NFTs for Dummies - A Complete Guide to NFTs

Written by
Rahul Kaushik
Published on
June 3, 2022
Read time
4 Min Read
Category
NFT
In the NewsBlogHome

NFTs have taken over the digital economy by storm. People are making millions of dollars by selling pictures of Monkeys and Zoo animals. What's this NFT thing all about? Let's find out in detail.

What exactly are NFTs?

NFTs are digital passes that represent ownership of a one-of-a-kind digital item, such as a video, song, in-game object, or work of art.

The blockchain is where these digital passes are stored (an immutable digital ledger).

Once an NFT is created or "minted," its code is permanently woven into the blockchain and it can be traded on a marketplace with a digital currency (cryptocurrency) - ETH, SOL, and so on.

What distinguishes NFTs from cryptocurrency?

NFTs and crypto are similar in that they both use blockchain technology and cryptography.

But that's where the resemblance ends.

Physical cash and popular cryptocurrencies such as Bitcoin and Ethereum are both 'fungible.' They can, in other words, be traded or exchanged for one another.

To understand 'fungibility' better, consider a physical cash exchange between you and a friend

→ You give your friend $1 in cash in exchange for another $1 in cash.

→ Your $1 and your friend's $1 have the same monetary value. They both obtain the same products and services.

Similarly, 1$ BTC or one 1$ ETH will always be equal to 1$ BTC or 1$ ETH and can be traded. This is known as 'Fungibility,' and cash and cryptocurrency are both 'Fungible.'

However, NFTs are 'Non-Fungible.' NFT is an abbreviation for 'Non-Fungible Token.'

Non-fungible means that it is unique and cannot be replaced with anything else. One NFT is not the same as another.

Let's look at an example of 'non-fungibility.'

Consider a men's t-shirt with a round neckline. Assume there are two of them that are the same size and color.

They are currently the same and can be exchanged for one another. They are 'fungible.'

Assume one of them has the autograph of global superstar Cristiano Ronaldo.

Will they be similar?

Obviously not. The one with Ronaldo's signature would be one-of-a-kind, valuable, and not exchangeable with the other t-shirt.

Ronaldo's autographed t-shirt is now 'Non-Fungible.'

Similarly, all NFTs are 'Non-Fungible,' distinguishing them from other cryptocurrencies.

Why do we require NFTs?

We have never had the opportunity to truly own digital items before.

Consider your membership to video and music streaming services such as Amazon Prime, Apple iTunes, or Spotify.

Do you truly 'own' what you've paid for?

The answer is no; you are licensing it under terms set by the retailer, which usually do not equate to ownership.

You can truly 'own' a digital item with NFTs. That is, you are free to do whatever you want with the NFT you hold. You could use it as an in-game item, lend it to a friend for a limited time and earn interest on it, use it as collateral for a loan, or sell it and profit. The options are limitless.

This was never possible in the internet's Web 2.0 era.

What makes NFTs valuable?

What gives anything any value? Think about it.

You could use the old adage, "Value is in the Eyes of the Beholder."

Why do you think people flock to stores that offer 20-30% off for a limited time?

We are hardwired as humans to value limited and scarce resources.

Global value is driven by economic scarcity. Consider natural resources such as crude oil, gas, coal, and gold. The main reason they are valuable is that they are limited in supply and are hard to produce.

NFTs are a digital manifestation of physical scarcity. Because they are limited and non-fungible (they cannot be duplicated), NFTs create 'digital scarcity.'

Mike Winklemann, better known as "Beeple," a famous digital artist, created a composite of 5,000 daily drawings to create perhaps the most famous NFT of 2021, "EVERYDAYS: The First 5000 Days," which sold for a record-breaking $69.3 million at Christie's.

The collection is called EVERYDAYS: THE FIRST 5000 DAYS. Image: Beeple.

Another factor that contributes to the value of NFTs is the fact that you 'own' your NFT and can do whatever you want with it without being bound by the terms of a corporation that dictates what you can and cannot do with the ownership of a digital item.

Where can you purchase NFTs?

NFTs can be purchased on a variety of platforms. However, the vast majority of them are purchased on the Etherreum blockchain using ETH cryptocurrency.

The most common marketplaces for buying and selling NFTs are Opensea and Rarible.

What is the outlook for NFTs in the future?

In 2021, the NFT market took off. As of November 2021[1], the NFT market cap was worth more than $7 billion.

Analysts predict that it will grow by more than $80 billion by 2025[2]

Trading volume increased tenfold year on year in the fourth quarter, reaching $11.7 billion, and there were 2.7 million unique active NFT wallets (digital storage to hold NFTs) by the end of the year.

The trading volume on OpenSea, the largest NFT marketplace, has exceeded $30 billion in 2022. A whopping 156 percent increase in volume.

NFTs Overview. Image: daapradar

Those two statistics alone should indicate that the world is rapidly becoming aware of NFTs.

NFTs range from collectibles like digital art, trading cards, and in-game items to digital passes like event and concert tickets. Skeptics dismiss NFTs as nothing more than jpegs or animal pictures, but others see enormous potential for new work, economic, and social value paradigms.

The full potential of NFTs has yet to be realized. With the convergence of NFTs and cryptocurrencies, entire economies could one day be built on digital assets.

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Rahul Kaushik

Rahul is a former software engineer who is now a writer. After working as a full-stack developer early in his career, he realized that coding was not his forte and began writing blogs, poetry, and articles for sports magazines. He is always torn between Football and Bitcoin as his first love. In his spare time, he enjoys reading books on economics, startups, and business, as well as educating people on personal finance, cryptocurrency, and Web 3.0 on Instagram.

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