What Is A Non-Fungible Token (NFT)?
Understanding how NFTs can be used in the real world
Like the crypto wave, NFTs are currently taking over the digital art and collectibles world. According to a report on Cointelegraph, the non-fungible token market will be worth a whopping $231 billion by 2030.
Furthermore, the report revealed that the market will grow by a compound annual growth rate of 33.7% between 2022-2030.
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The proliferation of NFTs in multiple industries will play a significant role in the forecasted market growth.
Now that we have given you a peek into what the future holds for NFTs, you need to understand what it's all about and how you can benefit from it. In this article, you will learn what NFTs are, how they work, and how you can use them to your advantage.
The Meaning of NFT
They are unique digital assets designed with a unique identification code and deployed on the blockchain network. You cannot exchange two NFT assets at equivalency because they are non-fungible.
The reverse is the case for crypto assets because you can convert your BTC to any crypto asset of your choice. Although these NFTs have been around since 2014, they have become more mainstream today because of how they are used in digital artworks and collectibles.
Non-fungible tokens are created through a process called minting. It involves you signing a blockchain transaction that lists every fundamental detail of the token.
Once the transaction is signed, it will initiate a broadcast to the blockchain protocol, which triggers a Smart Contract function. The smart contract is saddled with creating the token and assigning it to a new owner.
Once an NFT is created, its unique identification code is marked with an ‘owner identifier’ and stored within the smart contract. When it is to be sold, the ‘owner identifier’ makes it easy to verify the ownership of the token before reassigning it to a new owner. Some have been sold for millions of dollars.
For example, Beeple sold his 'Everyday-The First 500 Days' for a staggering $69 million; former Twitter CEO sold the first ever tweet for $2.9 million, Cryptopunk #5822 sold for $23.7 million; the Merge sold for $91.8 million, etc.
Characteristics of Non-Fungible Tokens
Certain attributes are peculiar to only NFTs. These unique features separate them from other assets and explain their value. These characteristics include the following:
Indivisibility is one of the most notable characteristics of non-fungible tokens. You can't divide an NFT into smaller units or tokens. The implication is that when you pay for the asset, it belongs to you in its entirety, not a part of it. In the case of fractional ownership, you have multiple NFTs representing a real-world asset where different people can own each of these multiple NFTs, thereby being a path owner of the real-world asset.
Every NFT has a peculiar identifier that makes it completely different from millions of others. It is the uniqueness of the assets that guarantee their non-fungibility. You can only have one type of NFT, and there is no alternative. These non-fungible tokens' uniqueness helps confer their value in the marketplace.
This is arguably the most important attribute of NFTs and has been the game changer in the digital art world. You can view the audit trail of an NFT to ascertain the history of the asset. Cryptography helps to ensure the value of authenticity in non-fungible tokens. The unique identification code also comes in handy here.
The rarity of an NFT is one of the major drivers of its value. While creators can create these NFTts, they also limit the numbers to ensure scarcity of the items. If an NFT is not rare, its value will greatly diminish in the market.
The Applications of NFTs
While the NFT industry is relatively young, the asset is used across multiple industries. Let us explore some examples.
There are currently more than 2 million daily active players of Axie Infinity, an NFT-based online game valued at $3 billion. According to Devin Finzer, billions of people purchase digital goods within a gaming ecosystem. He projects that in the next 2-3 years, the NFT gaming industry will break unprecedented boundaries.
NFTs have had great success within the arts industry. The tokens have helped to solve the issue of ensuring the rarity of digital art, even when people can copy it. The fact that no one can claim ownership of an asset without proof helps add value to crypto art. You can easily go online and copy the image of a Bored Ape, but the art cannot be yours without the ‘owner identifier.’Therefore, only an individual can be the authentic owner of the art at every given time.
The market for digital collectibles has been growing in recent times. A good example is the NBA NFT collectible trading cards which are already making waves in the market. These collectibles comprise a huge chunk of NFT sales on platforms like OpenSea. There are more examples, such as Jack Dorsey's first tweet.
Real-World Application of NFTs
Tokenizing assets is not only restricted to the virtual world. With NFTs, anyone can have a stake in real-world assets like real estate or tangible artwork like the Monalisa.
For example, the digital equivalence of an artwork can be owned by multiple individuals who own minute portions of the art piece.
The real-world application of NFTs is enormous, especially with the rise of new markets and different avenues where people can invest. Imagine a real estate investment mapped out into other divisions, with multiple opportunities for people to invest in.
For example, one division can be a residential apartment, while another can be a beach house. Each of these divisions has unique features and is priced differently based on its characteristics.
How to Buy Non-Fungible Tokens
Because most of the NFTs are Ethereum-based, you will need to pay some ETH as gas fees during purchase. For NFTs deployed on different blockchain networks, you will have to pay using the specified token for gas.
There are varieties of marketplaces where you can purchase NFTs, like OpenSea, Rarible, Foundation, SuperRare, Nifty Gateway, etc. Each of these marketplaces has different requirements for anyone who wants to create an account.
The NFT market is only getting started, and the only way to ensure you enjoy a chunk of the growing market share is to gain knowledge about assets and the industry.
This article has painstakingly explained NFTs and how to engage in the market. Have it at the back of your mind that the market is volatile like crypto, so be careful while you are at it.
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