What Are Non-Fungible Tokens (NFTs): Introduction to NFTs
Key Questions Answered
NFTs, or non-fungible tokens, are crypto tokens that exist on the blockchain and are owned by only one person. NFTs can be images, videos, music, game extensions, domain names, and beyond, and can even represent physical assets, such as real estate.
The NFT industry generated over $20 billion in trade volume to date. Most NFTs are built on the Ethereum (ETH) blockchain, but other blockchains support them as well. NFTs are stored in decentralized wallets such as MetaMask and sold on decentralized marketplaces such as OpenSea.
NFTs for sale on the OpenSea marketplace
NFTs can be sold in collections, such as the famous “CryptoPunks” collection that comprises 10,000 images. Even though a user can own multiple images from that collection, they can’t own the same image in two wallets, because the token is non-fungible. Once an NFT is sold, the token is transferred to a new wallet and the new owner retains full ownership of the token.
The NFT industry has become especially active in the last few years, and NFT trading surpassed $300 million in daily volume in August 2021. Many NFT images have fetched millions of dollars at auction. Edward Snowden’s “Stay Free” was sold for $6 million. Other, sillier, NFTs such as “Bored Ape Yacht Club” ape avatars have also sold for $5 million and more.
How NFTs Started
The NFT movement started on Ethereum with the ERC-721 token standard. The Ethereum team decided that crypto needed a new type of crypto token that could represent exclusive ownership of assets such as digital art, videos, music, or tangible assets.
The only way this could be achieved was to create a crypto token type with a maximum supply of one token. Bitcoin (BTC) does not support NFTs, because they require smart contracts to mint and transfer tokens on top of a native blockchain.
Ethereum does not store NFT assets such as images on its blockchain. It only stores the NFT’s serial number, and the image itself is hosted elsewhere. Most NFT assets such as images are hosted on the Interplanetary Filing System (IPFS), a decentralized file-sharing system with no central server that works in peer-to-peer fashion.
Once a person buys an NFT, the blockchain records the transfer of ownership (on Ethereum’s block explorer such as Etherscan), and they also get access to the image through a link on IPFS.
NFTs are not copyrighted items, and owners don’t get intellectual property rights transferred to them once they purchase an NFT. In the real world, a collector buying a Picasso painting would get the rights to that Picasso. In the NFT market, a third party can still download an image someone else paid $1 million dollars for, and the NFT owner won’t be able to sue them if they share it. However, that third party won’t have the rights to sell that image on a marketplace like OpenSea, because the anti-fraud mechanism would detect that they’re not the NFT’s owner.
4 Most Popular Types of NFTs
NFTs can serve as a blockchain ownership certificate for every digital or physical asset in the world, and provide exclusive ownership of that asset. Even though they are commonly associated with pixelated art images, the NFT industry is slowly expanding to cover physical, real-world assets.
The following are the most commonly traded NFTs at the moment:
- Images: Digital art, drawings, photography, and other images are the most popular NFTs. A person could sell one image as an NFT or make a large collection with thousands of images. Collections such as Bored Ape Yacht Club also grant privileges such as membership in an actual yacht club. The floor price to own an image from popular collections can exceed $100,000. The highest-priced NFT was an image titled “The Merge” by an artist called “Pak”. It fetched $92 million at auction.
- Music: Popular music artists are leveraging NFT technology to sell their singles and albums and get higher amounts than they would at a normal auction.
- Game assets: NFT tokens are used to represent game assets such as cards that grant powers or virtual real estate and land plots. NFT games such as Decentraland (MANA) have had NFT land plots selling for $2 million.
- Domain names: Decentralized domains such as .ETH domains can be registered on the Ethereum Name Service (ENS) and sold as NFTs. Users can build actual websites on them using the Brave. Many brands and influencers are using .ETH domains on Twitter and social networks. Valuable domains such as the MeteVerse.eth domain name have had offers over $1 million. Even emoji characters are supported on ENS domains and can be sold as NFTs.
The majority share of the trade volume is generated by NFT images. The top 10 NFT collections account for more than 90% of daily trade volume. The top collection often has 5,000-10,000 ETH in weekly trade volume.
Fungible vs. Non-Fungible: What are the differences?
Fungible tokens can be replaced with another and non-fungible tokens cannot be replaced – they’re unique. In crypto, fungible tokens have unlimited supply, while non-fungible tokens exist as one token.
Fungible tokens on Ethereum belong to the ERC-20 standard, while non-fungible tokens belong to the ERC-721 standard. Block explorers such as Etherscan can easily differentiate between ERC-20 and ERC-721 tokens.
The difference between ERC-20 and ERC-721 tokens
Users can own ERC-20 and ERC-721 tokens in the same wallet. The system splits them in two categories and automatically recognizes which they belong to. Despite the difference, NFTs are still crypto tokens. An NFT token can be stored in a MetaMask wallet, the same way the Shiba Inu (SHIB) or Tether (USDT) tokens can be stored.
Both non-fungible and fungible tokens consume gas fees to mint and transfer. You need ETH to mint NFTs and pay the gas fees involved in buying or selling an NFT — the same way you need ETH for swapping an ERC-20 coin on an exchange like Uniswap (UNI).
Tokenization and NFTs
Tokenization is the process of converting assets into crypto tokens. The original purpose of NFTs was to tokenize assets from the real world on the blockchain. There are currently tokenized stocks of companies such as Tesla and Apple that are pegged to the actual stock price.
NFT tokenization can be used to verify exclusive ownership of a tangible asset in the real world. In February 2022, the first NFT sale of a house occurred in the United States, when a house was sold as an NFT for $650,000 worth of Ether.
There is currently no legal act that would enable tangible-asset owners to sell their assets as NFTs and have this ownership backed by the justice system. If the NFT market grows in the future, NFTs could be used to verify legal ownership of tangible assets and not just digital assets.
NFT Marketplaces, Collections, and Market Value
The NFT industry generated $20 billion in trade volume in 2021. More than 90% of all NFT trading activity is on the OpenSea marketplace. According to DeFi Llama, a decentralized finance analytics tracker, NFT trading started taking off during the summer of 2021:
The NFT market as a whole has produced over $20 billion in trade volume.
The highest trading volume for NFTs was in August, when the market traded $340 million worth of NFTs. As the market is in early stages of development, the trading volume can fluctuate greatly based on the crypto market at large. NFT trading can drop by as much as 40% in a single day and spike just as fast.
What are the most-trade NFT collections?
The most-traded NFT collections by total volume are as follows:
|Bored Ape Yacht Club||$1.15 billion|
|Mutant Ape Yacht Club||$450 million|
|CLONE X – X TAKASHI MURAKAMI||$350 million|
|The Sandbox||$250 million|
|Cool Cats NFT||$240 million|
The top NFT storage wallet is MetaMask — it is accepted on all NFT trading websites. Aside from OpenSea, emerging NFT marketplaces include Rarible, Foundation NFT, Looks Rare, X2Y2, NFTB, Solanart, and others.
The collection with the most items for sale is the Ethereum Name Service. Currently, over 600,000 ENS domains are available for sale on OpenSea. These domains can be used to change a MetaMask address from a regular address such as “0x2xw2G5c25w1d4C” to a comprehensive name such as “Jack.eth” — giving users a decentralized identity in the Metaverse.
How NFTs Are Minted
The creation process of an NFT is called “minting“. Minting is a blockchain term for creating new tokens. Every time a new cryptocurrency enters the market, the initial tokens are minted using a piece of code.
Minting a new NFT on the OpenSea marketplace
Marketplaces such as OpenSea allow easy minting. To mint an NFT, you have to first prepare your asset — an image, video, 3D model, song, domain name, or any other digital asset. The NFT can be minted using the automated system on OpenSea. The process is as follows:
- Install MetaMask. MetaMask is a Chrome extensionthat stores NFTs and other crypto assets.
- Deposit Ethereum. Visit “Buy Crypto” on Phemex to learn how to get Ethereum. You will need at least $200-300 worth of Ethereum to initialize your wallet and mint your NFT. This covers gas fees on the Ethereum network and the OpenSea marketplace.
- Connect Your Wallet. Head to ioand press “Connect Wallet” at the top right. The MetaMask window will pop up asking you to connect to the website.
- Upload Media. Go to “Create” at the top right, and upload your media. You will need an image, audio, 3D model, or another digital asset. This is uploaded directly from your computer.
- Mint NFT. A MetaMask notification will pop up asking you to initialize your wallet. This can cost between $100 and $300, depending on the gas fees. The initialization fee is paid once when you first start trading. You will then need to make a second transaction to mint the NFT and list it for sale. The listing gas fee will range between $10 and $20.
The same minting process is used in other NFT marketplaces. To mint NFTs with lower fees, you can consider alternative layer-2 chains such as Polygon (MATIC) that are supported by OpenSea and cost significantly less than the Ethereum mainnet. Do note that most popular collections are hosted on the Ethereum mainnet.
How to Invest In NFTs?
To start investing in NFTs, you need to set up a wallet and deposit Ether in it, as shown in the previous section. Once you have an activated wallet on OpenSea, you can start investing in NFTs and generating revenue by flipping them (i.e., selling them after they increase in value).
To start investing, head to the “Stats” section on the OpenSea homepage. This will display the most-traded NFT collections on the market for the past week. The volume shows the total amount of ETH traded for the whole section, and the “Floor” price is the lowest price that NFTs in that collection would sell for. If you have a budget of 1 ETH, you want to pick a collection with a floor of below 1 ETH.
For this demonstration, we’ll select the most-traded collection this week, “CryptoBrokers.” Click on the collection name to access the CryptoBrokers NFTs available for sale:
The CryptoBrokers NFT collection on OpenSea
Pro tip: If you want to purchase an NFT right away, use the sorting option to select “Ending Soon”. This will show the auctions that are about to end, and you can bid right before the auction closes. To browse the prices that have been paid for individual NFTs, click “Recently Sold”.
Click any NFT in the collection and to see an individual profile on that NFT. For example, this is an NFT whose sale is ending in about 2 minutes:
An auction for an NFT belonging to the CryptoBrokers collection
If we want to purchase this NFT, we can click “Buy now” and the MetaMask window will pop up asking us to confirm the transaction. An extra gas fee of $10-20 will be added to the final price and OpenSea will take a 2.5% cut. The NFT is automatically transferred to the new owner.
The NFT market is easy to grasp once you browse the marketplace and analyze the price action (top bids, recent sales, etc.) on the collections. Many of the top collections have their own communities and Twitter bots that help track the price action.
Investing in NFTs might not be that different from investing in regular crypto coins, because NFTs accumulate value over months and the floor price can increase dramatically. The main risk of being an NFT trader is that you may wait longer for your NFT to be sold, while you can instantly sell your crypto coins.
One thing is certain — as the industry is in its infancy and tangible assets are just starting to sell as NFTs, the industry’s development over the coming years will certainly be interesting.