What is an NFT? How non-fungible tokens work

How Is an NFT Different from Cryptocurrency?

NFT stands for non-fungible token. It’s generally built using the same kind of programming as cryptocurrency, like Bitcoin or Ethereum, but that’s where the similarity ends.

NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible). One NBA Top Shot clip, for example, is not equal to EVERYDAYS simply because they’re both NFTs. (One NBA Top Shot clip isn’t even necessarily equal to another NBA Top Shot clip, for that matter.)

What are NFTs?

Anything that can be converted into a digital form can be an NFT. Everything from your drawings, photos, videos, GIF, music, in-game items, selfies, and even a tweet can be turned into an NFT, which can then be traded online using cryptocurrency.

What are cryptocurrencies?

Cryptocurrencies are digital currencies. The term “crypto” comes from the fact that these currencies (often called digital tokens) are secured via a process called cryptography, meaning they are highly protected and just about impossible to double-spend or counterfeit.

This security is achieved via various processes (including encryption algorithms, public-private key pairs, and more) which have their own controversies attached to them, but for the purposes of this explainer, it’s enough to know that cryptocurrencies are basically a digital form of money — which is why you often hear digital tokens named “X-coin.”

Physical representations of cryptocurrencies. Credit: Art Rachen via Unsplash

Anyone can buy and sell cryptocurrencies on decentralized exchanges, like OpenSea (a platform that also allows you to buy NFTs) and Binance. But you’ll need a place to store that digital money, so you’ll have to set up a crypto wallet before you buy any. You can use crypto to buy things like NFTs (which we’ll get into next), but many see these currencies as a trading and investment tool due to their volatility and, occasionally, their soaring values.

The key thing to understand about cryptocurrencies is that, just like fiat currency, they are fungible. If you have a five-dollar bill in your wallet and someone asks you to trade it for a five-dollar bill in their wallet, you wouldn’t care. Your money is fungible — any five-dollar note is as good as any other so long as it gets the job done. This is exactly how cryptocurrencies work. Five ETH in my digital wallet is interchangeable with 5 ETH in someone’s else digital wallet.

Make sure you do your research and keep a level head. The media likes to exacerbate reports of doom and gloom. Likewise, take any report or article that says the world of crypto is without risk or the solution to all the world’s problems with a massive grain of salt. Both perspectives are extreme and the reality is far more interesting and nuanced.

Now that you’ve got a basic insight into what cryptocurrencies are and how they work, one of the best ways to further your understanding of them is to contrast them with their closely-related digital cousin, NFTs.

Blockchains that run NFTs

Characteristics

A diagram showing the right to own an non-fungible token and linked file. In most cases, it is heavily dependent on the token’s smart contract.

Uses

No centralized means of authentication exists to prevent stolen and counterfeit digital works from being sold as NFTs, although auction houses like Sotheby’s, Christie’s, and various museums and galleries worldwide started collaborations and partnerships with digital artists such as Refik Anadol, Dangiuz and Sarah Zucker.

Other associated files

Cryptocurrencies aim to act as currencies by either storing value or letting you buy or sell goods. Cryptocurrency tokens are fungible tokens, similar to fiat currencies, like a dollar. NFTs create one-of-a-kind tokens that can show ownership and convey rights over digital goods.

How Does an NFT Work?

An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including:

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.

Who can buy NFTs?

Some of the largest NFT marketplaces are:

Touted as the largest NFT marketplace, you can find digital art, there are collectibles including game items, domain names, even digital representations of physical assets at OpenSea. Essentially, the platform is like an eBay for NFTs with millions of digital assets organised into hundreds of categories.

Quite similar to OpenSea, Rarible is also one of the largest NFT marketplace that enables artists and creators to issue and sell NFTs.

History

NFT stands for «non-fungible token.» At a basic level, an NFT is a digital asset that links ownership to unique physical or digital items, such as works of art, real estate, music, or videos.

To really get a handle on NFTs, it’s helpful to get familiar with the economic concept of fungibility.

So why are people shelling out so much money for NFTs? «By creating an NFT, creators are able to verify scarcity and authenticity to just about anything digital,» says Solo Ceesay, co-founder and COO of Calaxy. «To compare it to traditional art collecting, there are endless copies of the Mona Lisa in circulation, but there is only one original. NFT technology helps assign the ownership of the original piece.»

Selling NFTs has been a lucrative business in the art world. Here are a few examples you may have heard about:

Other people may be able to make copies of the image, video, or digital item that you own when you buy an NFT. But, similar to buying a unique piece of art or limited-series print, the original could be more valuable.

What is the blockchain?

So, we have this new technology that can support decentralized data transactions of all kinds.

Let’s start with cryptocurrencies.

How to Buy NFTs

If you’re keen to start your own NFT collection, you’ll need to acquire some key items:

First, you’ll need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You’ll likely need to purchase some cryptocurrency, like Ether, depending on what currencies your NFT provider accepts. You can buy crypto using a credit card on platforms like Coinbase, Kraken, eToro and even PayPal and Robinhood now. You’ll then be able to move it from the exchange to your wallet of choice.

You’ll want to keep fees in mind as you research options. Most exchanges charge at least a percentage of your transaction when you buy crypto.

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Popular NFT Marketplaces

Once you’ve got your wallet set up and funded, there’s no shortage of NFT sites to shop. Currently, the largest NFT marketplaces are:

•  OpenSea.io: This peer-to-peer platform bills itself a purveyor of “rare digital items and collectibles.” To get started, all you need to do is create an account to browse NFT collections. You can also sort pieces by sales volume to discover new artists.

•  Rarible: Similar to OpenSea, Rarible is a democratic, open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform enable holders to weigh in on features like fees and community rules.

Although these platforms and others are host to thousands of NFT creators and collectors, be sure you do your research carefully before buying. Some artists have fallen victim to impersonators who have listed and sold their work without their permission.

In addition, the verification processes for creators and NFT listings aren’t consistent across platforms — some are more stringent than others. OpenSea and Rarible, for example, do not require owner verification for NFT listings. Buyer protections appear to be sparse at best, so when shopping for NFTs, it may be best to keep the old adage “caveat emptor” (let the buyer beware) in mind.

See also

NFTs are unique digital assets. Cryptocurrencies are the digital money you use to purchase those assets. The best way to conceptualize this is through a real-world example.

Catch Simard’s “Free Hawaii” photo

Much like how a painter signs their work and inscribes its edition number, Simard’s photo now had a digital fingerprint, available to be seen at any time and by anyone in the world. The image had been written into an immutable public record that proved its originality and authenticity.

This perfectly encapsulates just one of the merits of NFTs. Visual artists who used to have to work with intermediary institutions like galleries, earning a fraction of the profits gained, now have an easy and direct way to be fully compensated for their work. The other benefit of NFTs is that, because the digital contracts that underlie them are customizable, artists can code in the amount of royalties they make from secondary sales. This means that each time the artwork changes hands, a cut of the profits goes to the original artist, creating a more sustainable creative economy for the industry.

Musicians are taking advantage of NFTs as well. It’s a well-known fact that streaming services like Spotify, YouTube Music, Apple Music, and others treat musicians like, well, garbage. Unless you’re already a massively well-known artist, you’re going to have a hard time making any money off of your art. Spotify, for example, pays artists between $0.003-0.005 per stream, meaning you’d need around 250 streams to make a single dollar. Rapper and producer Black Dave is a great example of someone who has used NFTs to their advantage, having sold songs and entire albums as NFTs for thousands of dollars at a time.

In any case, cryptocurrencies and NFTs have changed so many things in society, from how we view and appreciate art and how that art gets made and distributed, to how we think about the basic concepts of economy and value and currency in the first place. Web3 is a dynamic — and yes, risky — place. But it cannot be argued that it isn’t an exciting and inspirational one.

How to earn with NFT tokens?

There are several ways to make money. Here are the most popular:

Let’s go over each option in detail.

Designing your own project

There are 2 parts to developing and selling your own NFT collection: the creative stage and the technical one. We’ll start with the creative stage, seeing as it’s the more complicated one.

The creative stage

You need to come up with an original and unique idea that people will want to buy. When brainstorming, you can build on:

After that, it’s time to pick a format. You can NFT-ize any form of digital content, just so long as you are the rightful author. You can experiment with music, design a picture or make a video.

The most expensive NFT painting “The First Five Thousand Days” by Beeple was sold at Christie’s auction for $69 million

The technical stage

Done, you’ve created a token. Wait a few days for it to pass moderation, and after that, you can put it up for auction.

The “HUMAN ONE” NFT sculpture by Beeple sold at Christie’s auction for $28.9 million

Auction

Create a selling proposal, select the NFT’s starting price, auction format, and set access parameters. When you’re done, click the “Post your listing” button.

Keep in mind that the price changes dynamically throughout the day. Traders recommend paying the commission at 8:00 AM NY time, since this is the time the price is usually lower.

And that’s about it. Your NFTs make their way onto an auction, where investors can buy them, after which you will get cryptocurrency on the wallet you attached. Also, some networks also provide you with dividends on subsequent transactions involving your NFT.

The likelihood of people taking an interest in your art and buying it depends directly on how active you are in the community, on the product, and on the advertising. Communicate with other players, post ads and talk about your project — this will raise the price of your NFTs.

The most expensive NFT painting “CryptoPunk #7523” by Larva Labs sold at Sotheby’s for $11.8 million

Invest

There are 2 strategies to choose from:

One of the newest NFTs from Bored Ape

A secondary resale is a suitable option for large investors who are willing to spend thousands of dollars on investing in large NFT projects. It is almost always pointless to resell tokens of small projects, they rarely grow.

That’s why we’ll focus on buying the token before it hits the exchange, on presales, in other words. Pick out promising projects, exchanges promote them on their own on their main pages:

Preparing for the presale

Once you decide which project to invest in, you need to prepare for the presale:

And that’s about it, now you just need to wait for sales to open and buy the tokens. Reaction time is crucial at the start — many NFTs are sold within seconds. If you manage to purchase tokens, you can immediately put them up for sale.

When setting a price, focus mainly on how rare the token is. For ordinary tokens, a 30% margin will do, for rarer ones, the markup can reach several thousand percent.

Also, check the offers of other players on the exchange to adjust the cost. Reduce the price gradually if your NFTs aren’t selling.

Collect Airdrops

This is a way to earn on NFT without investments. The income from this method is minimal, but in the long run, it can become quite impressive.

The conditions may include:

If you have met all the conditions, you may get rewarded with cryptocurrency or NFTs credited to your account. Generally speaking, tokens from airdrops are almost of zero value, developers give them out as a symbolic reward.

You can scale your Airdrop profits if you set up an account farm. That will enable you to take part in drops several times, helping you accumulate assets more quickly. Keep in mind that organizers will have requirements for accounts — don’t think you can take part in Airdrops without warm-ups and a normal-looking friends list.

Here’s where to look for information about upcoming drops:

After making your NFT, you can immediately put it up for sale. If the price on the exchanges is high, no need to wait, secure that profit immediately. Otherwise, it is better to wait, often projects can grow dramatically and bring in hundreds of thousands of percent of profit.

Please note that taking part in the airdrop doesn’t guarantee you an NFT or cryptocurrency. Developers reserve the right to decide who they pay and who they don’t. They also determine the size of the remuneration on their own, since sometimes there are more participants than prizes to go around.

NFT Meaning

New projects and authors are emerging every day, NFT prices are soaring, and many moneymakers have already capitalized on this nascent industry.

We decided to devote a series of articles to NFTs and crypto technologies, with this being the first article. After reading, you will learn about the basic principles of the technology, what is a non-fungible token and how to make money on them.

Types of NFT content

Now let’s figure out what can be used as content for an NFT. Any digital product can be made into a non-fungible token, for example:

You can pack any sort of digital content into an NFT, as long as it is unique.

The Flying Cat With a Pop-Tart Body GIF was sold for 300 ETH ($590 000)

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We’ve combed through the leading exchange offerings, and reams of data, to determine the best crypto exchanges.

What Is an NFT?

An NFT is a digital asset that can come in the form of art, music, in-game items, videos, and more. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.

Although they’ve been around since 2014, NFTs are gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. The market for NFTs was worth a staggering $41 billion in 2021 alone, an amount that is approaching the total value of the entire global fine art market.

This stands in stark contrast to most digital creations, which are almost always infinite in supply. Hypothetically, cutting off the supply should raise the value of a given asset, assuming it’s in demand.

Famous digital artist Mike Winklemann, better known as “Beeple,” crafted a composite of 5,000 daily drawings to create perhaps the most famous NFT of 2021, “EVERYDAYS: The First 5000 Days,” which sold at Christie’s for a record-breaking $69.3 million.

Anyone can view the individual images—or even the entire collage of images online for free. So why are people willing to spend millions on something they could easily screenshot or download?

Because an NFT allows the buyer to own the original item. Not only that, it contains built-in authentication, which serves as proof of ownership. Collectors value those “digital bragging rights” almost more than the item itself.

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Создать уникальный токен и связать с ним медиафайл можно самостоятельно и бесплатно на сервисе opensea.io. Для этого потребуется адрес в Ethereum. Если его нет, для генерации можно воспользоваться множеством сервисов криптовалютных кошельков, одним из вариантов которых является MetaMask в форме расширения для популярных браузеров или мобильного приложения, не требующий регистрации и передачи каких-либо персональных данных.

Передать уникальный токен на другой Ethereum-адрес, вне зависимости, принадлежит он тому же человеку или другому, возможно только по процедурам обработки смарт-контрактов, что подразумевает уплату системе (сети узлов Ethereum) комиссии.

Wallets for different blockchains, how to replenish them and link them to the exchange

Create a wallet, remember and write down all your passwords and passphrases. After that, you can start using it, to do this, click the “Connect Wallet” button, most decentralized exchanges have it.

No need to register — just add your wallet on the top right side of the screen

Next, you need to make a crypto deposit in your wallet. Funds will be needed to pay commissions when creating and exchanging NFTs. You can top up your wallets through exchange points or centralized exchanges as long as they accept bank cards.

To top up your wallet through an exchange, you must:

After some time, the cryptocurrency will arrive in your wallet, the exact time depends on the commissions and overall load on the network.

We’ve already figured out NFT what is it. Now let’s get to the bottom of how to make money on them.

The bottom line

While there may be many practical applications for NFTs in the future, they’re primarily used with digital art today.

«For creators, NFTs create a seamless way to sell digital art that might not have much of a market. Additionally, there are ways in which creators can get paid fees for each subsequent sale of the art,» says Ceesay. «On the flip side, collectors are able to speculate on digital art as well as have bragging rights on rare collectibles on the chain.»

If you’re considering purchasing an NFT as an investment, know that there’s no guarantee it will increase in value. While some NFTs sell for thousands or millions of dollars, others may remain or become worthless.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer. Read our editorial standards.

Please note: While the offers mentioned above are accurate at the time of publication, they’re subject to change at any time and may have changed, or may no longer be available.