NFTs 101- Everything You Need to Know - Part 1

NFTs gained popularity in 2021, particularly after NFT artist Beeple wrote history by selling his NFT art for $69 million. Since then, NFTs have rocked the digital world, with artists, celebrities, global brands, tech heavyweights, and more hopping on the bandwagon.

Initially, NFTs were an experimental technology and a way for creators to take control of their work, NFTs have gone mainstream. But what exactly is an NFT? How does it work? Let’s find out!

What Are NFTs?

A non-fungible token, or an NFT, is an asset linked to a digital or physical object and stored in the blockchain. It serves as authentic proof of ownership. We can view NFTs as ownable and transferable digital certificates for media files. They are essentially the cryptographic signatures of images or other types of media and are:

  • Non-interchangeable
  • Immutable
  • Traceable

Since each non-fungible token has unique properties, NFTs are not replaceable or interchangeable. They offer an unprecedented value proposition regarding tokenized data and property rights that could revolutionize many industries.

How Do NFTs Work?

Every NFT has a code, a unique ID, and metadata that no other token can match. They exist in a blockchain that serves as the decentralized ledger which traces the ownership and transaction history of each NFT. A non-fungible token may only have one owner at any given time. Smart contracts assign ownership and govern the transferability of NFTs. They also create an NFT’s unique ID and metadata which manages its ownership.

When you mint (create) a non-fungible token, a code stored in the smart contract executes, and the information gets added to the NFT’s blockchain.

The minting process follows three main steps:

  1. Creating a new block.
  2. Validating information.
  3. Recording information into the blockchain.

An NFT can be transferred to another owner using the same principle.

Unmarshal MARSH LP Staking Phase 2 on BSC
Source: Pixabay
How Do NFTs Make Money?

Before we get to how NFTs make money, we must understand what gives them value.

Consumer interest drives the value of an NFT. A non-fungible token is practically worthless if no one is interested in buying it. There are several factors that influence the value of an NFT.

  1. NFT rarity – Scarcity drives up the value as the investors love having something no one else has.
  2. Utility – Investors prefer NFTs that can provide real-world utilities and perks.
  3. Social proof – Popular NFTs or those with celebrity endorsements will have higher price valuations.
  4. Ownership history – NFTs created by big-brands/reputed individuals or those with notable previous owners will have a higher value than others.

But how can you make money with NFTs? Let’s look at six ways to earn money from NFTs.

  1. Minting Your Own NFTs – Minting a non-fungible token means publishing a unique digital asset on a blockchain. It can be sold in an NFT marketplace, allowing you to monetize your creation.
  2. Royalties – While minting the non-fungible token, the creator can set their royalty percentage, which means that any secondary market sales will provide the original creator with a payment. Most royalties are between 5% to 10%.
  3. Flipping NFTs – Flipping is a method of buying low and selling high, ultimately producing a positive return. It is usually a very short-term approach that requires expertise in the NFT market.
  4. NFT Trading – NFT trading is more geared toward incremental capital gains over the long term. This method focuses on buying undervalued NFTs and selling them at the appropriate time, which involves patience and market expertise.
  5. NFT HODLing – HODLing is buying and holding an undervalued non-fungible token and selling it only once it gains value. It is not a guaranteed approach to making money. Sometimes holders receive airdrops.
  6. NFT Staking – Staking an NFT is an ideal way to gain a passive income from your NFT without selling it. You can receive rewards by locking your digital asset on a DeFi platform.

Like in any other investment, there are risks in making money from NFTs. DYOR and invest wisely!

Are NFTs Bad for the Environment?

One of the most common criticisms against NFTs is that their use of cryptocurrency leaves a negative environmental impact.

The most widely used blockchains are proof-of-work. Though these are highly efficient, efficiency comes at the cost of the environment. Ethereum is the dominant home of NFT activity and trading. Before the Ethereum Merge, the energy consumption of Ethereum rivaled that of entire countries when paired with Bitcoin. But since The Merge, Ethereum’s energy requirements have dropped by a staggering 99.5%. In the past, many people argued that NFTs increased the overall carbon footprint of blockchain since they promoted its use.

Additionally, several blockchains are already taking steps to address the blockchain energy problem. Solana uses a unique combination of proof-of-history (PoH) to control its energy use. For instance, Tezos’ liquid proof-of-stake (LPoS) system consumes almost two million times less energy than Ethereum did before The Merge. Non-fungible tokens (NFTs) minted utilizing an energy-intensive approach, such as proof-of-work, can harmfully impact the environment. Proof-of-stake blockchain-based NFTs have a substantially lower environmental impact.

Are NFTs Expensive Now?

The popularity of NFTs skyrocketed last year as some NFTs fetched millions of dollars at auction or sale, with the total sales of NFTs climbing to $25 billion. But the NFT market is not as robust as it used to be. Many NFTs have plunged significantly in price. Many have even collapsed to zero.

The first tweet of Twitter founder Jack Dorsey was converted to an NFT and sold for $2.9 million. But it has only a top bid worth $97 now. Logan Paul spent $623K on an NFT Bumblebee last year; it is now worth only $10. True, NFT sales have plummeted, but that doesn’t mean that no high-valued trades are happening in the space.

Take a look at the top 10 NFT sales of the last month.

NFT Sales
Source: DappRadar

Popular NFTs like CryptoPunks still sell for insane amounts of ETH. So not all NFTs have become worthless. Those with actual utilities or exclusive communities have retained their value. Although hype may have contributed to the insane valuations of NFTs, the actual utility will be the catalyst for its mainstream adoption.

NFTs remain risky, but once they progress beyond their present phase and address real-world concerns, organic and sustainable growth will ensue.

Read the second part of this article here.

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