NFTs for Dummies: A Complete Guide to the World's Biggest Trend in Art Business

Just because you aren't a computer scientist doesn't mean you shouldn't take advantage of the opportunities non-fungible tokens (NFTs) can bring. Like a standard token, NFTs can represent anything – from cars to houses, from money to equity.

But what are they, and how should you think about them? This guide gives a simplified introduction to NFTs. It covers the meaning and history of NFT, including its challenges and real-life applications.

What is an NFT?

NFTs are non-fungible tokens stored on a blockchain. The term NFT can apply to any unique token, but it's most commonly used to describe a collectible, such as a piece of digital art or a trading card. An NFT may be bought, sold, or traded within the confines of the platform where it was created.

History of NFTs

The first-ever non-fungible token (NFT), Quantum, was created by a digital artist named Kevin McCoy. It was a pixelated octagon with eight shapes, pulsating in different patterns. Also of note is that it was sold on November 28, 2021, at Sotheby’s Auction House, for over $1.4 million.

Understanding Blockchain Tokens in NFTs

Blockchain technology is responsible for the current NFT and cryptocurrency craze. A blockchain is a decentralized database that stores pieces of information (also known as blocks) in chronological order. This data can then be accessed by the public and used to track transactions or payments between parties.

NFTs and Cryptocurrency

Since NFTs are stored on blockchain networks like Ethereum, they function like cryptocurrencies without actually being currencies themselves. Like Bitcoin, for example, an NFT is tracked by computers worldwide to establish ownership and value. Unlike Bitcoin (in theory), however, every NFT is unique—no two are exactly alike, even though they can all be traded using the same technology.

Fungible Vs. Non-fungible

Fungible refers to something that can be easily swapped for something else of the same value (think: interchangeable). An example would be Bitcoin, a fungible token. Like dollars or any other form of currency, every bitcoin is equal to every other bitcoin. They are all equally valuable and can be exchanged for each other. In this case, "fungibility" means interchangeability.

Non-fungible refers to something unique that cannot be replaced by another of the same kind (think: one of a kind). Some examples would include CryptoKitties and video games like Cryptovoxels. Each kitten is unique and has different characteristics from every other kitten. This makes them non-fungible assets—they have unique properties that make them irreplaceable!

How NFTs Work

NFTs are issued as a contract on a blockchain network, and that contract is what creates the non-fungibility. A token is just a fancy name for an object generated by the smart contract when you mint your NFT.

Let’s look at this process in more detail to see how it works.

• The artist creates artwork (or makes a video game or writes music)
• They use software to create an NFT by minting it on a platform such as OpenSea or Rarible
• Someone buys the NFT​
• The sale is verified by miners who run software to validate the transaction and add it to the blockchain​
• Once validated, the new owner has received their NFT, which they can store in their wallet.

Wallets and Smart Contracts

Wallets are the interfaces where you can store, receive, and send your digital assets. Each wallet is given a unique string of characters which includes letters and numbers. This string is a public address that allows others to send you digital assets.

Once your wallet has received NFTs or other digital assets, users can trade them via smart contracts.

Smart contracts are programs written into the blockchain by developers that allow two parties to exchange digital assets. As long as the contract conditions are met (i.e., both parties receive what they expected), the transaction will go through without issue.

Minting NFTs

Minting is the process of creating a non-fungible token (NFT) child token from a fungible parent token. A new token comes out of the mint with its unique NFT I.D while still inheriting whatever specific properties were passed onto it from its parent.

Minting can be performed by an end-user or contractually through another smart contract. In other words, you can mint a new NFT yourself or let someone else do it for you if you don't feel like doing it yourself.

Buying and Selling NFTs

Trading NFTs is relatively straightforward: pick the relevant marketplace and select the token to purchase. Some of the most popular platforms include OpenSea, Rarible, and SuperRare.

On these sites, users can find a wide range of digital collectibles—from digital artwork to game character skins and in-game items. A portion of each successful transaction also typically goes to the platform.

Why Are NFTs So Popular Right Now?

NFTs are on fire because they're fast, easy, and exciting: actual items are bought and sold on blockchain platforms in real-time. Most of these things have never existed before in real life—because they haven't existed before in any digital format at all. Certain factors contribute to the growth of NFTs. These factors are:

The Pandemic

The pandemic has undoubtedly sped up the need for digital entertainment and creativity. Millions of people have more time to learn new things and try new things online. They have more time to be creative online, but they also have more time to spend money on digital goods.

And the NFT market is like a casino, with people trying out different things and seeing what returns they can get from their investments. Many wealthy people are investing in NFTs to diversify their portfolios in times of economic uncertainty.

Technological Adoption

The accelerating adoption of blockchain technology buoys the rising tide of NFTs. Although digital assets were being tokenized back in 2017, it wasn't until CryptoKitties (the popular Ethereum collectible game) went viral and burst into mainstream awareness that non-fungible tokens began to be widely noticed. Since then, many artists and creative professionals using blockchain to mint their work have skyrocketed.

Social media

NFTs' popularity is mainly dependent on social media, primarily Twitter. Social media helps in three ways for NFTs to grow. First, it helps in creating awareness about NFTs. Second, it educates users about NFTs, how they function, and the idea behind them. Third, it creates a community of interested users who can connect.

Art Democracy

NFTs enable more artists and creators to turn their passion into sustainable careers. It’s a way for them to own their work, decide how it's monetized, and profit from sales. People are no longer passively consuming art; now, they can be compensated for creating it.

This has led many traditional artists, videographers, creators of digital media or content on Tiktok/Instagram/Youtube, etc., and other forms of art that aren’t typically considered “fine art” such as memes and gifs to join the movement. They don't want to be gatekept from earning money from their craft by big companies anymore. They don't have to rely on getting big brand sponsorships or even selling out in real life every day either since they can sell their NFTs online instead.

NFTs as a Creator and Artist

For creators and artists, NFTs allow them to build their marketplaces. In the past, an artist would rely on a gallery or middleman to find buyers for their work. That meant the artist didn't control their destiny, which came with some downsides:

• The artist had little control over how much money they made from a sale.

• The artist had limited ability to create hype for their work through social media or other channels.

• The artist was at the mercy of any disputes that might arise between themselves and the middleman who sold their art (e.g., if sales numbers were misreported).

  
  

By selling NFTs instead of physical works of art, digital artists can set up shops in a marketplace where they can bring fans directly to their work and interact with them without third-party interference.

Power to the People

Let’s say you’re an artist and want to sell your art. With the traditional route, you sign up with a gallery or platform that takes between 20-50% of the sale as their cut. You also have no control over when or how your art is sold, and there's no transaction history associated with each piece. Enter NFTs: A non-fungible token allows artists to take back ownership of their art by selling it on the blockchain without an intermediary.

Passive Source of Income

NFTs allow you to get paid for things you already do, such as watching videos, commenting, or just holding some token that has value. It doesn't matter if you are a Youtube star or a random person. These tokens can be mined decentralized so that you're not at the mercy of miners that charge insane prices for their "work."

Exploring NFT Real Estate

You can create a virtual island, decorate it to your liking, and then sell it as an NFT. Anyone interested in buying the island will have to pay with crypto and own the token representing their new property. They’ll be able to visit their island whenever they want and even invite friends over. Or they can resell it at a higher price if they feel like it.

Applications of NFTs (Use Cases)

An area where NFTs are most likely to succeed first is in the art world. NFTs can be used to represent artwork. There have already been instances of artists selling digital artworks as NFTs, one of the most promising use cases for NFTs.

But it’s not just digital artwork that an NFT can represent—any work of art or collectible could benefit from being represented by an NFT, whether online or offline. You can use an NFT for the following:

To Represent Properties

You might be wondering how an NFT can verify ownership of a property if it's something completely digital. The answer is that you can use an NFT to represent a deed or title to your house, but the legal processes are still the same as with paper documentation.

For example, you could use this method when buying a home from another person who owns it outright and is not using a mortgage. This kind of transaction is called "buying free and clear" since neither party needs bank lending to make it happen.

To Secure Tickets

Think of an NFT ticket as a traditional paper ticket that allows entry to a baseball game. It’s unique and can’t be changed, but you can sell it to someone else. And if you try to make a copy, the counter staff will know it’s invalid.

To Play Games with Blockchain-Based Assets

NFTs can be used to play games with blockchain-based assets. Blockchain-based games are all the rage these days, and they use NFTs to establish ownership of in-game items like characters and weapons, among other things. In these games, you don't just have a sword "in your inventory" or "equipped." You own a digital sword tied to a smart contract on the blockchain. That digital sword has its unique name and serial number, so no one else can have it except for you.

Challenges with NFTs

The NFT market is a young industry. It still has a lot of uncertainty and volatility compared to other industry players. NFTs are also new and still evolving, meaning that their purpose could be refined or even replaced by another technology in the future. Additionally, NFTs are not without their own set of problems.

Security and Value

The value of an asset purchased as an NFT fluctuates based on what the market will bear. There are many risks associated with holding or purchasing this type of asset; because they're not guaranteed to hold their value or even represent what they claim to represent.

Besides, if you purchase a work of art as an NFT, there is no regulatory protection over the purchases. And since these assets exist only online, there's a chance they could be stolen from your digital wallet by hackers.

Speculation and Volatility

Valuation and speculation are also issues, as it's difficult to determine the actual value of an NFT. For example, this art piece was sold for $69 million, but since it's a digital asset and not a physical object, there's no natural way to determine what the market value of the item should be. Because of this uncertainty, NFTs could be highly volatile over time.

Tax Evasion and Money Laundering

NFTs enable tax evasion and money laundering for two primary reasons: the anonymity of the transaction and the ability to convert ill-gotten gains into legitimate assets.

In January 2021, New York prosecutors opened a criminal investigation into cryptocurrency mogul Matthew Mellon, who was suspected of using his NFTs to launder $300 million of cryptocurrency for Mexican drug cartels. This is an extreme example of how someone can use NFTs to hide their illicit activities from regulators. But there are many more common ways that this could happen on a smaller scale.

The simple act of reselling an NFT at a profit may be considered taxable income in some countries—but if you purchase your initial token in crypto or fiat currency through an anonymous account with no recordable payment information (as many transactions on OpenSea do), then the government has no way to trace the sale or levy a tax. In other words, if you buy your first NFT anonymously and flip it for a profit later, you may have just successfully engaged in tax evasion without even knowing it!

Theft and Authenticity

One of the primary concerns when using NFTs is the safety of counterfeiters. Some unique digital tokens can be easily copied, so you will not own the property rights. On the ERC721 protocol, each token is unique, but there is still no way to ensure that the specified third party or creator has created it. When dealing with non-fungible tokens, ensure you get the authentic ones.

Physical Vs. Digital

The idea of buying a painting from an unknown artist and selling it later for millions is romanticized in art collecting. Still, it’s virtually impossible to do so with most physical paintings because there is no guarantee that they will be worth as much in a year as they are today.

With NFTs, however, their value is based on speculation: what people expect them to be worth tomorrow. This makes their value volatile and complex to understand at times.

Conclusion

NFTs are still relatively new and can be challenging to understand, but their potential is great. While NFTs are currently most popular in the art world, they can also be used for many other things. Eventually, NFTs may become more mainstream than crypto; however, there are still a lot of challenges that need to be overcome before then. Luckily, the technology surrounding NFTs is constantly improving; we will likely see more improvements soon as companies and developers continue finding ways to optimize it. For now, all we know is that NFTs are here to stay!