What are NFTs and how do they work?

Since relatively recently, NFT has taken over the Internet. Everyone is talking about them: news, influencers, politicians, marketers, actors, singers….. The only problem is that most of us, except for people who are actively in that profession, do not know exactly what NFTs are and what the meaning of the word NFT is at all. Are NFTs worth the money or the excitement? Some people say they’re a balloon ready to burst, like dot-com madhouses or Beanie Babies. Others believe nfts are here to stay and will change investment forever.

What are NFTs?

NFT stands for Non-Fungible Token. NFT is a digital asset on the blockchain that represents real-world objects like art, music, in-game objects, and video. They are bought and sold online, often with cryptocurrency, and are generally encoded with the same underlying software as many cryptocurrencies. Although it has existed since 2014, NFTs are now becoming more and more famous as they become an increasingly popular way to buy and sell digital art. The market for NFTs was worth a whopping $41 billion in 2021 alone, an amount approaching the total value of the entire global fine art market.

NFTs are also generally unique or at least in a very limited series and have unique identification codes. This is in stark contrast to most digital creations, of which it is almost always infinite. Hypothetically, a supply outage should increase the value of a particular asset, assuming there is demand.

Unlike cryptocurrencies, they cannot be traded or exchanged at equivalence. This is different from exchangeable tokens like Bitcoin, Ethereum and the like, which are identical to each other and can therefore serve as a medium for commercial transactions. For example, a school could issue NFT students who have earned a degree and allow employers to easily verify candidates’ education. Or the venue could use NFT to sell and track tickets for events, potentially reducing resale fraud.

History of NFTs

Long before Ethereum existed, the concept that became the driving force behind NFTs had already been devised. In 2012, Manny Rosenfield published his research in which he introduced the concept of ‘Colored Coins’ for the Bitcoin blockchain. The idea of colored coins was to describe a class of methods for representing and managing real assets on the blockchain to prove ownership of those assets. Something similar to Bitcoin, but with an added ‘token’ element that determines their use, making them separate and unique.

The limitations of Bitcoin meant that the concept of colored coins could never be realized, however, it laid the foundation for experiments that led to the invention of NFTs. On May 3, 2014, digital artist Kevin McCoy forged the first known NFT ‘Quantum’ on the Namecoin blockchain. ‘Quantum’ is a digital image of a pixel-art octagon that hypnotically changes color and pulsates in a way reminiscent of an octopus.

After these events, there was a significant amount of experiments and developments and there were platforms built on top of the Bitcoin blockchain. At the same time, the Ethereum blockchain began its initial reign over NFTs. The Counterparty platform (Bitcoin 2.0) was established and established as a platform that enabled the creation of digital assets. “Spells of Genesis” followed in the footsteps of Counterparty and began a pioneer in in-game asset issuance. 2016 evoked the age of meme and saw the release of a series of Rare Pepes NFTs on the Counterparty platform.

In 2017, the idea of NFT art took on a new life when Matt Hall and John Watkinson created CryptoPunks. Both developers loved the simple Ethereum programming language. They made 10,000 pixel-art avatars of punk-rock looks and released NFT for each character. They set up 9000 CryptoPunks on the site, free for everyone. The remaining 1,000 were kept to themselves. Initially, few people claimed NFTs. That changed when an article about Mashable showing CryptoPunks came out.

Within 24 hours, all 9,000 CryptoPunks were claimed. Then something strange happened: these original owners began to sell their CryptoPunks in the subsequent market. By the end of 2017. CryptoPunk NFT sold for $170,000.

How is NFT different from any other cryptocurrency?

It’s generally built using the same type of programming as cryptocurrencies, like Bitcoin or Ethereum, but that’s where the similarity stops. Physical money and cryptocurrencies are “exchangeable,” meaning they can be traded or exchanged for each other. They are also equal in value – one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Crypto’s interchangeability makes it a reliable means of conducting transactions on the blockchain.

NFTs change the crypto paradigm by making each token unique and irreplaceable, thus making it impossible for one irreplaceable token to be equal to another. Each has a digital signature that makes it impossible for NFTs to replace or equalize with each other (thus, irreplaceable). One NBA Top Shot clip, for example, doesn’t equal an EVERYDAYS clip just because they’re both NFTs. (One NBA Top Shot clip isn’t even necessarily equivalent to another NBA Top Shot clip, for that matter.).

They are digital asset representations and are compared to digital passports because each token contains a unique, non-transferable identity to distinguish it from other tokens. They are also extensible, meaning you can combine one NFT with another to “grow” a third, unique NFT. Depending on the NFT, copyright or license rights may not come with the purchase, but this is not necessarily the case. Similar to buying a limited edition print doesn’t necessarily give you exclusive rights to the image. As the underlying technology and concept advances, NFTs could have many potential applications that transcend the art world.

Controversy of NFTs

A lot of money is made in the NFT market, but there is great controversy, not least because of the impact on the climate. Creating blockchain assets, including NFTs, uses a large amount of computing power – and thus a huge amount of energy. Some are concerned about the very real impact this madness could have on the environment. Artists actively help by making efforts to create carbon-neutral art. But the problem is deeper, because of the way blockchain works. Ethereum, Bitcoin and the like are built on a ‘Proof of Work’ system to keep users’ financial records safe. And this system uses an incredible amount of energy.

ArtStation was so concerned about the impact on the climate that it recently backtracked on its decision to sell NFTs after a massive backlash. There are organizations that are trying to make a difference. New blockchains such as Palm, Flow and Wax are low energy and carbon neutral and offset emissions by planting trees. The Polygon token, for example, states that forging an NfT on its blockchain costs the same amount of energy as sending three emails.

Many voices in the art and design community are also angry that NFTs trade hands for such astronomical sums of money, and that often doesn’t go to the artist. Given that NFTs were originally created as a way of giving control by asserting digital ownership, the idea that they are becoming increasingly elitist is causing tension. Buy-in fees are too high for many, and the price of an actual purchase means the market is becoming something of a playground for the super-rich.

Conclusion

While there may be many practical applications for NFTs in the future, they are primarily used with digital art today. For creators, NFTs create a seamless way to sell digital art that may not have too many markets. In addition, there are ways creators can get fees for each subsequent sale of art. On the other hand, collectors can speculate about digital art as well as boast of rare collectibles in blockchain. If you’re considering buying an NfT as an investment, know that there’s no guarantee it will increase in value. While some NFTs sell for thousands or millions of dollars, others may remain or become worthless.

For more information, visit the ethereum.com