What is a non-fungible token? NFT explained

NFT Explained 

To explain NFT, it should be noted that initially, NFT technology was based on Ethereum. This blockchain platform, created by Vitalik Buterin, has become especially popular due to the possibility of creating so-called smart contracts on its basis: they make it possible to specify in detail the terms of the agreement and the mechanism for its strict implementation in the blockchain. In fact, it is a digital analogue of paper contracts. You can secure ownership of a certain asset under a smart contract through a token which is a digital analogue of a security.

Most tokens are fungible – that is, they are equal to each other and can be used as a currency. There are also semi-fungible tokens that have one unique property that allows them to be distinguished from each other. For example, these tokens can assign to their owners the right to receive a ticket to a movie session – in this case, the price for them will be the same, but the places assigned to the token owners in cinemas will be different.

What Is an NFT

NFT non-fungible tokens are completely unique and provide for their owners the opportunity to own a digital object that exists in a single copy: musical works, digital art objects, game items (weapons, characters) and any other unique virtual things.

Real world objects can also be taken into account using NFT, similar to how real estate or cars are taken into account in registers. But with the objects of the material world, the main advantages of decentralized digital accounting disappear. The characteristics of such objects are difficult to unambiguously determine, their sale and purchase is impossible solely by transferring data: the object itself must also be transferred. Therefore, the NFT is now mainly used as a global registry for recording the rights to digital objects: photos, music, paid items in computer games, etc.

How Do NFTs Work

While making a transaction with NFT, the user buys only a unique digital certificate for a work of art recorded on the blockchain, while the work itself does not move anywhere. Everything is stored in the so-called IPFS – Inter-Planetary File System, this is a peer-to-peer distributed file system that connects all computing devices together. Such a blockchain certificate confirms that it is you who owns the original copy of this object – despite the fact that absolutely anyone can view or download it. In the same way, any painting can be owned by a museum or an individual, but you can see it in an exhibition or in a catalog.

The author, like any Internet user, can store a picture anywhere: on a phone, flash drive, computer, tablet. A digital art NFT can still be downloaded, copied, and shared, but only the owner of the token will own the original. In the past, the lack of original digital art was a big problem, it was impossible to sell it without giving it a physical form. NFT has solved this issue, making it possible, even in a digital world where there are no borders and physical copies, to still claim that you somehow "own" a particular work or collectible. Prior to the NFT, there was simply no effective technical ability to own digital objects, which significantly limited the ability to monetize the work of digital artists.

That is why NFT collections have become widely spread in the art industry, especially now, during a global pandemic, when almost all exhibitions and art fairs have either been closed or moved online.

Can I Buy This Article As an NFT? 

Much of the hype around NFT technology has come about because it can be used to sell digital art. You can't buy this article as an NFT, but you can buy some other articles  – technically anything digital can be sold as an NFT, be it a picture, a text or a piece of music

Buying an NFT: Useful Tips

NFT Non-fungible tokens platforms are divided into 2 categories:

Self-service – tokens minting and independent choice of royalty percentage from each sale is available to any user. Such platforms can attract scammers, which repels large collectors.

Curated – Token creation is restricted to approved users, allowing platforms to provide exclusive, high-quality digital objects. While selling them, a higher commission is charged, the choice of the percentage of royalties remains with the site.

According to the activity of the NFT marketplaces, they can be divided into specialized ones which are focused on in-game assets, art, or the sale of tweets, and complex marketplaces with various types of tokens.

The platforms’ interfaces are more or less similar. The user registers and installs a digital wallet to store the token. If these conditions are met, you can create your own assets, buy or sell tokens.

Marketplaces offer sellers the choice of either a fixed price bid or an auction. The site may allow you to set the amount of commission for subsequent sales of the token.

When a digital asset is put up for sale, a transaction is created to trigger a trading smart contract for the merchant's NFT wallets. If pre-moderation is in effect, tokens become available to all visitors after approval by moderators.

You can sell and buy not only art: there are sections with sports cards, domain names and even objects for building your own virtual world (digital pieces of land, palaces, etc.), since with the help of NFT collections they have already begun to create their own virtual universes. Users buy digital land and real estate there, build museums and galleries where they can exhibit the art objects they purchase in the form of NFTs. In the metaverses, it is possible to communicate with other users, have parties and conduct excursions. For gamers, a number of NFT blockchain games in which you can sell and buy NFT assets are already available. 

Can I Buy NFT Collections With Cryptocurrencies?

In most cases, buying an NFT is not possible through fiat money – only with cryptocurrency. Since non-fungible tokens are created on the basis of Ethereum, the most common cryptocurrency for purchase is ETH. Another option is to enter the smaller but growing markets of Solana, Cardano or Tezos. There are fewer participants, but the chance to find a masterpiece cheaply is much higher,and these networks and marketplaces based on them have not yet realized their growth potential. However, technically anyone can sell NFTs, and can accept payment in any currency they wish.

Is NFT unique?

What is an NFT? NFT can be compared to the key to a safe deposit box with valuables. Blockchain technology functions similarly to an “international incorruptible notary” who, in any city in the world, can confirm that the key to a safe deposit box can open it, or can confirm that something belongs to the owner. 

In the case of NFT art collection, anything can be owned that does not violate the logic of the blockchain. For example, a picture or a gigabyte video. You can make a unique "cast" of this video, consisting of letters and numbers. This cast is attached to the brick (written inside it). And an “international notary” can confirm that a certain person owns a “brick” with a unique string of letters and numbers, which, in fact, encrypts a file. This is the NFT token.

In reality, anyone can violate copyrights, take a picture, logo or character they like, make a T-shirt with it, paste over a car, put it on an avatar. But there are laws that prohibit doing this, and in case of violation of rights, you can deal with the violator with the help of lawyers. The same goes for buying an NFT and NFT drops. All the necessary rights are transferred to the owner. That is, the owner of the token is be able to prove that the rights to some picture “attached” to his token belong to him, but at the same time, no one can forbid a person to download such a picture to his phone or computer, just as no one can forbid saving a photo from the Internet.

There are people who want to not only collect pictures, but also show them off, for example, putting pictures in their profile photos on social networks. But anyone can download a picture and put it on an avatar or somehow use it, especially if he is not afraid of legal consequences. However, in addition to the legal aspect, there is a practical and social aspect. In the case of NFT, the use of other people's pictures is condemned. If you are a famous person and do this, then you are acting unethically.

Thus, NFT non-fungible tokens largely function similarly to a regular cryptocurrency: a non-fungible token can be sent, it cannot be divided and copied. The NFT contains a picture or a link to it, which makes it possible to uniquely identify the picture. The NFT token owns the rights to this picture – this is the universal copyright. You can confirm this right using a crypto wallet.

How to make money on NFT projects

The demand for digital goods appeared long before the advent of NFTs. Many gamers bought skins in games, and the cost of such skins was often expressed in completely non-symbolic numbers. Of course, in those days, users did not buy NFTs, but the software code of the skin, but this hardly changes the essence.

Even more money is spinning where it comes to collectibles. Here you can recall the most expensive popular NFTs. Imagine that you have a unique baseball card. Or maybe you paint, collect stamps, or create game characters or be involved in the NFT music industry. All of your creativity can be sold digitally using NFTs although the application of NFT is much wider. Unique tokens can also be useful in work tasks. For example, they may certify your right to receive unique information or access to a private club.

But to make money on NFT projects, it is not necessary to create something new. As is the case with any asset, the price of an NFT token for a certain object changes over time, and you may well invest – invest your money in a project at the bottom of the market and sell at the top, thereby earning on the price difference. But, as with any investment and speculation, there are no guarantees that you will be able to make money on such actions. Investing is always a risk, and NFT investment strategy is no exception. 

Another example of a possible application of NFT is the purchase of digital tickets for a concert, football match or any other event. They can be used as souvenirs or, for example, an autograph of a celebrity.

How to Invest in NFT

In order to become an NFT buyer or participate in NFT drops, a user will need a cryptocurrency wallet and a fairly decent supply of coins. You can make a deposit through popular crypto exchanges, such as Binance. To do this, you will need to go through the KYC (know your customer) procedure, i.e. provide your details along with a photo. Further, you can replenish the balance by any convenient means, for example, by paying with a bank card.

Although a lot of different cryptocurrencies have been used recently to buy and sell NFTs, it should be understood that ETH is still the most universal means of payment. All popular NFT platforms operate on the Ethereum network. The same applies to all kinds of crypto wallets. The list of supported NFT wallets differs depending on the site, but whatever the site, MetaMask and Trust Wallet are almost always present in it.

Since the universality of payments is the main advantage of any buyer, you can focus on these payment instruments. At the very least, they are optimal for a novice buyer who has not yet decided on his preferred marketplace.

By installing the Metamask browser extension, you can use it to generate a private key for signing transactions. After copying the address of the new wallet, you need to transfer the purchased crypto from the crypto exchange to the balance in Metamask. Having a wallet and ETH tokens in it, you can register on one of the major marketplaces. You will be prompted to select the wallet used and link it to the marketplace. 

Next, you will be able to trade on the most popular marketplaces. Some of the marketplaces are “permissionless”, i.e. anyone can create any collection, including fakes of other collections. However, a number of such sites conduct content moderation, and popular collections that have passed verification have a special mark that you should definitely pay attention to.

Sometimes phishers lure users to replica sites selling fake NFTs. Phishers use bots to send messages, acting on behalf of representatives of crypto projects. For example, they offer to participate in a closed sale of tokens or the purchase of rare NFTs. Therefore, as elsewhere on the Internet, it is necessary to observe network hygiene – pay attention to the address bar in the browser and not follow dubious links. In the crypto world, things are even more complicated, as there are risks associated with vulnerabilities in smart contracts. It is impossible to insure against them, so the user can only trust the developers.

It must be borne in mind that there may be risks with the purchase of popular NFTs associated with the widespread bad advice of the authors of the collections. First, you need to look at the collection, check whether the NFTs in the collection are really unique or if the author tries to sell the same lot many times. It is also worth checking the name of the lots through the platform search to exclude the possibility of duplicates on the platform when the author of the collection copied other people's works and does not have copyright on them.

By registering, the user can start “walking” through the marketplace in search of the most interesting products for him. Prices range from completely symbolic to sums with 5-6 zeros. Some items can be bought immediately using the "Buy now" button, while others will have to be competed in the auction.

Even if the NFT costs next to nothing, the buyer will still have to pay a transaction fee. Therefore, the buyer's wallet must contain the necessary amount to cover the price of the goods and the commission. The latter usually depends on the time of day, platform load and other factors.

After purchasing an NFT painting or other product, they appear in the buyers’ crypto NFT wallets. Most marketplaces have an auction format, so you will need to apply for the NFT you wish to purchase.

The advantage of buying NFTs in the primary market is the potential resale value once the art is on sale. Some high-demand NFTs will sell for 5-10 times their original price right after release.

Tips for beginners:

  • Don't rush to buy.
  • Be prepared to read a lot, in order to understand what is an NFT and how to create an NFT.
  • Start using Twitter and Discord. All decent collections are promoted and publish news there.
  • Take the time to study market trends, NFT wallets, top collections/projects and those that are just gaining momentum.
  • Join thematic communities, they help even beginners with advice and information about NFT drops.
  • Always study what is an NFT and how do NFTs work – the project you plan to invest in, because 90% of NFTs turn out to be empty shells.
  • Do not take the word of those who offer to invest in NFT, check the information about the project and the team.
  • Don't invest everything in 1 collection. 1 out of 100 collections can shoot.
  • NFTs and investments in general are a risk. Get ready to win, but don't be discouraged if you don't make millions on your first try.

Legal status of popular NFTs  

Many users mistakenly equate an NFT with a digital object. But in fact, what is an NFT? It is a digital certificate denoting your rights to an image, animation, music, or any other object. At the same time, such a certificate does not always mean the transfer of exclusive rights to the content to you.

For example, with the help of an NFT token, you can get  the right to listen to some tracks, or attend a certain event. In this case, you will not receive any ownership of the object itself. There are also reverse situations, when NFT certifies the fact of buying exclusive rights to an object. Moreover, recently there are more and more situations when, with the help of NFT, not only digital assets are sold, but also quite tangible things and even intellectual property. 

The user agreement of one of the most popular platforms for purchasing NFT says that by placing or sending certain digital assets using the platform, you thereby grant the platform a non-exclusive license valid world-wide and free of charge, with the right to enter into sublicensing agreements.

Such license is granted for the following designated purposes: use, copy, reproduce, process, adapt, modify, publish, transmit, display and distribute by any means. Separately, it is emphasized that the granting of such a license does not restrict the rights of the owner of an asset, and it is also noted that the platform does not have any rights to sell your assets.

And the rules of another similar platform state that its users are not entitled to create NFT tokens that violate the rights of third parties. The issue of the transfer of exclusive rights to the objects of intellectual property themselves has not yet been settled by the creators of the platform.

Since the transfer of rights is most often regulated by agreements between the art platform or the right holder and the acquirer, these documents can serve as evidence of ownership of the rights to the tokenized object. Thus, if a separate legal agreement is not concluded between the creator and the buyer of NFT, then along with the purchase of a non-fungible token, the buyer does not receive any exclusive rights to the work as an object of intellectual property. Other rules may be established on some alternative platform – but to date, the user agreements of none of the largest platforms for transactions with NFT contain such rules. 

Perhaps in the future, the creators of NFT tokens will be given the right to choose the terms of licenses or otherwise obtain rights (for example, by way of alienation) in future versions of their products. 

What Challenges Does the NFT Sector Face?

One of the key problems of NFT is that the user can tokenize not his own work and, thus, secure ownership of someone else's creativity or object – there have already been incidents. In fact, at the time of the creation of the NFT, the ownership of the work by the one who creates the token is not verified in any way. There are already many scam accounts out there trying to cash in on your tweets/creativity and post it as NFTs.

Critics of the new technology also point out that the possession of a work or object in the form of NFT does not give any exclusive and legal rights to it. Purchasing a tweet from NFT does not alienate copyright or intellectual property from its creator, nor does it give you the right to commercially exploit the content of the tweet. Thus, you cannot buy an Elon Musk tweet, then print it on T-shirts and sell them. Also, Twitter can still delete the original tweet. 

In addition, it should be taken into account that a variety of rights for the buyer of a token can be envisioned for NFT. In other words, instead of the right of ownership of an object, it can only speak of the possibility of using it, and sometimes even without the right to profit from such use. Although, of course, there is nothing wrong with that if the NFT is bought for this purpose, and, in fact, you just want to leave a memory of yourself in the digital space.

Most NFT tokens traditionally refer to a specific object located on a specific server. But what happens if you buy NFT and the server moves to another domain or goes offline altogether? In this case, the NFT token will no longer refer to the object you purchased. And it's good if such a situation arises due to an accidental failure. In fact, it can be quite a malicious act.

Another point concerns possible plagiarism, against which the NFT does not insure in any way. Yes, once created, an NFT token can neither be counterfeited nor stolen. But do not forget that this is not a physical, and not even a virtual object of sale. Therefore, it costs nothing for an attacker to copy an object tied to an NFT and create their own token for this copy. Moreover, a copy on the Internet is a very loose concept.

A small insurance in case of buying NFT for a non-original object can be the use of specialized online platforms that take care of the copyright protection of the content creator. But even they cannot give a full guarantee here.

In addition, the NFT market is still quite low liquidity. Only a few, very rare works are in great demand and, after purchase, can be resold many times more expensive – a significant number of objects are of no potential interest. The hype surrounding the NFT collecting is considered by skeptics to be a "speculative bubble". Partly because of the hype that appeared, even non-existing works began to be sold.

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Maxim Katrich
Crypto enthusiast, editor of BitOnfeed, expert on the NFT industry.
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