What are NFTs: art, fluff or the future, the 2023 guide

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Written By Dylan

Even if you’re not sure what they are exactly, you’ve likely heard about people buying these things for millions of dollars. You might also hear about these young teens living in their parent’s basements earning six figures a year creating and selling them. People are even using them to buy and sell their homes, vehicles, and other personal items.

So what in the world are they? Allow me to break this wild concept down for you with an easy-to-understand guide to all things NFT.

Let’s get right into this, what are NFTs:

An NFT is a Non Fungible Token. If non-fungible-token just sounds like gibberish to you, then join the club. At one time, I too was utterly confused by those three words. So please allow me to explain the concept using words that actually make sense.

NFTs are nothing more than digital proof of ownership. A proof of ownership for something irreplaceable and unique. This means it’s non-fungible. These unique items are created, stored, and transferable on a blockchain.

Here are some examples of other non-fungible items:

  • Art
  • Used car
  • Houses
  • Rare trading cards

If something is fungible, this means it can be replaced or can be exchanged with items that hold the same value. They are not unique.

Examples of fungible items:

  • A ten-dollar bill
  • Oil and other commodities 
  • Packaged goods

While the proof of ownership is digital, the assets they represent can be digital or real-life tangible items. You’ve probably heard the acronym NFT used in the same sentence as digital art. While this is one of the primary uses, it’s only one of the many possible uses of the technology.

While cryptocurrencies intend to decentralize currency, NFTs aim to decentralize proof of ownership. Cutting out the need for validation of a middleman. Should notaries be scared? I’m thinking, yes.

Let’s break it down some more

NFTs live on what is called a blockchain. To explain this in layman’s terms, the blockchain is essentially a digital ledger of transactions. There’s a lot more to it, but that’s an entirely separate topic. 

NFTs are predominantly created and traded on the Ethereum blockchain. Ethereum is a proof-of-work concept blockchain. This requires people to use their computers to mine the blockchain and confirm each transaction, keeping the ‘ledger’ up to date. This can result in extremely high gas fees (blockchain transaction fees), slow transaction speeds, and a negative effect on carbon emissions from extreme power consumption. Therefore, this should always be taken into consideration when trading NFTs on the Ethereum blockchain.

The increasing popularity of NFTs has sparked other blockchains, that are not proof-of-work based, to also adopt the ability to mint and trade NFTs. Thus creating more cost-effective and eco-friendly alternatives. Ethereum is however also working to transition away from this proof-of-work method.

Examples of alternative blockchains are:


The history of NFTs

NFTs have been around longer than you might think. A paper was published back in 2012 that brought to life the concept of NFTs. It was an idea named ‘Colored Coins’ which was based on the Bitcoin blockchain. They were extremely small amounts of Bitcoin that represent unique digital or real-world items. However, the Bitcoin blockchain had limitations that prevented this concept from ever being realized. Though it never came to life, it was a huge step forward and brought to light the possibilities and potential of this technology.

The very first NFT was created in 2014. The NFT entitled “Quantum” was created by a man named Kevin McCoy. The NFT was a piece of digital art, a simple GIF of a pixelated octagon with concentric circles inside. Kevin may not have known this at the time, but this was a huge step towards making NFTs what they are today. 

Side note: ‘Quantum’ has recently sold for a whopping 1.4 million dollars via an online auction. It is a widely recognizable piece of NFT history that any enthusiast would be lucky to add to their collection.

Since then, the NFT market has erupted in popularity. With nearly 28 million NFTs being traded during Q1 of 2022 alone, it’s no surprise that the total market volume also surpasses the $12,000,000,000 mark. 

Medium user @Wrabbit1111 has created a nice visual overview of the NFT scene throughout the years. Also stating we’re still technically in the early adopter’s stage of things.

Source: https://whiterabbit1111.medium.com/the-origin-digital-antiquities-market-nfts-1ea9b69c03f9

Let’s take a look at some modern NFTs


Alright, you’ve read about what they are and where they came from. Now let’s take a look at some examples. To date, billions of dollars have been spent trading NFTs globally. Yet a large portion of that was accumulated by only a handful of extremely successful collections. 

Source: https://en.wikipedia.org/wiki/Bored_Ape#/media/File:Various_Bored_Ape.jpg

Bored Ape Yacht Club

First launched in April of 2021, by Yuga Labs. Bored Ape Yacht Club (BAYC) features cartoon apes, each with unique qualities that are generated via an algorithm. BAYC was launched on the Ethereum blockchain with 10,000 unique NFTs. The NFTs themselves also function as a membership to the group’s real-life yacht club. To date, BAYC has totaled over $1,000,000,000 US in sales.

This is certainly one of those NFTs you wish you bought when they launched. The initial price of each NFT was roughly $190 US and they sold out in 12 hours. Currently, the average value for one of these NFTs is sitting around $115,000 US.

Source: https://cloudfront-us-east-1.images.arcpublishing.com/coindesk/VE5KNCXHLRDYTGJQRB5JYIKZNE.png

CryptoPunks

CryptoPunks launched in 2017 and was developed by Larva Labs. CryptoPunks is Ethereum based and features a series of 10,000 unique punk-styled characters. This is certainly another one everyone wishes they would have bought early. Prices for rare CryptoPunks NFTs are valued anywhere from $75,000 US to $1,200,000 US.

In the spring of 2022, Yuga Labs (Bored Ape Yacht Club) purchased the intellectual property rights for CryptoPunks from Larva labs for an unknown amount.

Image Source: CryptoKitties Media Kit

CryptoKitties

Launched in November of 2017 on Ethereum, CryptoKitties is a blockchain-based game developed by Dapper Labs. The game allows users to buy, sell, breed, and collect virtual NFT cats.

This was a huge stride for proving the blockchain can be used for more than just finances. The game quickly picked up a large player base and increased the overall transaction volume on the Ethereum blockchain by around 25%. CryptoKitties is commonly referred to as one of the first and one of the most popular NFT collections released.

Why could NFTs be ever be valuable ?

You may be wondering “How do NFTs get to be worth thousands or even millions of dollars?” This is actually a great question. Most NFTs start out with a very modest and downright affordable price tag. They become valuable based on rarity, who created them, or the scarcity of the collection. 

Digital art NFT collections usually start with a minting process. Once an NFT is minted it’s given a set of random and unique attributes. These attributes all represent a particular aspect of the image. Some are common, and some are extremely rare. If you happen to mint and NFT with very rare attributes, you can almost guarantee that the value is going to be significantly higher than others in the collection. Everyone wants to be the owner of a rare piece of art, and some are willing to pay extraordinary prices. Check out our guide on the best NFT rarity tools on the market to help you in your NFT hunting journey.

Artificial scarcity is a common marketing tactic that is used to increase the value of products.This tactic is now also being used in the NFT market. Seeing “small quantity”, “selling out fast”, or “limited edition” taps into our psyche and gives us the feeling we might miss out on something. This method of marketing is quite manipulative, but it works. Creating scarcity with digital content has always been a challenge to achieve, until NFTs that is. NFTs and the blockchain gave us a way to verify and prove digital ownership of content and even real-world objects. This has given sellers the ability to create scarcity in the market.

Don’t forget about the ‘hype’. Once a collection gains popularity or goes ‘viral’, the prices tend to skyrocket and they quickly become unattainable for the average person. After reaching these ridiculously high prices, many celebrities and wealthy individuals purchase these NFTs simply to prove their status. When celebrities get involved, the value keeps rising, sometimes to astronomical heights. Some of the most popular collections, take Bored Ape Yacht Club, for example, have celebrity owners such as Justin Bieber, Post Malone, Mark Cuban, and many more.

NFTs are more than just art

NFTs and Gaming

The world of gaming is constantly growing and evolving. Today it’s estimated that the world consists of roughly 3 billion people that frequently play video games. With the size of both markets, it was only a matter of time before gaming NFTs were a thing.

NFTs have a massive range of use-cases and of course, gamers have found ways to make use of them. An NFT can be used to represent a multitude of things in a game, such as:

  • In-game content or items
  • Unique art for collectors
  • Passes or tickets to play the games
  • Rewards for in-game achievements
  • Payouts for play to earn games
  • Forms of payment for player-to-player transactions

One of the first NFT/Blockchain games to hit it big was Axie Infinity in 2021. Gaining good worldwide adoption and even being the main source of income for a lot of people in different countries.

This is only the beginning of NFTs being incorporated into the gaming industry. I can assure you, throughout the coming years, expect to see their use grow exponentially.

NFTs and Decentralized Finance ( DeFi)

If you’ve been in the crypto space for years, or you’re brand new here, two of the most popular topics you’re going to hear about are ‘decentralized finance’, and ‘NFTs’. You know all about NFTs, but what is decentralized finance?

Decentralized finance is simply having a financial system that isn’t controlled by any particular governing entity and isn’t based in any particular location. No country or individual controls the blockchain and therefore makes it decentralized.

NFTs play a vital role in encouraging the growth of decentralized finance around the globe. Whether you’re using an NFT to store and build wealth, buy and sell real estate, or purchase passes to your favorite festival, you’re decentralizing your finances. With NFTs having the ability to store value and represent physical and digital assets, this opens up a wide range of possibilities for the future of decentralized finance and NFTs.

Fractionalized Ownership

Gather your friends and buy an NFT as a group; with fractionalized ownership, it’s possible. Essentially, this process locks up a single NFT in a secure digital vault, then a small supply of fungible tokens are minted and can be purchased by multiple individuals. Each of these tokens represents a fraction of the original NFT. The tokens can be bought, sold, and traded just like any other token. 

A great example of one of the possible uses would be, say you purchase a cottage. You could then create an NFT that represents the deed to the cottage. You then mint tokens to fractionalize the ownership. You stipulate that each token owned is equal to a percentage of ownership.

Each of your friends buys an equal number of tokens while you keep an equal share as well. You’re all now equal owners and spend an equal number of days at the cottage. You’ve sold a portion of my cottage and recouped some of your investment for the original purchase. As the real estate market rises and falls, as a group, you can decide to sell the property, or any one of your friends could buy another out and take their share of the investment.

Fractionalized ownership is a great way to help everyone get involved in the booming space. Buying a small fraction of an NFT is a more affordable investment instead of purchasing an entire rare NFT on your own. 

Buying your first NFT

I’ve got you all excited now and you’re itching to buy one. I completely understand, I was once in your shoes. The entire process of purchasing an NFT, once understood, is quite simple. It may seem a little daunting at first, but you’re smart, I know you’ll master it in no time.

The first thing you’ll need to know is where to find these things. Here are a few of the most popular NFT marketplaces to get you started:

Each of these marketplaces only accepts specific cryptocurrencies, always be sure to note which one you’ll need to have on hand. 

Now, you’ve picked a marketplace and you’re ready to get buying. I’ve broken up the process of funding your shopping spree and making your first purchase into steps below.

Step One: You’re going to need to get yourself a digital wallet that can hold the NFTs you purchase. I highly recommend Metamask or Trust Wallet, they’re the most popular and user-friendly. Both have how-to guides available on their websites for you to easily get set up and add specific tokens to your wallet. 

Step Two: Once you’ve set up your new wallet, you’re ready to add funds. Depending on which marketplace you’re shopping at or which country you live in, you may need to research to find out which exchange you’re able to buy the cryptocurrency you need. After you’ve done your research, go ahead and buy your desired amount.

Step Three: Head on over to your marketplace of choice, create an account and connect your wallet. Browse their selection of NFTs until you find one you like. Some may be purchased instantly for a flat fee, or some may be sold via an auction where the highest bidder wins. 

After successfully purchasing your first NFT, you should now be able to see it in your wallet. Congratulations, and don’t forget to crack open that bottle of champagne you’ve been saving for a special occasion, you’ve earned it.

How to create an NFT

So you’re an artist. You see the potential for untold riches, and you want to sell your digital artwork. Lucky for you the process is quite simple.

Step One: You’re going to need to make sure you’ve got your crypto wallet set up. Once it’s set up, you’ll need to purchase the native token for whichever blockchain you decide to mint your NFT on.

Step Two: Head on over to your favorite NFT marketplace. Set up an account and connect your wallet.

Step Three: Using the marketplace Opensea as an example, click on the ‘Create’ button located on the top navigation bar.

Step Four: After signing in using your wallet, you’ll be presented with the create page. You can fill out the form with the necessary details, and upload your original content. You can create an entire collection if you so desire.

Step Five: Once you’re finished on the details page, go ahead and click the create button on the bottom to mint your NFT. Once you sign the transaction in your wallet and pay any gas fees, your artwork has now been minted as an NFT.

How much does it cost to make?

Of course, there are usually fees associated with the process of minting an NFT. Some marketplaces charge a one-time signup fee, and some just charge you a small fee each time you mint. These fees can vary drastically depending on the blockchain and the traffic at the time of minting.

Minting on the extremely popular Ethereum blockchain can have large fees totaling hundreds of dollars depending on the time of day you’re trying to process the transaction. Other chains like Polygon and Binance are slightly less popular, but usually have little to no gas fees for each transaction.

Always do plenty of research and be sure to pick the chain you feel is right for you.

How to keep those precious NFTs safe

Keeping your new NFT in your standard hot wallet is pretty safe. There aren’t too many cases of people being hacked, or having their NFTs stolen. The most common way for this to happen is by giving out your seed phrase or falling victim to malicious wallet connects. Remember, always double-check the links you click are 100% correct, and never connect your wallet to an unfamiliar website.

For those of you who do want that added layer of security, there are many options available to help keep your NFTs and cryptocurrencies extra secure. One of the most popular methods involves using a ‘cold storage wallet’. A cold storage wallet is a piece of hardware, similar to a flash drive, that keeps your NFTs and cryptocurrencies stored offline in the device itself. They are often heavily password-protected or require a fingerprint to gain access. Making these completely inaccessible to anyone but you.

If you’re a frequent trader, these devices may not be practical for you. You would need to connect the device and send them in and out of the wallet every time you need to trade, adding an extra step to the process. However, if you don’t trade very often and want to protect your investment, then cold storage may be right for you.

If you do happen to purchase and use these devices, be sure to store them somewhere safe. If the device is lost, damaged, or stolen, you likely won’t be able to recover your funds.

Nobody’s perfect, the problem with NFTs

Now, I might have made NFTs sound like the best thing around. In many ways, they are truly amazing. Though they come along with issues of their own. It would be wrong of me to leave this information out of an informative article such as this.

Below is a breakdown of some of the most common NFT issues today.

Copyright Infringement

People that create unique content and want to remain the sole owners will often copyright the content. This means that you’re unable to use this content without consent from the owner.

When you purchase an NFT, you own it, it’s yours. However, if the content has been copyrighted, you may not. Therefore, you can flaunt it around and hold it dearly, but you must still respect the laws.

Additionally, NFTs can be created by anyone. You’ve always got to research and ensure you’re getting what you’re paying for. Make sure it’s genuine and original content that isn’t stolen or reproduced illegally. 

The Screenshot Issue

You might be wondering, what is stopping someone from just taking a screenshot of your newly purchased digital art and claiming it to be their own? Well, honestly, nothing… However, thanks to that handy blockchain, all the records will prove that you alone are the true owner of said NFT. Also, a screenshot will never replicate the exact glorious resolution of the original.

So don’t worry if someone is parading around claiming your new NFT is theirs. As long as you don’t share your wallet’s seed phrase with anyone, there is no way anyone can take it from you.

Price Volatility

So you’ve purchased an NFT, you’ve cherished and loved it for several weeks, but now you’re looking to sell it and buy a new one. You may quickly realize that your NFT has tripled in value, or perhaps plummeted to a third of what you bought it for. The NFT market is extremely volatile and very unpredictable. This is a risk that everyone takes when investing their hard-earned pennies in them.

How can you prevent this, or stay on top of potential price fluctuations? I’m going to tell you the same thing I tell everyone. Stay on top of your investments. That means, researching the creator, looking at the market, checking the floor price for similar NFTs, and learning how to buy and sell at the right time. 

Gas Fees and Confirmations

Every transaction on every blockchain will have a fee tacked on to it. These fees help transactions move along and are essential for the functionality of the chain. Some blockchains might have small insignificant fees as low as a few cents, some might be as high as several hundred dollars. Ethereum is notorious for having some of the highest gas fees. Always consider these fees when trading, they can quickly eat up all your profit.

These gas fees are used as an incentive for people to mine or stake each blockchain. Each block that is mined will provide the miner with a financial reward, and you with a confirmation. The confirmations are a stamp of approval that says your transaction was successful and has been updated on the blockchain. Some blockchains require multiple confirmations to complete each transaction, which will result in longer processing times and higher fees.

Tax Implications

Buying and selling NFTs can be a lot of fun and also make you a pretty penny when done correctly. However, if you’re not careful, it can also end up costing you. Be sure to research what the tax laws are regarding trading NFTs and other cryptocurrencies in your country. Many countries are different from one another. Some may have you pay a small tax when withdrawing profits, and others may have you pay large capital gain taxes.


Smart Contracts

The concept of buying and selling NFTs is the same as buying and selling any cryptocurrency with a smart contract. A smart contract is the coding behind the token that controls how it’s bought, sold, and traded. It also determines the supply, fee distribution, and more. These smart contracts act as an agreement between the involved parties and eliminate the need for a governing body to oversee the transactions.

Not all contracts are created equal. A smart contract is only as safe as the individual who wrote the code. Someone with malicious intent can write lines of code to steal tokens, secretly send fees to private wallets, or make the NFT/token unsellable. Scams involving these types of smart contracts are becoming increasingly popular as more people begin to get involved in the space. The best way to protect yourself is to always do your research and ensure that you’re satisfied with the legitimacy of a project before spending your hard-earned dollars.

The smart contracts behind the most popular cryptocurrencies and NFT marketplaces of today are extremely safe and you don’t need to worry about them. Buying and selling NFTs and Cryptocurrencies outside of major marketplaces and exchanges should always be done so with caution.

The future of NFTs

The future is bright and full of possibilities for NFTs. If you’re thinking this is just a fad and won’t be around for long, think again. Their rising popularity and increasing potential have ensured their longevity. With technology quickly becoming more advanced and the digital world slowly moving to a web 3/Metaverse environment, NFTs will become a central part of many people’s daily lives.

Imagine signing into your bank, or social media using your one-of-a-kind NFT that nobody can replicate. Or purchasing your transit pass NFT that is held securely in your digital wallet. The possibilities are nearly endless and I for one, am excited to see what the future brings. I truly hope that after reading this, you are too. 

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THE AUTHOR

Dylan
I'm an avid crypto investor/creator, dedicated father, and passionate writer. When I'm not writing, I enjoy researching new projects and offering my expertise to anyone that might need it. I enjoy helping others and writing informative content to aid my readers in the ever-growing crypto space. Happy investing!

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