What is an NFT?
NFTs have become increasingly popular in recent years as a way to trade unique digital assets in a growing number of online marketplaces. While some NFTs are purely collectible, others can be used to access exclusive content or services, or even confer ownership of physical assets.
NFTs are digital assets that can represent a wide variety of real-world objects and concepts, from art and music to in-game items and videos. They are bought and sold online, often using cryptocurrency, and are typically encoded with the same underlying software as many cryptocurrencies.
Whether you’re a seasoned crypto trader or just getting started in the world of NFTs, understanding how they work is essential to participating in this growing market. So what exactly is an NFT?
Let’s get started. Here’s what we’ll cover:
Table of Contents:
- What is an NFT?
- What is Blockchain?
- What are Cryptocurrencies?
- How do NFTs work in the blockchain?
- What are Smart Contracts?
- What types of NFTs are there?
- What is the web3?
- How do people make money with NFTs?
- What is the Metaverse?
What is an NFT?
First, let’s start with the concept of an NFT. The acronym NFT stands for Non-Fungible Token. A non-fungible token is a type of property or digital asset with a specific value. This property is unique, so it doesn’t have a replica with the same value.
In contrast, a fungible token is a type of asset that can be replicated and exchanged for similar to that asset. For example, a $10 bill could be exchanged for another bill of the same characteristics, since its value is exactly the same. Therefore, it is fungible.
When someone creates an NFT, they can auction off this work at a starting price, and sell it to an interested buyer. When the NFT is transferred to the buyer’s wallet, in addition to the NFT file, the buyer also receives the title deed. This property title validates the authenticity of the NFT.
The last buyer of the NFT is the one who holds the title to the NFT. However, the creator of the NFT still holds the copyright, and the art is still credited to the creator.
It is probably very complicated for many people, but to better understand this, think of a famous work of art, such as the Mona Lisa. The Mona Lisa is currently valued at over $908 million. This work of art can’t be exchanged for a replica, much less a photograph. This work could only be purchased for $908 million dollars.
If a person comes to buy this work of art, the property title would be held by this buyer. However, if Leonardo Da Vinci were still alive, he would retain copyright as the creator of this work. This is the same with NFTs, only in digital form.
Anyone could download this NFT, just like everyone could take a picture of the Mona Lisa, or take it from the internet. But, this image or photograph wouldn’t be worth the same as the NFT or the Mona Lisa.
All these NFTs circulate in a system called blockchain, then, we will explain a little more about blockchains.
What is Blockchain?
A blockchain is a system created primarily to make cryptocurrency transactions safer and faster. But over time, blockchains started to be used for more things like NFTs, or smart contracts.
There are many blockchains from different companies. There are even blockchains created specifically for a some cryptocurrencies. But how does the blockchain work?
This is a bit more complicated, but we’ll try to put it into simple words. A blockchain is a network of interconnected blocks. These blocks keep the information of the transactions that a user has in his wallet (a wallet is like a user’s account book).
When a person sends money from their wallet to another person’s wallet, two blocks are created. 1 block for the person who sends the money, and another block for the person who receives it. Each block knows the information that the other block has. This is a blockchain, with a little difference, a blockchain has thousands of blocks on the network.
Every block on the network has the transaction information of every other user on the network. In order for a transaction to be completed, it has to be validated by the entire network of blocks that exist.
In order for all the blocks in the network to validate this transaction, each one of the blocks will verify if the information of the users is the same as the one they have. Let’s put it in an example.
If Robert wants to make a $10 transaction to Sara, this transaction has to be confirmed by Peter’s block. If Peter’s block sees that Robert does have $10 and Sara will receive $10, then Peter can confirm this transaction. If Peter’s block notices that there is a change in the information, the transaction is canceled.
This same process happens in the blockchain, but it’s not just 3 people, it’s thousands of people confirming thousands of transactions per day. This is why
they call it the impenetrable network, because it is impossible for a hacker to be able to modify a transaction without being seen by the other blocks.
In the case of monetary transactions, these are not made with any fiat currency. These have to be made with cryptocurrencies.
What are Cryptocurrencies?
Cryptocurrencies are a type of token which can be used to buy things on the blockchain.
Cryptocurrencies work on a blockchain system, which allows them to be completely decentralized. This means that the value of these coins is only changed by the demand they have.
An example of cryptocurrencies are Bitcoins. Currently, a Bitcoin is worth $30,000, and it is the most valuable cryptocurrency on the market today.
These coins can be used for many different things. For example, in most NFT purchases, Ethereums are used to make the transaction. One ETH is equal to $1,700.
How do NFTs work in the Blockchain?
We already mentioned how a blockchain works with a cryptocurrency transaction, but how does it work with an NFT transaction?
First, NFTs are typically running on top of a blockchain network. When a user transfers an NFT to another user, they transfer it directly to their wallet.
What the blockchain does is make this transaction in the form of a smart contract. This contract is the one that verifies that the property title has the name of the person who bought this NFT. Now all the blocks on the network will know who owns this NFT, and no one will be able to hack the NFT to change the owner or the value.
What are Smart Contracts?
Smart contracts work in the same way as cryptocurrencies. These contracts are created in a blockchain where other users know the information of this contract.
In order for this contract to be changed, it will have to be verified by the other blocks of the blockchain where it is located. This makes contracts unbreakable and unchangeable by hackers.
As we already mentioned, these contracts serve to give a person to hold title of an NFT, but they can also be used for many other things.
What types of NFTs are there?
There are many types of classification for NFTs, but we have simplified this classification for you into 3 categories. The 1 of 1 NFTs, Gaming NFTs, and Collection NFTs.
1 of 1 NFTs
1 of 1 NFTs are the type of NFTs that were created to be unique. No copy or similar NFT exists, and they were created to be sold as a single work. This is done to increase its value in the market.
An example of a 1 of 1 NFT is Nyan Cat’s NFT. The author who created Nyan Cat in 2010 wanted to digitize his work in the form of NFTs. The NFT was sold at a price of $852,000, which is equivalent to 300 Ethereum coins, or ETH. In fact, he has posted more NFTs about Nyan Cat!
Gaming NFTs are the type of NFTs that are found in NFT games. These are the famous games also known as Crypto Games, NFT games, Play-to-earn games, or even Metaverses (We will talk more about the Metaverse later).
These NFTs can be obtained in games as a form of reward, and can be sold like any other NFT.
An example of an NFT game is The Sandbox game. This game is a multiplayer game where many users can join in the same world and perform different tasks. The official currency of The Sandbox is a cryptocurrency called Sand, which is currently equal to $1.24.
With Sands, players can purchase NFTs in the form of items in the game. For example, the NFT for a yacht was purchased for $600,000. The name of the yacht is The Metaflower Super Mega Yacht.
Collection NFTs are NFTs that are part of a larger group of NFTs. Typically, these NFTs are similar, but have different characteristics that make them unique.
Collection NFTs are created by a group of people. The reason why various types of similar NFTs are mass-created is because of mass advertising. Instead of advertising a single NFT, they can advertise an entire collection, so that they all have more relevance in the market.
An example of Collection NFTs are Bored Apes. The Bored Apes are a collection of NFTs inspired by the Planet of the Apes movie. It consists of 10,000 different NFTs of an Ape, but with different combinations of colors, accessories, and outfits. The name of the collection is Bored Ape Yacht Club.
What is the Web3?
Web3 is a term that has been around for several years, but has been gaining popularity with the explosion of NFTs, blockchains, and cryptocurrencies.
First, to understand web3, we have to understand the concept of “decentralized”.
When something is centralized, it means that it is controlled by an entity greater than the users or people. An example is fiat money, the money of countries. The dollar is controlled by a group of specific people, which in this case is the Federal Reserve System.
In a decentralized system, control is exercised mainly by the users or people who are part of this system. An example of this is the blockchain, since it is a decentralized block system that depends only on the users in the system and not on someone who manages the entire blockchain.
Similarly, cryptocurrencies are decentralized currencies whose price is dictated by the market.
Now that you understand what a decentralized system is, we will explain you about web3. This web3 refers to a new era of the internet, in which all types of existing services are completely decentralized.
For example, on web3, all transactions will be done with cryptocurrencies, which requires a decentralized blockchain system. On web3, all video games will be based on a blockchain which will be decentralized. And there would also be decentralized social networks.
This means that all possible services will be controlled by the market or users through tokens or cryptocurrencies.
But there are many people who criticize this idea of web3, saying that this is a way to convince people that blockchain is the next phase of the internet.
How do people make money with NFTs?
There are 2 ways to make money with NFTs. The first way is by creating your own NFT, and the second way is by buying and selling other people’s NFTs.
- Create your own NFT
When you create your own NFT, you can upload literally anything from a photograph to a drawing.
The way in which people earn money is this. When they create their NFT, they can sell it at a fixed price or sell it at auction. When they find a buyer, they will earn the money that the buyer gives in exchange for the NFT. So far, so good.
But in addition, the creator will also earn a percentage for each sale made of your NFT. This means that, if the person who bought the NFT from you sells it to another person, from that transaction, you will take a commission in the form of a percentage.
This commission is the largest form of income for the creator of the NFT, since he doesn’t have to do anything and the money will fall into his wallet for each transaction. This is also a great form of passive income, as an NFT that is worth a lot of money can make considerable income.
Let’s say you create an NFT worth $1 million, and you take a 5% commission from each trade of that NFT. This means that if your NFT changes hands at least 1 time a month, you would be getting $50,000 a month!
Now imagine what the creators of the most famous Collection NFTs in the world are gaining, without having to do almost anything…
- Buy and Sell NFTs
One of the most common ways to generate income with NFTs is by selling NFTs from other creators.
An NFT can go up a lot in price, and that’s how people make money with NFTs. You can buy an NFT for a cheap price and sell it for a higher price, making money from the difference you keep. For example, if you buy an NFT for $100 and sell it for $200, you would be making $100.
It should be mentioned that this method is riskier than the previous one, and that this is mere speculation. It’s hard to tell when an NFT is going to go up or down in price, and if it does go up, earnings are likely not to be very good. It all depends on the price and the money you spend.
One way to get a good income from selling NFTs is to know very well the product you are buying. You have to know if that NFT has the possibility of going up in price in the short or long term.
Another way to generate income is to sell gaming NFTs. As we mentioned before, gaming NFTs can be obtained by buying them or getting them by completing tasks. If you dedicate yourself to improve in one of these games and get the best NFTs, you will be able to sell these NFTs without having to invest any money.
What is the Metaverse
The metaverse is a concept that has become famous in recent years, especially since the introduction of Facebook.
In this presentation, Mark Zuckerberg talks about the new path he wants to take for his company, now called Meta. In this presentation he talks about creating a metaverse where many people can live with each other. Mark Zuckerberg mentions that he plans to have this metaverse ready in at least 10 years.
In this metaverse, it is also mentioned that the goal is to create an economy with a special cryptocurrency for this metaverse. He also mentions that people will be able to buy NFTs such as clothes, accessories and even houses.
It must be emphasized that, at present, there are already many games with the modalities that are mentioned in the presentation. The Sandbox, for example, already has an entire economy based on its own cryptocurrency, the Sands. And also NFTs are bought and sold everywhere.