What is NFT & how does it work – Everything you need to know

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Beeple’s collage, Everydays: The First 5000 Days, sold at Christie’s

You might have heard the term ‘NFT’ with regards to Grimes selling NFT art for millions. The digital artist who goes by the name ‘Beeple’, Mike Winkelmann made headlines earlier in March by selling an NFT for about $69 million to Christie.

It’s not just this. People from all over the world are spending an absurd amount of money on NFT collectables of all types – digital houses, sports trading cards, augmented reality sneakers, highlight reels and much more. It might have kept you wondering: what exactly is an NFT?

We are here to answer all your questions related to NFT and why has it gained so much popularity in the past few months.

The full form of NFT

The full form of NFT is Non-fungible token.

What exactly is an NFT?

An NFT is a new form of digital asset whose ownership is recorded on a blockchain. A blockchain is a digital ledger that’s similar to the networks cryptocurrencies use. What’s special about NFT is that each and every NFT is unique and cannot be duplicated. Therefore, NFTs can be thought of as unique digital assets nobody else owns. Yes, people might have a picture of the piece of an NFT art you own. However, they don’t own the original and that’s what makes it worth millions.

How do NFTs work? How can I buy or sell an NFT?

ethereum cryptocurrency near wallet | iTMunch

Minting is the process of turning a normal, regular image or digital asset into an NFT. Minting essentially tokenizes the digital asset on the blockchain. If you want to engage in buying and selling of NFTs, you need to have a cryptocurrency wallet for performing the transaction. That’s right. At least for now, you can buy and sell NFTs only using cryptocurrencies.

NFT is no different from any non-NFT media in itself. However, it’s verification on the blockchain gives NFT owners legitimacy. Yes, you might be seeing a lot of finance technology news about people buying NFT art because they like the content. However, there are people who are seeing NFTs as speculative assets that can be bought and sold as and when their value increases. What increases the value of NFTs? One of the many reasons behind this may be NFTs selling in limited quantities as the scarcity increases its value over time. Most of the NFTs are a part of the Ethereum blockchain. Why Ethereum? Because its blockchain supports the extra information that makes NFTs work differently.

Where to buy non-fungible tokens (NFTs)?

Depending on what kind you want to purchase, NFTs can be bought on various platforms. For example, if you want to purchase baseball card NFTs, you need to head to digitaltradingcards. Most NFT marketplaces work on auction house models. If you like a piece of NFT art and have a crypto wallet, all you do is place a bid and pray no one out-bids you. As many types of NFTs are pretty high in demand these days, they’re released in bunches as ‘Drops’. This means hawkeyed eager buyers rush to the auction at the time top the drop. So, if you want to buy the NFT art you love, you’ll need to be on your toes and be ready with your wallet topped beforehand.

Here’s a list of NFT marketplaces and websites:

  • SuperRare
  • OpenSea
  • VIV3
  • Nifty Gateway
  • Foundation
  • BakerySwap
  • Rarible
  • NFT ShowRoom
  • Axie Marketplace

SEE ALSO: 6 Different types of cryptocurrencies and why governments fear them

The costs involved

To purchase NFTs, you need to have a cryptocurrency trading wallet. However, what not many people are talking about is what are the charges involved in minting, buying and selling NFTs. This cost fluctuates depending on the platform you’re using. Usually, a fee is usually charged for buying, selling and minting NFTs. This charge essentially pays for the heavy computing power required to legitimize purchases as well as mint NFTs. This fee is dynamic.

Another one is the ‘Gas Fee’ – which is charged in the name of transaction fee. It is important to note that not all NFT marketplaces accept all cryptocurrencies. So, you will have to convert the cryptocurrency you own into the cryptocurrency the marketplace accepts. As a consequence, you will also have to pay fees related with conversion of cryptocurrencies. Though NFT sounds like a cool thing, it is important to consider its impact on the environment.

NFT, cryptocurrency & the environment

To solve complex mathematical puzzles, mining farms of cryptocurrencies have to use dozens of mining rigs. This requires a lot of computational power, and hence, electricity. Whenever someone sells, buys or mints an NFT, the transaction needs to be verified by hundreds of thousands of computers that form a blockchain. Naturally, this consumes a massive amount of power, which ultimately requires a lot of energy.

Though most cryptocurrency mining operations use renewable energy, there are several others that derive energy from non-renewable sources of energy that cause pollution.

Speaking on a broader note, big tech companies like Twitter, Google, YouTube and Facebook also have to set up and use huge data centres to store data like posts, tweets and searches. These data centres also have thousands and thousands of computers to store information about your account and activity. In turn, greenhouse gases are released because of the energy consumptions of these data centres that ultimately affects the environment.

The impact of big tech data centres and cryptocurrency data mining farms seem to be the same from an environmental perspective. NFT artists and creators can buy carbon offsets in order to stay carbon neutral. It doesn’t change the fact that Ethereum (which is the most used blockchain by NFT marketplaces) and other cryptocurrencies require a high amount of power to run. However, Ethereum says that it is working on updating its system that would use almost no power. This might take a lot of time, though.

Stock photography vs NFT

For creators, designers and photographers who create stock content for a living (or as a side hustle), selling NFTs can surely be an alternate source of income. On websites like Cargo, OpenSea and Rarible, animations and illustrations seem to be popular forms of NFTs. Stock photography and NFT marketplaces, both pay the creators for their creations on each transaction. However, there’s a difference.

Stock photo website Shutterstock, for example, pays the photographer each time someone purchases a licence of the image. It does  not pay anything to the photographer at the time of uploading content. On the other hand, NFT creators are paid at the time of selling the digital asset the first time. Moreover, they receive a profit percentage from each subsequent sale.

Creators can sell one NFT of one image or as many as they like. However, producing more than one might decrease the overall value of each NFT. NFT creators continue making money each time it is sold. The issue – There’s a possibility that the buyer may decide to  not to sell it for a long time. There’s also a possibility that  they might not sell it at all, ever. Though the NFT creator might make a generous amount Ethereum, they might not receive another payment for a long time through that NFT for a long time, or may be ever. Also, it is important to keep in mind that anybody can create a non-fungible token, but it doesn’t mean someone will buy it.

Both are great ways to monetize photography. Selling non-fungible tokens requires some technical know-how along with a clear understanding of blockchain and cryptocurrencies.

It is too soon to say whether or not NFTs are here to stay or it is just another passing trend. However, this can be said for sure that this has certainly become a plaything for the rich. If you’re a digital artist with knowledge about blockchain and cryptocurrencies, NFT can help you earn a generous amount of money. NFT has surely given a new meaning to digital art. Now that you have a basic idea of what are NFTs, you can choose to begin minting NFTs or wait and watch if the trend sticks around.

SEE ALSO: FinTech Trends 2021: Top 6 technologies to watch out for

For more updates and latest tech news, keep reading iTMunch

Feature Image Courtesy: Beeple’s collage, Everydays: The First 5000 Days, sold at Christie’s

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