NFT was the buzzword of 2021, and it has taken over most of 2022. However, most people don’t know how these pixelated illustrations sold for thousands of dollars work.
Not your traditional tokens, NFTs are the new kid on the block, coming onto the scene to potentially revolutionize how value is transferred and stored.
In this post, we’ll explore what they are, how they work, and some prominent use cases.
So without further ado, let’s get started!
What is an NFT?
An NFT stands for non-fungible token. This is a digital asset minted in the tamper-free ledger known as Blockchain. Every NFT is minted in a particular Blockchain and cannot be modified, duplicated, or plagiarized.
Many NFTs take the form of digital files: JPEGs, PNGs, MP4 files, PDFs, and even videos.
When a user purchases an NFT, they buy the digital certificate that states that they are the sole owner of the NFT.
The NFT’s metadata also includes the verifiable transaction history of the token.
Digital content creators and artists have a new opportunity of making a profit using NFTs. That’s because NFTs provide crypto artists with direct revenues from primary and secondary sales without cutting a percentage of their earnings.
NFTs are sold on NFT marketplaces, of which there are two major types: streamlined and augmented NFT marketplaces.
NFT marketplaces are like Amazon for NFTs, where users can browse NFTs they want to purchase or sell their own. They can sell them directly or auction them.
A streamlined NFT marketplace sells the most varied types of NFTs to a general audience, aiming at NFT amateurs and enthusiasts who want to hold their pieces in the short term. Examples of these include OpenSea, Rarible, and Magic Eden.
They allow the seller to include the percentage of royalties they wish to obtain from future sales.
For example, if an NFT seller sold an NFT on OpenSea, and set the royalty percentage to 10%, then every time another seller resells the NFT, they’ll get a 10% revenue stream.
Augmented marketplaces have a smaller niche or are invite-only auction marketplaces with a specific target audience.
Many of these are among the most prestigious marketplaces, where multi-million dollar sales occur, or are specialized for a demographic, such as photography-only NFTs.
Examples of these include Nifty Gateway and Foundation.
How do NFTs work?
To understand how NFTs work, first, we need to understand the concepts of fungibility and non-fungibility.
When we say something is fungible, we mean that this asset can be replicated or exchanged with a similar asset, and its value won’t be affected.
You can switch a $100 bill for another $100 bill, and both will be worth the same. This means that dollars, and most currencies, are fungible.
On the other hand, you can’t exchange a used car for another one, even if they are the same model and year.
Even if they are similar, other factors could alter the objective value of each used car: past accident history, current condition, and even the country where it’s sold. This means that vehicles are non-fungible.
NFTs are also non-fungible because you can’t exchange an NFT for another, even if they are part of the same collection. All of them have different properties, utilities, and values in crypto.
Most NFT collections drop several thousand NFTs using generative art software, with many of them quickly reaching 8,888 NFTs or even more.
None of these thousands of NFTs with similar features will have the exact same ones, nor will they fetch the same price.
NFT can only be hosted at a single address on the Blockchain and can only be transferred using a private key.
This private key is usually stored in a crypto wallet assigned to the same Blockchain as the purchased NFT.
You can access the historical records of transactions of an NFT using the Etherscan free-to-use Blockchain search tool, which identifies wallet addresses and smart contracts.
What are the primary use cases of NFTs?
While one might think that NFTs can only be used in art and finance, there are use cases for NFTs in every major industry conceivable: hospitality, tourism, entertainment, food, law, and even real estate.
This is possible thanks to the Blockchain technology that makes NFTs work.
Blockchain technology allows for instant transactions between two or more users. This has been explored in the real estate industry by using real estate NFTs that allow for the transfer of properties between two consenting parties in a couple of hours.
In the past, securing a property transaction could take several months of paperwork at best.
In the food industry, fast-food chains are using the exclusivity factor of NFTs to share top-secret recipes by top chefs or tokens that give access to invite-only NFT dining experiences.
NFT restaurants and dining clubs are starting to appear, such as Flyfish Club. Membership in Flyfish Club is purchased on the Blockchain as an NFT, and only the NFT holder can participate in the dining experiences provided by the club.
Music festivals like Coachella use NFTs for lifetime passes and provide winners with additional augmented reality experiences in the live event.
And those are just the beginning, as NFTs have only recently obtained worldwide popularity. The more we learn about NFTs, the more use cases will come up, as these assets are the bridge between Web2 and Web3.
About The Author
Sebastian is a wordsmith and B2B SaaS article writer & scriptwriter for podcasts, channels and social media and Blogs. He also writes for finance, entertainment and motivational clients. In his spare time, you can find him coming up with ways to improve his mental health.