Back

studBit

20 min read

0

WHAT ARE NFTs

NFT stands for Non-fungible token, they are one of the types of cryptographic tokens that can represent ownership of digitally scarce goods. They are a way to digitize asset into unique tradable ownership tokens making it easier to buy and sell ownership of a digital asset.

NFT is a token that is non-fungible, this means that they are starkly unique from each other and one token isn’t interchangeable with any other token of its asset class.

Fungible means that an asset can be traded without losing its value within the asset class, it also means that whatever fungible things is being traded cannot be unique because uniqueness increases value.

In economics, fungibility is the characteristics of goods or commodities where each individual unit is interchangeable and indistinguishable from each other like most concepts fungibility is best explained with an example.

Fiat money like US dollar is a good example of fungible. A good way to think about it is one dollar is interchangeable with any other one dollar, it’s going to have the same value of another dollar(those are fungible token) like the ERC20s 1BTC = 1BTC.

By contrast is going to be NFTs. A limited edition of a basketball card is a good example of something non-fungible, each card is treated as collectibles that has individual properties. a Pokémon would be a good example of an NFT, Your Pokémon is going to have different stats, different move sets and isn’t interchangeable with any other Pokémon.

A more relatable one is a trading card or unique piece of art, these are all non-fungible token, non-interchangeable tokens.

For the moment they are best thought about as a digital piece of art that are incorruptible and have a permanent history of who owns and who deployed them etc.

NFTs are just a token standard, so you can actually make them do much more than just be an art. You can give them stats, you can make them battle , you can really do unique things with them but for right now the easiest way to think about them and the most popular way to think about it is an ART, some type of collectible or just anything that is unique.

They are just tokens that are deployed on a smart contract platform and you can view them on different NFT marketplaces like opensea and rarible. NFTs marketplace are where you buy and sell NFTs.

You obviously can do that without these marketplaces because it’s decentralized, but they help give good user interface.

For most people who think NFTs are a dump idea. I do think art does have a lot of value and I think that artists are not always paid fairly for what they do.

This is actually a huge issue in the modern day world where an artists can make some type of art, people just copy paste it everywhere and they never get attribution for their works.

So having a really easy decentralized royalty mechanism or some type of mechanism where these artists can get attribution for what they are doing is really important.

NFTs are a great way to solve this issues as kind of having these decentralized audit trails and royalty traits that we can set up and see really transparently without having to go through some centralized service

MINTING

This a means that a digital asset has been assigned its unique token, its ownership data along with its unique properties and entire digital file is now stored on the blockchain.

NFTs are stored encrypted on a blockchain and can be unlocked only with a digital key. When an asset is minted, whoever starts the minting process is given a digital key and automatically becomes the owner of the asset.

This key can be used to unlock or decrypt the digital asset on the blockchain, this means that whoever has the key is the true owner of the digital asset. The key (NFT) can be bought, traded or sold via NFT marketplaces and thus transferring ownership.

BUYING OF NFTs

NFT marketplaces are the first place you should look if you want to buy non-fungible tokens. A crypto wallet and some crypto are essential to the process. For Ethereum NFTs, prices will almost always be in ETH. Once you’ve purchased your chosen crypto, move the funds to a wallet that can interact with NFT marketplaces. Metamask is good option, it can be connected to an NFT marketplace.

Interacting with Ethereum or any other blockchain NFT isn’t free! It’s always worth having some extra crypto for paying transaction fees. Be careful with fake or suspicious websites. Double-check the URL and consider bookmarking if you use it often.

HOW DOES AN NFT WORK?

NFTs exist on a blockchain, which is a distributed public ledger. An NFT is created from digital objects that represent both tangible and intangible items, including:

• Art
• collectible
• Music
• And More...

Essentially, NFTs are like physical collector’s items, only digital. So instead of getting an actual oil painting to hang on the wall, the buyer gets a digital file instead. They also get exclusive ownership rights.

NFTs can have only one owner at a time. NFTs’ unique data makes it easy to verify their ownership and transfer tokens between owners. The owner or creator can also store specific information inside them. For instance, artists can sign their artwork by including their signature in an NFT’s metadata.

Blockchain Technology and NFTs afford artists and content creators a unique opportunity to monetize their wares. i.e. Artists no longer have to rely on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT.

In addition, artists can program in royalties so they’ll receive a percentage of sales whenever their art is sold to a new owner.

NFTs PROPERTIES

UNIQUENESS

This is actually a huge issue in the modern day world where an artists can make some type of art, people just copy paste it everywhere and they never get attribution for thier works.

NFTs has different properties that are usually stored in the tokens metadata. NFTs makes a digital asset unique and stores its properties and true ownership data on the blockchain in the form of a token

Uniqueness creates value, think of a limited edition sneakers or one of a kind painting, the items or assets are more valuable than ordinary assets.

PROVABLY SCARCE

There are usually a limited number of NFTs with extreme examples of having only one copy, the number of the token can be verified on the blockchain hence its probability.

They are more valuable than non-limited assets

INDIVISIBLE

NFTs cannot be split into smaller denominations, you can buy or transfer a fraction of your NFT

WHY ARE NFTs POPULAR

The reason NFTs are becoming increasingly popular is because all parties benefits from the process

WORLDWIDE

Creator can freely sell and trade digital ownership of their asset without geographical constraints in other words a worldwide audience is ready to pay attention to what creator have to offer.

INVESTMENT OPPORTUNITY

Investors see NFT as a relatively safe way to invest capital because hype boosts assets value raising its price because NFT will be used more in the futures.

Investors, creators and marketplaces will keep generating hype around NFTs.

EASE OF SELLING

Traditionally if you want to sell an exclusive or one of a kind physical or digital asset you’d have to use a middleman service to sell the asset. This process takes time and cost transaction fees, middleman fees and buyer’s fee, ownership was then verified by a certificate that states the name of the owner.

NFTs changes the process because ownership can now easily be transferred and without the interference of an expensive middleman service.

NFT marketplaces still serve as a middleman between buys and sellers of NFTs, but anyone can tokenize a digital item and sell without difficulty. This means that artists and sellers now have access to a global audience of interested buyers, this opens up new ways for sellers and artists to earn extra income or to gain extra exposure.

THE COPYING PROBLEM

Copying a digital item is easy, this means digital items without unique ownership are worthless because anyone can copy it. NFT solved this problem by making any digital item unique and storing this true ownership data securely on a blockchain, this creates uniqueness which increases value for NFT owners and investors.

NFTs UTILITIES

NFT has already gone beyond art/collectables. More and more NFT projects start to empower NFT diverse utilities to bring a better usage experience to the buyers. They include:

• SPORTS: Highlights of some particular moments can be sold as NFTs, and they can be invaluable to a fan. The NBA is already using this mechanism extensively.

What is the purpose of using NFTs in sports?

To sell highlights of particular moments as valuable collectiblesTo represent liquidity provider positions on Uniswap V3To simplify the voting process by eliminating voter fraudTo represent physical property or land on the blockchain
• DEFI: NFTs could be used in the future as an asset, or as coverage for loans. On Uniswap V3, liquidity provider (LP) positions are represented as NFTs (ERC-721 tokens) as opposed to the fungible ERC-20 tokens on Uniswap V1 and V2.

How can NFTs be used in DeFi?

To sell highlights of particular moments as valuable collectiblesTo represent physical property or land on the blockchainTo simplify the voting process by eliminating voter fraudAs assets or coverage for loans
• GAMES: NFT represents digital assets such as avatars, game equipment and game cards in crypto games. NFTs can unlock and add value to gameplay already experienced. These NFT games are a place where the users’ time and effort are given real-world value.
• MEMBERSHIP: If you own an NFT, this can give access to exceptional experiences with celebrities and people you like, like special dinners or calls.This is one of my fav use cases, as the value is in some sort of exclusive activities you can do.
• VOTING: NFTs can simplify the voting process by eliminating the problem of voter identification and voter fraud.
• MUSIC: The fast-growing ecosystem in the music NFTs is also noticeable. Some artists have already started interacting with their fans, finding new ways to monetize using NFTs, and associating them with some particular activities or unique moments.
• REAL ESTATES: A physical property or land can be represented as an NFT on the Blockchain. It’s possible in this way to keep track of both the real estate property and the history of the owners

Things to look out for when investing in an NFT project

• BUDGETING
• FINDING THE RIGHT PROJECT
• UTILITIES
• ACTIVE COMMUNITY
• GOOD SOCIAL PROFILE
• ROAD MAP
• RARITY

BUDGETING

NFTs are quite expensive, it is rather of great importance to carefully select those that suites your budget and risk appetite. Don’t invest in a project ignorantly because it has given high returns in recent times. The best way to go about it is to look for projects with a high potential ROI (Return on Investment) that is not yet mainstream.

It is rather convenient to enter such projects early as you stand a chance to get a much better return from such projects before they go mainstream.

FINDING THE RIGHT PROJECT

When your budget has been confirmed, the next step is to look for a data aggregator platform that can provide you with an overview of potential NFT projects.

An example of this platform is Moonly, a platform that rates NFT projects built on the Solana blockchain based on some factors. Its main purpose is to filter promising projects with high ROI.

Other platforms could provide you with such info, including the famous OpenSea and Solsea.

UTILITIES

It’s important that when we look out for a project to invest in we evaluate the purpose this NFT serves. It is important to check if its utility cuts across the real world or if it’s limited to its artistic nature or digital space.

NFTs with real-life use cases are best to invest in these use cases may include holders having access to members-only events, holders being eligible for dividends and future airdrops, and many other perks.

ACTIVE COMMUNITY

Belonging to a vibrant NFT community and following top NFT social media promoters and collectors is a way of gaining insight into upcoming projects. Most of the popular NFT groups are usually premium, which reflects the value they can provide to their members.

In the NFT market, community members are like customer service reps they tend to have answers to most of your pressing questions and can go as far as to provide you with practical guidelines. The more members an NFT project has the more popular and profitable it might be.

GOOD SOCIAL PROFILE

Good projects are never socially inactive. You can judge an NFT by using its social proof. Almost every new and the upcoming project uses Twitter to post important news and events. NFT projects that tend to attract massive social engagements are considered good to invest in as in every ecosystem numbers are considered paramount.

ROAD MAP

Only invest in NFTs that have a clear, transparent, and detailed road map that you can understand. The road map should define specific milestones, and any changes must be communicated clearly to stakeholders.

RARITY

The rarer an NFT is the higher in value it would be. Investors with a large pool of funds when buying a particular NFT goes for the rarer NFTs for that collection. Within a collection, the class of NFTs can be separated as follow

SUPER RARE: These class in the collection are deemed the most valuable and has the lowest supply in most case not more than 3% of the total collection.

RARE: They are considered more valuable than the ordinary but of lesser value compared to super rare. The rarity distribution for rare can be in the range of 5-10% of the total collection.

ORDINARY: These are the very common class in the collection and accounts for 85-93% of the total collection

In terms of rarity distribution, various projects can have a name for the different classes of rarity which would be stated in their whitepaper or docs.