A Non-fungible token (NFT): What is it?


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Non-fungible token (NFT) or digital collectible: what is it?

An NFT is a digital asset that can come in the form of art, music, game items, videos, etc. They are bought and sold online, frequently with crypto-currencies, and are usually encoded with the same underlying software as many cryptos.

Although they have been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital art. The NFT market was worth a staggering $41 billion in 2021 alone, an amount that approaches the total value of the entire global fine art market.

NFTs are also typically one-of-a-kind, or at least of very limited edition, and have unique identification codes. “Essentially, NFTs create digital scarcity,” says Arry Yu, chairman of the Cascadia Blockchain Council of the Washington Technology Industry Association and managing director of Yellow Umbrella Ventures.

This is in stark contrast to most digital creations, where the supply is almost always infinite. Hypothetically, cutting supply should increase the value of a given asset, assuming it is in demand.

But many NFTs, at least in the early days, are digital creations that already exist in some form elsewhere, such as iconic video clips of NBA games or securitized versions of digital art already circulating on Instagram.

Famed digital artist Mike Winklemann, better known as “Beeple,” created a composite of 5,000 daily drawings to create what is perhaps the most famous NFT of 2021, “EVERYDAYS: The First 5000 Days,” which sold at Christie’s for a record $69.3 million.

Anyone can view the individual images, or even the entire collage of images, for free online. So why are people willing to spend millions on something they can easily capture or download?

Because an NFT allows the buyer to own the original object. Plus, it has built-in authentication, which serves as proof of ownership. Collectors almost value these “digital bragging rights” more than the object itself.

How is an NFT different from a crypto-currency?

NFT stands for non-fungible token. It is generally built using the same type of programming as crypto-currencies, such as Bitcoin or Ethereum, but that’s where the similarity ends.

Physical currency and crypto-currencies are “fungible,” meaning they can be exchanged for each other. They also have equal value: one dollar is always worth another dollar; one bitcoin is always equal to another bitcoin. The fungibility of crypto-currencies makes them a reliable way to conduct transactions on the blockchain.

NFTs are different. Each has a digital signature that prevents NFTs from being exchanged or equal to each other (hence their non-fungibility). An NBA Top Shot clip, for example, is not equal to EVERYDAYS simply because they are both NFTs. (An NBA Top Shot clip is not even necessarily equal to another NBA Top Shot clip, by the way.)

How does an NFT work?

NFTs exist on a blockchain, which is a distributed public ledger that records transactions. You are probably most familiar with the blockchain as the underlying process that makes crypto-currencies possible.

Specifically, NFTs are typically held on the Ethereum blockchain, although other blockchains also support them, MultiversX, Solana, Polygon among others.

An NFT is created, or “minted”, from digital objects that represent tangible and intangible elements, including

  • Graphic art
  • GIFs
  • Videos and sports clips
  • Collectibles
  • Virtual avatars and video game skins
  • Designer sneakers
  • Music
  • SoulBound (Unique digital identity, ID card, passport, etc.)
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Even tweets count. Jack Dorsey, co-founder of Twitter, sold his very first tweet as an NFT for over $2.9 million.

Basically, NFTs are like physical collectibles, but digital. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file.

They also get exclusive ownership rights. NFTs can only have one owner at a time, and their use of blockchain technology makes it easy to verify ownership and transfer tokens between owners. The creator can also store specific information in the metadata of an NFT. For example, artists can sign their artwork by including their signature in the file.

nft, non fungible token, blockchain-7035115.jpg

What are NFTs for?

Blockchain technology and NFTs offer artists and content creators a unique opportunity to monetize their work. For example, artists no longer need to go to galleries or auction houses to sell their work. Instead, the artist can sell it directly to the consumer as an NFT, which also allows them to keep more of the profits. In addition, artists can schedule royalties to receive a percentage of sales when their work is sold to a new owner. This is an interesting feature, as artists typically do not receive future income after the first sale of their work.

Art is not the only way to make money with NFTs. Brands such as Charmin and Taco Bell have auctioned off themed NFT art to raise money for charity. Charmin named its offering “NFTP” (non-fungible toilet paper), and Taco Bell’s NFT art sold out in minutes, with the highest bid being 1.5 packaged ether (WETH), or $3,723.83 at the time of this writing.

Nyan Cat, a 2011 GIF of a cat with a pop-tart body, sold for nearly $600,000 in February. And NBA Top Shot generated more than $500 million in sales by the end of March. A single NFT of LeBron James sold for more than $200,000.

Even celebrities like Snoop Dogg and Lindsay Lohan have jumped on the bandwagon, releasing memorabilia, art and unique moments in the form of securitized NFTs.

How to Buy NFTs

If you want to start your own NFT collection, you will need to acquire some key elements:

First, you’ll need to get a digital wallet that allows you to store NFTs and crypto-currencies. You will likely need to purchase crypto-currencies, such as EGLD, based on the currencies accepted by your NFT provider. You can purchase crypto-currencies using a credit card on platforms like MultiversX, Coinbase ou Binance.

Keep fees in mind when researching options. Most exchanges charge at least a percentage of your transaction when you buy crypto-currencies.

Popular NFT marketplaces

Once your wallet is set up and stocked, there is no shortage of NFT sites to shop. Currently, the largest NFT marketplaces are:

While these and other platforms host thousands of NFT creators and collectors, be sure to do your research before buying. Some artists have fallen victim to copycats who have listed and sold their work without their permission.

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