About 3 weeks back, Abhijoy and I wrote an article on NFT Finance which saw a lukewarm response in terms of readership and engagement. Consequently, we started exploring why. As we discussed the many possible reasons, it suddenly hit us like a bolt of lightning.
While both of us have been dabbling in the world of cryptocurrencies, DeFi, NFTs, DAOs and whatnot for quite a while, crypto is still a new area for the vast majority, more so when it comes to NFTs. Therefore, a post on a new segment within NFTs, which in itself can be considered as a subcategory of crypto, would have a very nuanced and niche audience.
Studies on the total number of cryptocurrency owners suggest a figure anywhere between ~220 million to ~800 million individuals worldwide. The total number of NFT owners is a small percentage compared to that. It is debatable what the actual figure is though.
A Financial Times report says the number is as low as 360,000. A Forbes article says the world’s largest NFT marketplace, OpenSea, has 1.8 million active users. Even if we consider users of other marketplaces as well (since OpenSea alone does not support all-chains), the total number of NFT owners will still be miniscule in the crypto universe.
Similarly, the total market capitalization of NFTs, their daily trading volumes etc. are also much smaller than the overall cryptocurrency market size and activity. But it might not be this way for long.
Twitter recently launched its first NFT integration which allows users to link their wallets and set their owned tokens as profile pictures. This is the first major functional integration by a large platform - blockchain-linked verifiable ownership of pfp art.
Most other newsworthy integrations so far have been about launching brand collections, some of which come with utility (like TIMEPieces and Deathbats), some with income streams (like Royal) while others are purely collectibles. More on the reactions to the Twitter Blue announcement later.
It was also recently reported that Meta is planning NFT features for Facebook and Instagram. With billions of users on these platforms getting their first exposure to NFTs, the NFTverse is poised to grow.
In light of this, we thought it might be ideal to pen a piece that covers the basics of NFTs. For someone who has just read about NFTs and is considering getting into the rabbit hole, there needs to be a manual on how to get started.
While there are myriad guides on what-are-NFTs, there are very few that provide a simple navigational tour on how-to-NFT. How to create and mint, trade, use, rent, collaborate, etc. Intrigued? Read on.
But First, What is an NFT
To begin with, it is important to discern between what NFTs are and what they are not. An NFT is a token that represents something unique, and hence it is non-fungible. Fungible tokens like Bitcoin and Ethereum are indistinguishable from each other in terms of value or utility. For example, 1 BTC in my wallet is the same as 1 BTC in your wallet. If we exchange them, it would be an exchange of equals with no net benefit to either party.
A non-fungible token is verifiably distinct from another one. So, NFTs offer a way to manage provenance, ownership and transfer of unique items in a trustless manner.
NFTs can be used to represent a wide variety of items, like event tickets, legal documents, educational certificates, etc. However, the most popular applications of NFTs have so far been in collectibles and art. Hence, common pop culture references to NFTs are almost always meant to represent an underlying artwork. In this article, we will be practicing the same.
While Ethereum is the most popular blockchain for NFTs, chains like Polygon, Solana, Tezos and Stacks are also starting to see high traffic with their own dedicated patrons, communities and marketplaces. We will be focusing on Ethereum in this article.
The audio-visual representation of an NFT comes from media files linked to the token’s metadata. The media files can be static images, gifs, 3D objects, video, audio etc. They can be created anywhere by the artist and then hosted on any storage. Minting an NFT involves creating a token on a blockchain whose URI points to this file link. So, when anybody “sees” the NFT, they are basically looking at the stored media linked to it.
Minting is an on-chain process that requires a wallet to receive the NFT and to pay for the transaction fees (gas). The fee is in the form of the native cryptocurrency of the respective blockchain in which the NFT is minted. Some platforms allow for a free mint by sponsoring the gas on your behalf.
NFTs which have their media (or rendering instructions) hosted on-chain are considered by purists to be the truest form of NFTs such as CryptoPunks and OnChainMonkey. Then there are those that are hosted in distributed storage like IPFS. Since blockchains are not optimized for data storage, a vast majority of NFT collections choose to host their heavy media files in centralized repositories.
It is important to note that while there is a genuine critique of permissioned storage, the value of an NFT is in the token itself and its associated verifiability. The media file is an add-on. At the end of the day, the CryptoPunk token minted by Larva Labs is valuable and not a right-click-save media file or a copy-mint with the same image.
Minting and Trading NFTs
Now that you are familiar with NFTs, why not try minting one of your own? You can put your art up for sale, or simply share your creation with other enthusiasts. You can even pick up a piece or two for your own digital art gallery. Platforms like BlockArt let you create procedurally generated NFTs and mint them. These would fall within the broader generative art category.
Most NFT marketplaces have an embedded minting feature. OpenSea is by far the most popular marketplace and is possibly already covered in great detail in most publications, and so we will explore an alternative platform instead.
Rarible is another popular and rapidly growing decentralized NFT marketplace built on Ethereum, where you can mint, buy and sell digital collectibles seamlessly.
To mint, all you need is the artwork file and a Web3 wallet like Metamask. Rarible’s smart contract mints an Ethereum-based NFT and puts the file on IPFS. Thereafter, you can choose to put the NFT for sale on Rarible’s marketplace itself or just showcase it.
Rarible uses two different NFT standards - ERC-721 for creating unique digital assets and ERC-1155 for creating multiple editions of the same item.
Rarible’s “lazy minting” feature allows free minting. While the NFT gets listed on Rarible’s marketplace, the minting actually happens at the moment of purchase. The fee is paid by the buyer, and in case the NFT goes unsold, the artist doesn’t unnecessarily end up paying any minting fee.
When purchasing an NFT, you can either pay the listing price or place a bid and see if the seller accepts. For each sale, Rarible charges 2.5% of the sale proceeds from both parties. Rarible’s smart contracts also enable the original creator to earn royalties on secondary sales, i.e. every time the NFT is re-sold.
While Rarible is a centralized platform as of now, the creators plan to gradually hand over control to a DAO (Decentralised Autonomous Organisation) run by the community. $RARI, the governance token of Rarible, will play a vital role in the DAO by allowing members to decide the future course of development through decentralized voting.
Recently, Rarible has started supporting Tezos and Flow blockchains apart from Ethereum. This will not only introduce a host of new NFTs to the platform, but also enable users to create, buy or sell NFTs at comparatively lower gas fees. Integration with other blockchain networks is part of Rarible’s immediate roadmap.
Monetizing NFTs
By now you’re a proud owner of one (or more) NFTs, proudly HODLing them in your collection. Based on the utility or aesthetic value, an NFT can be: a wearable or property in metaverses like Decentraland or The Sandbox, put up in virtual galleries like Cyber, used to access exclusive communities like Illiquid Capital, a playable in P2E games like Axie Infinity and Star Atlas, used to receive a share of royalties through Royal, a passive earning source on rental platforms, and so on.
Since many blue-chip NFTs are considered valuable, there are platforms that help financialize them beyond a simple trade/flip utility. For example, NFT rentals for blockchain-based gaming. This is a new sector within NFTs with many promising platforms coming up. We had explored some of them in our NFT Finance article. We will discuss another one here.
Double Protocol is a fully decentralized NFT rental protocol for blockchain games and metaverses developed on Ethereum. This is based on the DeFi primitives of staking. NFT lenders earn yield from renters on Double Protocol just like liquidity providers earn APY in DeFi pools.
On the other hand, games like Axie Infinity require users to purchase and create a team of 3 digital playable characters called ‘Axies to play the game. This can represent a high economic barrier of entry for many potential players. With Double Protocol, you can rent Axies trustlessly (as opposed to Axie scholarships) from existing players and evaluate the game before making a bigger investment.
NFT rental platforms usually require collateral higher than the value of the NFT itself. Going by the price of in-demand NFTs, such over-collateralization might dissuade most gaming enthusiasts.
Moreover, many NFT rental protocols transfer the NFT itself to the borrower on payment of the collateral. NFT prices are volatile, and in case the price exceeds the collateral amount, the borrower might not return the item, leading to loss of asset for the original owner.
Double Protocol takes a different approach – it transfers a time-bound right to ownership of the NFT but not the actual NFT indefinitely. This is done through ‘doNFT Factory’ smart contracts.
When a user borrows an NFT, the smart contract mints and issues a doNFT to the borrower. This doNFT maps to the original NFT and contains the terms of lending, including the start time and expiration date. On termination of the renting period, the doNFT automatically expires, relinquishing the ownership to the lender.
This enables Double Protocol to offer NFT renting with 0 collateral, while the lender is at no risk of losing the NFT either. Any ERC-721 compatible token can be lent through Double.
DoNFTs can be split into new doNFTs or combined with other doNFTs. This opens up the doorway to a wide range of NFT rental use cases, such as subletting borrowed NFTs or reserving NFTs which aren’t currently available for borrowing. Double Protocol plans to implement such features in the near future.
Double Protocol has already been integrated into the popular metaverse project, Decentraland. The integration will allow users to rent lands and assets in a minimal risk and collateral-free manner. Decentraland has also
More metaverse projects on both Ethereum and other blockchains will also be supported in the future. Double Protocol’s contract is currently beingaudited by Peckshield. The report is expected to be released soon.
Owning NFTs through DAOs
The skyrocketing prices of popular NFTs have led to the creation of NFT DAOs where members govern together as a group and pool in their funds to collect blue-chip NFTs as a community, similar to a cooperative.
DAOs such as PleasrDAO and Flamingo have become quite popular in the NFT space today, but most of them have a high financial barrier to entry for regular NFT lovers. This is where PartyBid comes in.
PartyBid allows users to trustlessly pool funds and collectively bid on NFTs. The platform has been built on Ethereum. Anyone can create a new PartyBid or join an existing one, contribute ETH, and place bids as a collective effort.
During the course of bidding, any member can increase their bid to the lowest winning bid at the time. If the PartyBid wins, that group becomes a DAO, and the NFT is fractionalized and distributed among the members proportionate to their contribution.
In essence, each member of a winning PartyBid comes to own a fraction of the NFT. If the group decides to sell the NFT, the profits are shared depending on the amount of fractional tokens held.
PartyBid supports most of the popular NFT marketplaces, such as OpenSea, Foundation and Zora. Fractionalization is done through Fractional.art, a DApp which allows NFT owners to mint tokenized fractional ownership of their NFTs in the form of ERC-20 tokens.
For winning bids, the PartyBid platform charges 2.5% of the ETH used and 2.5% of the fractional tokens created. In case the bid fails, or if a user ends up contributing surplus ETH in a winning bid, then the extra Ether is refunded (keeping aside the gas fees).
As we come to a close, a word of caution. While the idea of NFTs has been around for a few years now, they have only started seeing major eyeballs since last year. Suffice to say, like anything new that bursts into the scene, NFTs have received mixed reactions from the fields of art, gaming and software development. This was on display in the reactions to the Twitter Blue announcement regarding NFT integrated profile pictures.
While crypto/Web3/blockchain advocates naturally have a positive stance towards NFTs, there is a lot of politics and debate ongoing with sceptics. For example, Wikipedia editors recently voted to not classify NFTs as art. Even among crypto advocates there are nuanced divisions with some camps not being as enthusiastic as others.
The idea of blockchain-based digital ownership has not sunk in yet. Cross-platform portability is also something that skeptical game developers have doubts on. So, there are issues to be worked through. It is not a slam dunk and will take time to mature. Nonetheless, the world of NFTs is fast moving and everyday there is something new happening. Keep watching this space as it keeps evolving.
Share with us whether this guide helped you get started navigating the world of NFTs. Abhijoy and I are always up for a chat on Telegram.
Disclosure: None of the information mentioned above should be considered as financial advice. The authors own tokens (both NFTs and fungible tokens) from some of the projects mentioned in the article.
Rohit Chatterjee is an Analog Design Engineer working at Texas Instruments. Abhijoy Sarkar is a banker-turned-entrepreneur. They are high school friends who lost contact years ago. They reunited over crypto in early 2018 and have been investing through mutual research and shared knowledge.