NFTs: Everything to Know

By  Beluga Research September 2, 2023

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Summary

  • Cryptocurrency non-fungible tokens (NFTs) are unique digital assets stored on a blockchain, representing ownership of an item or piece of content
  • NFTs are unique digital assets that exist on a blockchain, each with distinct values and properties
  • They have gained popularity in various industries including art, music, gaming and virtual real estate
  • NFTs provide advantages such as authenticity, ownership and control, but face challenges including environmental impact, volatility and lack of regulation

Overview

Cryptocurrency non-fungible tokens (NFTs) are unique digital assets stored on a blockchain, representing ownership of an item or piece of content. Unlike cryptocurrencies like bitcoin or ether, which are fungible and interchangeable, NFTs are one-of-a-kind digital assets that represent ownership or proof of authenticity of a specific item, artwork, collectible or piece of content, often stored on a blockchain like Ethereum.

NFTs have gained immense popularity for the ability to tokenize and trade digital and real-world assets, including digital art, music, virtual real estate and more. They rely on the immutability and decentralization of blockchain technology to ensure the scarcity and provenance of these digital assets, enabling creators and collectors to buy, sell and trade unique digital items in a secure and transparent manner.

A Brief History

NFTs can be traced back to the early days of cryptocurrencies, but it was not until the launch of "CryptoKitties" in 2017 that they gained widespread attention. CryptoKitties was a blockchain-based game on the Ethereum network that allowed users to buy, sell and breed unique virtual cats. This marked the beginning of the NFT revolution.

Since then, NFTs have expanded beyond virtual cats and found applications in various industries. Artists, musicians and creators have embraced NFTs to tokenize and sell digital artwork, music and other forms of creative expression. NFTs have also entered the world of collectibles, gaming, virtual real estate and more.

NFT: Everything to Know

To understand NFTs, it is important to grasp the underlying technology that powers them. NFTs are built using "blockchain" technology, a decentralized and transparent ledger that records transactions across a network of computers. This ensures the authenticity, ownership and provenance of each NFT.

One key feature of NFTs is indivisibility. Unlike cryptocurrencies, NFTs cannot be divided. Each NFT is a whole and unique item, representing a specific digital asset. This uniqueness is achieved through cryptographic "hashes," which provide a digital fingerprint for each NFT.

Another crucial aspect of NFTs is ownership and transferability. NFTs are stored in digital wallets, and ownership is verified through cryptographic signatures. This enables users to buy, sell and trade NFTs on various online marketplaces. Each transaction is recorded on the blockchain, ensuring a transparent and unchangeable history of ownership.

NFTs also allow creators to embed attributes and metadata into digital assets, such as information about the creator, creation date, edition number and more. These additional details provide further context and value to the NFT, enhancing uniqueness and desirability.

While NFTs have gained significant attention and popularity, it is important to note that they have also sparked debates and discussions. Critics argue that NFTs contribute to environmental concerns due to the energy consumption of blockchain networks. Additionally, there have been instances of copyright infringement and plagiarism within the NFT space, raising questions about intellectual property rights.

Getting Started

To begin the journey into cryptocurrency NFTs, it is crucial to understand the basic building blocks. NFTs are created and traded on blockchain networks, primarily using Ethereum's blockchain, which provides a robust infrastructure for decentralized applications (dapps). Before diving into NFTs, users should familiarize themselves with fundamental concepts of blockchain technology like "decentralized ledgers," "smart contracts" and "digital wallets."

After learning about blockchain technology, the next step is to set up a digital wallet that supports NFTs. Popular choices like MetaMask or Trust Wallet allow users to securely store digital assets and interact with dapps. These wallets generate a unique address for each user, serving as a digital identity on the blockchain.

With a digital wallet, users can explore various NFT marketplaces. These platforms enable creators to mint and sell digital assets while offering collectors an opportunity to discover and purchase unique NFTs. Prominent NFT marketplaces include OpenSea, Rarible and SuperRare. Users should be cautious and conduct thorough research before engaging in transactions, as the NFT ecosystem is still relatively new and susceptible to scams.

Unique Aspects

The distinctiveness of cryptocurrency NFTs is a defining characteristic. Unlike fungible cryptocurrencies like bitcoin or ether, each NFT represents a unique asset with distinct properties. "Smart contracts," self-executing contracts with terms written into code, enable the creation of NFTs with specific attributes like limited editions, provable scarcity or dynamic properties that can change based on external factors.

NFTs also represent ownership and provenance of digital assets through blockchain technology. They provide a transparent and unchangeable record of transactions, ensuring easy verification of ownership. This has revolutionized the art industry, allowing artists to tokenize creations and sell them directly to collectors, removing intermediaries and fostering a more direct and transparent relationship between creators and respective audiences.

Furthermore, NFTs have opened up opportunities to monetize virtual assets in gaming and virtual reality. Players can own and trade in-game items, avatars and virtual real estate, blurring the lines between virtual and physical ownership. This has created vibrant virtual economies where digital assets hold real-world value, and players have the freedom to buy, sell and exchange possessions.

The intersection of NFTs and social media has also seen intriguing developments. Content creators can tokenize digital content, allowing fans to own a piece of their work and participate in the related success. This innovative model provides an alternative revenue stream for creators and introduces a deeper level of engagement and support from audiences.

Advantages

  • Authenticity - NFTs provide a secure and verifiable way to prove ownership and authenticity of digital assets. Each NFT has a unique identifier stored on the blockchain, making forgery or replication nearly impossible.
  • Ownership and Control - Unlike traditional digital assets, NFTs give individuals full ownership and control over creations. Artists, musicians and content creators can retain control over work, including the ability to sell, license or distribute NFTs as they see fit.
  • Interoperability - NFTs can be easily transferred and traded across different platforms and marketplaces. This allows creators to reach a broader audience, enhancing the liquidity and marketability of digital assets.
  • Royalties and Residual Income - Smart contracts embedded within NFTs enable creators to earn royalties on secondary market sales. When an NFT is resold, the original creator automatically receives a percentage of the sale. This feature provides artists with ongoing income opportunities.
  • Traceability and Transparency - The decentralized nature of blockchain technology ensures that every NFT transaction is recorded on the blockchain, creating a transparent and auditable trail of ownership. This traceability reduces fraud risk and enhances trust between buyers and sellers.

Disadvantages

  • Environmental Impact - The energy consumption associated with blockchain networks, especially those using proof-of-work (PoW) consensus algorithms, raises concerns about the environmental impact of NFTs. The energy-intensive nature of mining and transaction validation can contribute to carbon emissions, necessitating the exploration of sustainable alternatives.
  • Volatility and Speculation - The NFT market can experience significant price volatility and speculative behavior. The value of NFTs can fluctuate rapidly, making it a risky investment. This volatility also raises concerns about the long-term sustainability of the market and the potential for price bubbles.
  • Lack of Regulation and Consumer Protection - The nascent nature of the NFT market has resulted in a lack of comprehensive regulations and consumer protections. This absence of oversight creates risks of scams, counterfeit NFTs and fraudulent activities. Buyers and investors must exercise caution and due diligence when participating in the NFT space.
  • Accessibility and Inclusivity - The current NFT ecosystem primarily caters to individuals with technical knowledge and financial resources. Barriers to entry, including transaction fees and the requirement of owning cryptocurrency, limit access for artists and collectors from underprivileged backgrounds. Efforts are underway to address these issues and make the NFT space more inclusive.
  • Intellectual Property Concerns - While NFTs establish ownership of digital assets, they do not inherently address intellectual property rights. The unauthorized creation and sale of NFTs based on copyrighted works can lead to legal disputes and challenges. Clear guidelines and frameworks are needed to protect creator rights and prevent infringement.