NFTs: Much Hyped, But How Do They Work?

NFTs are sometimes sold online for astronomical sums, with major companies now joining the craze as tokens find their way into everything from the art market to video games. But what exactly are these digital assets, and how are they traded?

What is NFT?

NFT stands for non-fungible token. Something that is “replaceable” can be exchanged with an equivalent item – for example, a $5 bill with another $5 bill. Cryptocurrencies, which use a digital public record of transactions called blockchains, are fungible. NFTs are digital items that can be bought and sold using this blockchain technology. But they are not replaceable, making them a separate type of asset. Some have sold for millions, including an NFT from digital artist Beeple, which went under the hammer at Christie’s in March for an eye-watering $69.3 million. ,

Some of the most coveted NFTs are released through a collection of thousands of unique individual cartoons, such as Bored Ape Yacht Club. They are seen as intrinsically cool by their owners, who profess their purchases by displaying them as their social media avatar. Tokens aren’t necessarily images, however: on many websites, such as Decentraland and The Sandbox, you can buy virtual land in NFT form.

Critics say investors are spending money on pointless items, but proponents say NFTs are much more than a digital trinket. Some predict that using blockchain to record the ownership history of an object will eventually become much more widespread, revolutionizing how we think about assets.

How is NFT traded?

Like cryptocurrencies, NFTs are bought and sold on specialized platforms. OpenSea is the most popular NFT marketplace. The sale does not necessarily involve the transfer of the commodity represented by the token. For example, NFTs of famous paintings have been sold, but the buyer does not receive the painting. What changes hands is the certificate of ownership of NFTs registered on the blockchain. The certificate should be kept secure in a digital wallet, which can take various forms. The wallet can be accessed through MetaMask, a free Internet browser extension, or through a secure physical device. It can also take the simple form of a code printed on a piece of paper.

In order to buy NFTs, the wallet must contain enough relevant cryptocurrency – for example, Ether (ETH) if the individual is buying tokens on the Ethereum blockchain. With a little technical know-how, it is even possible to make your own NFTs or “mints”. Ultimately, NFTs are digital contracts that have underlying rules such as the number of copies available for sale.

What are the risks?

Trading NFTs involves technical processes that are sometimes misunderstood – and this can leave investors unsure of what they are dealing with. Every interaction with the blockchain involves a fee to pay for the “mining” – extremely energy-intensive computer calculations are required to verify each transaction. Thousands of users may rush to buy a very coveted NFT as it is mined, and have to pay fees even if they leave empty handed. Some buyers use bots to ensure they get their hands on the token, which makes the market even less accessible to novice investors. “A very small group of highly sophisticated investors rake in most of the profits from NFT collections,” blockchain data company Chainalysis said in a recent report.

And it added that NFTs are often sold at low prices to enthusiasts who have helped create hype for the project. “The data suggests that NFTs are far from a definitive investment,” concluded Chainalysis.

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