The Ultimate Guide to NFTs: The Future of Digital Ownership

By Anush Jafer
23 Min Read

Technological advancements have significantly influenced creativity, art, and storytelling. The invention of Gutenberg’s printing press ushered in the information revolution. The inception of the internet reduced the distance gap and allowed one to circumnavigate the globe at the click of a button. From print to digital, the transition has been swift and unrelenting. Furthermore, the advent of smartphones has brought accessibility to digital media, information, and communication within the palm of one’s hand. The rise of NFTs within the web3 revolution is of the same disruptive caliber, reshaping artistic expression and reception. 

A Non Fungible Token (NFT) is a tradable unique digital asset stored on a blockchain. NFTs serve as certificates of authenticity and provenance for digital assets using blockchain technology. These assets include various digital content such as art, music, video, virtual real estate, collectibles, and domain names.

Understanding Fungibility 

Before delving into the meaning, value, and defining characteristics of NFTs, it is critical to understand the concept of fungibility, which is central to the uniqueness of NFTs.

Any asset or item that is interchangeable and of equal value refers to a fungible asset. For example, a $5 note is identical to another $5 note’s value. Therefore, when individuals borrow a $5 note, they are not required to return the exact same note since another of its kind has the same value. This is true for other assets like cryptocurrencies, where the value of one Bitcoin is identical to that of another. Therefore fungible assets like fiat currencies or cryptocurrencies are defined by their homogeneity. These items are tradeable because they are characterized by their value and not their uniqueness.

Non-fungibility, on the other hand, refers to items that are defined by their distinctiveness. For example, a one-of-a-kind Jackson Pollock piece is non-fungible because it has a unique value that another work of art cannot duplicate. Similarly, NFTs in the digital realm are not interchangeable like-for-like. This is because each NFT has a distinctive and unique identifier that sets it apart from others. The rarity of certain art pieces within an NFT collection is valued differently from others. For example, an NFT creator might decide that out of a collection of 1000 pieces, 10 will have a different background. Therefore, an NFTs uniqueness and value are dictated by individual characteristics, much like other traditional luxury collector’s items such as fine art and watches.

NFTs Explained 

Non Fungible Tokens are best understood as unique digital assets that utilize blockchain technology to provide ownership and verification of their authenticity. These assets represent any media, from artwork, audio and video clips, virtual real estate, and many more. Therefore, since any form of media can be tokenized into an NFT, the utility of NFTs expands across several industries, including digital art and collectibles, gaming, music, and fashion to name a few. 

An NFT can be seen as a digital certificate representing a one-of-a-kind asset. The NFTs metadata serves as an authentication stamp that allows buyers and collectors to distinguish between two assets even if they appear identical. NFT metadata includes unique details about each digital asset, including its name, description or attributes, creator information, date created, edition number, and token ID.

The rapid growth of NFTs into the public spotlight is largely attributable to their capacity to demonstrate ownership in a transparent and immutable manner. This is done by leveraging the power of blockchain technology. Through the blockchain, every time an NFT is traded or created, the action is permanently recorded on the distributed ledger and timestamped, making it possible to trace and verify any individual NFT all the way back to its creation. 

This is especially relevant when it comes to art collectibles, as NFTs give buyers a way to establish an item’s provenance. Therefore, the risk of art forgery, such as the Knoedler art gallery scandal, is significantly reduced by utilizing blockchain technology’s transparent, decentralized, and immutable nature. 

In terms of transaction volumes and traders, the Ethereum blockchain continues to hold the majority of the market in the NFT sector. However, numerous other blockchains, including Solana and Binance Chain (BNB) have gained notoriety over the years among NFT enthusiasts as hubs for minting and trading NFTs. 

A graph indicating nft trading volume across several blockchains
Image via: The Block

Key Characteristics of NFTs 

Rarity and Scarcity 

Like with all assets, the price of NFTs is primarily influenced by supply and demand dynamics. NFT collections are frequently scarce and have a finite supply. The value of NFT projects could rise as a result of this exclusivity and the strong demand from collectors. Therefore, NFTs are often regarded by many collectors as a lucrative investment opportunity, much like traditional art. 

Indivisible 

NFTs are distinguished by their uniqueness and indivisible nature, unlike fungible assets like cryptocurrencies that can be divided into smaller or fractionalized units to be exchanged. In other words, individuals wanting to purchase an NFT must either buy the entire item, like a piece of digital art or not buy any art.

Immutable

Through blockchain’s decentralized, distributed ledger, NFTs are immutable by nature. This means that once an NFT is created on the blockchain, its data or properties cannot be altered, destroyed, or duplicated. 

Verifiable

The ease with which NFTs can be verified is another essential characteristic. Historical ownership data of an NFT is stored on the blockchain. This enables prospective buyers to identify the original creator or artist of a digital collectible or item, such as artwork, among its previous owners without having to entrust third-party verification processes completely. Moreover, since NFTs provide a verifiable trail of ownership, NFT creators can more efficiently safeguard their intellectual property or copyright infringement.

Direct Monetization for Creators

NFTs provide a foundation for artists and creators to sell their digital content directly to buyers and collectors without relying on traditional intermediaries like galleries. This not only creates a new revenue stream for up-and-coming artists that do not have access to prestigious auction houses but also enables them to set the price and retain full ownership and control of their content. This effectively empowers artists to have complete sovereignty over their revenue streams without relying on third-party platforms. 

Royalties via Smart Contracts

Another fundamental characteristic of NFTs is the royalties paid to artists. Royalties provide a more sustainable revenue model for creators. When an NFT is sold on a secondary marketplace like OpenSea, a smart contract automatically distributes a percentage of the sale price to the creator as a royalty. Artists have complete discretion and liberty to set their own royalty percentage when creating an NFT. This exemplifies how NFTs support a more equitable business structure for digital content creators. 

Communities

Owning an NFT and being part of a community have also become synonymous. The Bored Ape Yacht Club is the most notable example of an NFT project that fosters a thriving social environment for its collectors. A bored ape NFT entitles the holder to membership-exclusive benefits such as access to rare merchandise, a vote in the project’s future, and access to virtual meetups and real-world events. Therefore, apart from holding one-of-a-kind digital content, NFTs can represent a ticket to exclusive online communities. 

Brief History of NFTs

NFTs have risen from being a formerly obscure area of crypto and web3 to now an established sector in the space. Despite the NFT sector growing to prominence within mainstream press outlets in 2021, it has a rich history that expands to almost a decade. The first-ever NFT named Quantum was created in 2014 by digital artist Kevin McCoy on the Namecoin blockchain. 

Quantum - the first NFT
Quantum NFT. Image via: NFT Now

Rare Pepes and Spells of Genesis, which were launched on Bitcoin, gained some traction over the following two years, but it wasn’t until Ethereum’s launch that the NFT landscape underwent a complete transformation. Early projects such as CryptoKitties and Crypto Punks were seminal in laying the foundation for the rise of the crypto art movement. 

Crypto Punks NFT Collection
Crypto Punks. Image via: Larva Labs

Over the following four years, while remaining a relatively niche sector, the NFT space saw a number of projects that broadened the scope of digital art, moving beyond PFP (profile picture) art pieces to collectibles like NBA Top Shot and in-game NFTs through projects like Axie Infinity and Decentraland.

The Explosion of the NFT Sector

The NFT bull run of 2021 elevated the industry to the forefront among artists, collectors, investors, and mainstream news outlets bringing NFT news to the masses. According to data from Cryptoslate, the total NFT market cap reached $20 billion in December 2021 from $85 million the year before. This calculates to a growth of 23,429% in a single year. 

The NFT sector experienced a dramatic explosion in 2021 as a result of a number of catalysts. With the lockdowns brought on by the Covid-19 pandemic, people adapted to naturally becoming more digitally adept. Twitter and other social media platforms developed into hubs for web3 and NFT enthusiasts to encourage mass adoption. 

Along with this, widespread adoption increased as established auction houses entered the market for digital art, further highlighting the growing NFT sector. A paradigm shift in modern art culture and technology was highlighted by historical events like the $69 million sale of the digital artwork “Everydays: the First 5000 Days” by creator Beeple at Christie’s Auction House. 

Everydays: the First 5000 Days" by Artist Beeple
Everydays: the First 5000 Days” by Artist Beeple. Image via: The Verge

Furthermore, the fact that the entire cryptocurrency market entered a new bull market in 2021, with many cryptocurrencies setting new all-time highs, was another catalytic event. Therefore, the growth of the NFT market was compounded by the growth of the entire crypto sector as a whole. 

With the introduction of The Bored Ape Yacht Club, NFTs gained notoriety as a pop cultural phenomenon. The popular PFP NFT collection, created by Yuga Labs, engendered critical acclaim from celebrities buying into the art, which led to astronomical valuations.

Bored Ape Yacht Club NFTs
A collection of Bored Ape Yacht Club NFTs. Image via: Blockcrunch

The NFT sector has experienced a sharp downturn in trading volume and prices since May 2022, ushered in by a crypto bear market. However, veering away from the hype and euphoria, the bear market has allowed enthusiasts to explore the plethora of NFT use cases that have the potential to disrupt several industries, including fashion, music, and gaming.

The variety of NFTs has grown alongside the expansion of the sector into a multibillion-dollar market. From meme-themed profile pictures to trading in-game digital assets, the utility of NFTs expands across several industries. It can be broadly categorized based on the type of digital asset they represent. Although the technology’s use cases are constantly evolving as the industry matures, the types listed below are some of the most pertinent and well-known applications of NFT technology.

Art NFTs 

Art NFTs represent digital art, such as paintings, drawings, and illustrations. They are the most dominant type of NFT in terms of popularity. This is because they are accredited with being one of the earliest use cases of the technology. Moreover, this type of NFT has several sub-niches, such as PFP art, generative art, and photography. 

Music NFTs

NFTs are revolutionizing the music industry by providing a more democratized and equitable system for both artists and fans. By tokenizing music, artists can sell their music directly to their fans as NFTs without relying on traditional money-hungry record labels or distributors. In addition, since artists have complete ownership and control over the rights to the music, NFTs open new avenues for monetization and for connecting with their audience on a more personal level. This can include unique experiences such as access to backstage meet and greets, concert tickets, exclusive merchandise, etc. 

Gaming NFTs

In order to improve user experience, online gaming has traditionally offered in-game accessories like unique weapons, armor, skins, and other items. Players can obtain these resources by purchasing them through the platform or game developer. On the other hand, traditional in-game items do not offer players a source of income because they are only available as one-time add-on purchases and cannot be traded with other players. 

With the advent of Play to Earn gaming, also known as GameFi, in-game accessories are NFTs that range from items and characters to the gaming environment or virtual lands, as seen on popular platforms like Sanbox and Decentraland. As a result, items effectively turn into assets that players can sell and trade with others. These NFTs are available for purchase on an NFT platform like OpenSea or within the Games’ dedicated marketplace. 

Fashion NFTs

With the likes of fashion powerhouses like Gucci, Tommy Hilfiger, Dolce and Gabanna, Tiffany & Co, Nike, and Adidas forraying into the space, NFTs are making waves throughout the entire fashion industry. These NFTs represent ownership of both actual, tangible fashion items and their digital equivalents such as virtual clothing, shoes, and accessories that an individual’s avatar can wear within metaverse platforms. As a result, fashion NFTs not only generate revenue for fashion brands but also create new customer experiences by merging the physical and digital worlds.

Minting, Buying, and Selling NFTs

Before investing time and money in the NFT realm, it is critical that both creators and collectors understand the fundamentals of crypto and web3 jargon. Just as fiat currencies (USD, Euros, etc.) from a bank account are used for the purchase of goods and services in web2, cryptocurrencies (ETH, SOL, BTC, etc.) are the backbone for transactions in the web3 sphere. While specific marketplaces, such as Nifty Gateway, let users trade NFTs using traditional fiat currencies, the majority of them require cryptocurrencies to conduct transactions. 

Depending on the blockchain used to create or trade NFTs, the native currency of the blockchain must be purchased on exchanges like Binance or Coinbase. These platforms allow users to buy cryptocurrencies through simple fiat onramp methods such as bank transfers. 

Once purchased, it is vital to set up and transfer the cryptocurrency from the exchange to a dedicated cryptocurrency wallet. These wallets are effectively one’s bank account, vault, and gateway for all things web3. In order to create, buy and sell NFTs on marketplaces, users must connect their wallet to the platform to conduct transactions. In addition to enabling transactions, these wallets are also used to store NFTs. 

Examples of popular cryptocurrency wallets include blockchain-specific wallets like Metamask for the Ethereum blockchain, Phantom for Solana, and other multi-currency crypto wallets like Exodus and Ledger. This article provides a detailed guide for setting up a cryptocurrency wallet.

Minting 

The process of creating new NFTs is known as minting. However, minting can also refer to purchasing NFTs on the launch date for buyers. In order to create an NFT, the procedure is straightforward but requires specific mandatory actions. This includes selecting a marketplace to mint on and setting up a cryptocurrency wallet with sufficient funds to cover transaction fees. 

The dashboard for creating NFTs on the OpenSea NFT platform
Image via: OpenSea

Once this is in order, artists and creators can begin the minting process by uploading a file to convert it into an NFT. Subsequently, additional information on the description, price, method of sale (fixed price, timed and unlimited auction), and royalties can be added to the digital content. The final step before creating an NFT is paying the listing fee via the funds in the connected crypto wallet. 

Buying and Selling

Buying and selling NFTs can be initiated on several marketplaces. Although OpenSea is the most well-known platform, many other markets, including Blur, have emerged as user-friendly platforms for enthusiasts, capturing a sizable portion of the market in recent months.

A bar graph indicating weekly trading volume across different NFT marketplaces
Weekly trading volume across NFT marketplaces. Image via: Dune

Buying digital content on an NFT marketplace can either be purchased outright or by placing bids depending on the type of listing. Similarly, selling requires an NFT holder to decide on the auction method before initiating a sale. 

The purchased NFT will automatically appear in the buyer’s wallet after being acquired with cryptocurrency. For sellers, the ownership of the NFT will instantaneously be transferred following the NFT sale, and they will also automatically receive the transaction’s proceeds in their wallet.

Considerations and Closing Thoughts

Despite the undeniable potential of NFTs in transforming artistic creation and acquisition, the space remains not only a speculative investment but also a risky one. The number of scams in the sector has amplified the risk associated with NFTs. Common cryptocurrency scams like phishing and rug pulls are ever present in the NFT sector. Due to the accelerated growth of the space along with a novice investor profile entering in herds, malicious actors are omnipresent to siphon assets from unsuspecting victims. 

Therefore, before entering the space, it is paramount for individuals to conduct thorough due diligence. This includes proactively learning crypto-specific precautionary measures such as protecting seed phrases, analyzing an NFT project’s roadmap and team, and being aware of common scams and what to watch out for. 

That said, with an adequate cautionary approach and as the sector matures, it is clear that individuals in the space currently remain early adopters. The use cases of NFTs are bound to transition from simply being recognized as artwork to much broader potential applications such as ticketing and identity verification. Therefore, the technology revolutionizes the way individuals interact with digital content and authorize ownership in the digital realm.

As new applications for the technology come to the fore over the next few years, the utility of NFTs as proof of ownership contracts will continue to be a permanent presence in society. Similar to the introduction of the internet and social media, the NFT ecosystem represents a significant cultural and technological shift.

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