
The payments are made automatically upon subsequent sales with the help of Smart Contracts that exist within the Ethereum blockchain. Hence each time an NFT is sold the smart contracts corresponding to the token will get executed and the royalties will occur automatically.
A smart contract is a user defined program stored on a blockchain. The smart contracts run when the predetermined conditions are met. The transactions that happen in a smart contract are processed by the blockchain without any third party. Solidity is the most commonly used programming language for writing smart contracts.
How to Make an NFT?
- You have to determine which digital asset you need to turn into an NFT. It can be a custom painting, music, video, images, video game collectables or even a tweet.
- You’ll need to set up a crypto wallet since you need some cryptocurrency to fund your investment. Once you set up the digital wallet, you need to buy some cryptocurrency. Most NFT platforms accept Ether(Cryptocurrency based on Ethereum blockchain).
- Once you have your digital wallet with some crypto, then you’ll need to choose an NFT marketplace and connect it to your digital wallet and pay the necessary fees to mint your NFT.
- Now you are ready to start the minting process of the NFT. The market place you have chosen will give you the steps for uploading your digital file. This process allows you to convert your digital file into an NFT.
- You can set your price and royalties during the process.
There are plenty of NFT marketplaces available like OpenSea, Rarible etc. OpenSea hosts most number of NFTs and is the leader in NFT sales.
Investing in NFTs
Most of the NFTs are sold on the Ethereum blockchain. Every transaction on the Ethereum blockchain costs fees. These fees are called gas. Everything you do on the blockchain, from minting an NFT or bidding to purchase an NFT or even cancel one will cost gas. But this will not guarantee that your NFT will get sold and you won’t get the gas you paid back.
Just like the stock market, people are using NFTs as a trading instrument. They buy at small price and sell when the price goes up. These NFT markets are highly volatile and so it’s risky to bet on it.
Although we never know whether the NFT markets will drive the future economy or not, the underlying technology which makes the NFTs possible will stay on.