What are NFTs: A Basic Overview

What are Fungible Assets

Before jumping onto NFTs, let's first understand what fungible assets are. Fungible assets are items or things that can be easily swapped or exchanged because they are identical in value and features.

For example, if I have a $100 bill in my wallet and you have the same amount in $20 notes, my money can be easily exchanged with yours. They are 100% interchangeable.

If I have a 1-kilo bar of 999.9 fine gold, and if you have ten 100-gram bars of the same purity (999.9), we can easily swap them.

Similarly, if I have one Bitcoin and you also have one Bitcoin, their value is exactly the same, therefore they can be easily exchanged.

Therefore, assets that are identical in value and features can be considered as fungible, meaning cryptocurrencies, fiat money, pure gold and silver bars are all fungible things.  

What are NFTs?

NFT stands for Non-Fungible Tokens. But before we dive into "token," let me explain what "non-fungible" means.

Non-fungible simply means "unique."

This uniqueness makes non-fungible items different from others which means they cannot be swapped for something else of the same value.

Nice! Now we can move into what a token means. 

A token is simply a digital representation of ownership of a non-fungible asset. It’s like a receipt for a product you buy or a digital certificate that proves you are the holder of a non-fungible item.

Imagine you hold a digital artwork like “Everydays: The First 5000 Days” by Beeple which is highly unique and immensely valuable, and a friend of yours holds another digital artwork, let's say Crypto punk by Lava Labs. 

In this case, you can't swap your digital artwork with your friend's, even if they have the same monetary value. That’s because each piece is unique in its own way. 

Plus, one of the artworks could become much more valuable in the future. And no one can predict that! What seems equal now might change over time, making each piece special and irreplaceable.

Examples of NFTs

• Movies and Music
• Amateur or Professional Painting
• Digital Arts (NFT images, animations and creative designs)
• Virtual Land in the metaverse
• Famous celebrity signed football shirts
• The First Ever Tweet by Jack Dorsey 
• Nyan Cat 
• Your pet’s First Pawprint

How NFTs Derive Value

Anything that is very unique and that could be loved and admired by others, can become a great NFT because it is always people who assign value to things, and this value is represented in measurable value, that's why we provide a price tag to it in terms of money.

Apart from being unique, love and admiration, NFTs derive their value from Ownership, scarcity, authenticity and utility.

Scarcity - NFTs are unique items, this makes them scarce making them valuable. 

Authenticity - Blockchain makes sure that the ownership of NFTs cannot be duplicated. The clearer the ownership history, the higher the value, especially if the NFT was linked to a famous creator or celebrity.

Utility: Some NFTs grant special privileges like exclusive access to events or contents. 

Where to Buy NFTs

NFTs can be bought and sold in NFT marketplaces. These are usually websites that allow us to create, buy and sell NFTs. 

These websites are only a tool that helps us to create(mint), buy and sell NFTs to others for crypto or money, which are recorded securely in blockchains and decentralized storage file systems behind the curtain. 

Moreover, these marketplaces have their own terms and conditions regarding how they operate. For example, the type of NFTs available, payment methods you can add, fees etc. 

Popular NFT Marketplaces

• OpenSea - Largest peer to peer NFT marketplace.
• Rarible - A community-run marketplace where users have a say in decisions.
• SuperRare - A platform for high-quality, unique digital art.
• KnownOrigin - Focuses on showcasing creative and original digital art.
• Nifty Gateway - Known for limited-edition NFT drops from famous artists and brands.

Key Factors to Consider Before Buying NFTs

Seller Credibility

To verify a seller is genuine specially on large NFT marketplaces like OpenSea, make sure of these things mentioned below:

A blue tick or a badge on the seller's profile in the NFT marketplace.

Check the seller’s social media accounts for a good follower base and the verification tick.

Check the sales history of the seller, a well established seller would have consistent sales. Avoid any recently opened accounts. 

Above things are very important because anyone can impersonate an artist or seller and sell fake NFTs. 

For example, someone might download artwork from a popular collection like "Bored Ape Yacht Club," mint it as a new NFT, and sell it under a fake profile like “BAYC_Official. 

If you want to buy NFTS from popular sellers like World of Women or Cool Cats NFT, then make absolutely sure these accounts are verified.

Transaction Fees of the NFT Marketplace

When you buy NFTs, you might incur a transaction fee. Each NFT marketplace has its own rules when it comes to charging fees from sellers and buyers.

For example, OpenSea charges a 2.5% fee for sellers, but buyers don’t pay any extra fee. Other platforms like KnownOrigin and Axie work similarly. This is good for the buyers!

However, Rarible charges both the buyer and seller a 2.5% fee per transaction. So do your homework before buying from a certain NFT marketplace.

NFT Liquidity

It's important to remember that NFTs don’t have the same liquidity as cryptocurrencies. Unlike crypto coins, you can’t easily convert an NFT into cash whenever you want. This can be a challenge if you’re hoping to make a quick profit.

To make NFTs more liquid, some experts suggest "fractionalizing" them – which means breaking them into smaller parts. This makes it easier to buy and sell portions of an NFT.

Also, consider the overall market volume of NFTs. The market can rise or fall depending on the popularity of the NFTs being bought and sold. Since the NFT space is still growing, it’s smart to think about liquidity and market trends before purchasing your first NFT.

💡Quick Tip - There are many other factors to consider before buying an NFT, for example like the properties of an NFT, which crypto wallet to use etc., so carefully do your own research in this space. 

How to Buy NFTs

Select a Marketplace: Choose a well-known platform like OpenSea or Rarible to browse NFTs.

Set Up a Wallet: Install a crypto wallet, such as MetaMask or Trust Wallet, that can store NFTs.

Fund Your Wallet: Buy ETH (Ethereum) on an exchange like Coinbase and transfer it to your wallet.

Browse NFTs: Explore NFT collections and pick the one you want to purchase.

Bid or Buy: Either place a bid or buy the NFT at the listed price.

Confirm the Transaction: Approve the transaction in your wallet, paying the seller in ETH.

Receive Your NFT: After the transaction is complete, the NFT will be transferred to your wallet.

Where are NFTS stored?

NFTs are stored both in blockchains and decentralized file storage systems like IPFS (InterPlanetary File System).

This is because blockchains are only capable of storing metadata or small amounts of data typically transactional information and ownership data in a tamper proof and transparent manner in a decentralized way - meaning no one has individual control over the system.

Currently, Ethereum is the leading blockchain for trading and creating NFTs because of its smart contract's capabilities. 

Since NFTs can be large files like movies, these files are stored in decentralized storage systems like IPFS and Arweave.

For example, if you own an NFT movie, the blockchain will record that you are the owner of this movie NFT. It also stores important information like the creator, the date it was minted or created, and a unique identifier (ID) for the movie.

If you own an NFT movie, the blockchain keeps track of your ownership, the creator, the minting date, and a unique ID for the movie. But it doesn’t store the actual movie file, since it’s too big. Instead, the blockchain saves a unique hash that points to the movie stored elsewhere. 

But the real movie file is kept on a decentralized storage system like IPFS, which breaks it into small pieces and spreads them across multiple computers. This way, the movie stays safe and accessible, even if some computers go offline.

Additionally, NFTs can be secured using hardware wallets. However, it’s important to note that hardware wallets don’t store the actual NFT files or artwork. Instead, they store the private keys that grant access to the NFTs recorded on the blockchain, ensuring an added layer of security.

Top NFT Storage Platforms

• IPFS (InterPlanetary File System) - Decentralized storage that ensures files are secure and easy to access.
• Arweave - Focuses on permanent storage, ensuring your files stay online forever, with no need for constant renewals.
• FileCoin - Lets users buy and sell spare storage space in a decentralized way.

Final Thoughts 

While this blog provides only a brief snapshot of NFTs, it’s essential to dive deeper into the NFT space, especially to understand the risks and scams associated with them, which are not covered here.  Therefore, make sure to do your own research before stepping into this space.

Further, the profitability of NFTs from your investments mainly depends on the type of NFT you invest, market trends and timing. NFTs were a great investment a few years ago, but the market is now more competitive loaded with many types of NFTs. 

As with any investment, only buy what you truly believe in, and don’t rush into it without considering the long-term implications. Stay informed, enjoy the journey, and remember, NFTs are more than just digital assets – they are a new way to experience and interact with art, collectibles, and communities!

Disclaimer: The contents of this article are for informational purposes only and are not financial advice. The views here are just the author’s opinions. The crypto market is volatile, so be sure to do your own research before investing.