What is an NFT (Non-Fungible Token )? Definition, Benefits, Uses, and Scope

Posted on  

March 24, 2022

Published by: Codemonk

While non-fungible tokens are a new class of digital assets, they have grown in popularity and sold for millions quickly.

Don’t believe us?

Let’s speak stats then!

In 2021, as NFTs, Grimes sold $6 million worth of digital art, including one of a kind and thousand copies of art.

Since NFTs for digital artwork have sold for millions—and tens of millions—of dollars in some cases, labeling them popular may be an understatement.

But why is there so much buzz around NFTs?

Let's understand it from scratch!

What Are Non-Fungible Tokens?

Non-fungible tokens, also known as NFTs, are a kind of modern collectible.

It identifies ownership of something unique, such as an original piece of art, real estate, music, or video.

The blockchain—which powers cryptocurrency—encrypts and secures NFTs. 

The technology assures that the asset is unique and makes altering or counterfeiting NFTs challenging for hackers.

What Do You Mean By Fungible And Non-Fungible?

It is necessary to understand the business idea of fungibility to manage NFTs effectively.

Fungible goods are easily transferred since their worth is not contingent on individuality.

For instance, you may swap a $1 note for another $1 note and retain $1 despite the new note's serial number being different.

The opposite is true of non-fungible items.

Each NFT has distinct qualities and is not valued the same as other similar tokens.

Example of an NFT

NFT technology enables the transfer of ownership to the original item. 

In the art world, selling NFTs can prove profitable. 

Several examples that you may have heard of include the following:

  • Christie's auctioned the digital work "Everydays - The First 5000 Days" for $69.3 million. (Business Insider)
  • At Sotheby's inaugural curated NFT sale, a CryptoPunk NFT fetched $1.8 million. (Business Insider)
  • Auction of an NFT of Jack Dorsey's first tweet nets $2.9 million. (Business Insider)

How is an NFT different from Cryptocurrency?

Blockchain technology underpins both NFTs and cryptocurrencies. 

However, by enabling visual representations of physical assets, NFTs pave the way for the infrastructure's rebirth.

Additionally, NFT markets may compel users to acquire NFTs using a cryptocurrency. 

On the other hand, Cryptocurrencies aspire to function as currencies by holding value or facilitating the purchase or sale of products.

For example, cryptocurrency tokens are fungible like conventional currencies such as the dollar.

Are Non-Fungible Tokens Safe?

While non-fungible tokens that leverage blockchain technology are typically safe, the distributed structure of blockchains makes non-fungible hacking tokens difficult (but not impossible).

One security issue associated with NFTs is that the mania for high-priced, headline-grabbing NFTs draws scammers and fraudsters.

Scammers may attempt to sell you anything if you are not alert by falsely claiming it is an NFT. 

Some people may pose as creators to claim the right to sell NFTs they don't own.

The risk doesn't end here.

When you purchase an NFT, hackers may copy the image, video, or digital object that you hold.

So, it will help if you keep your eyes wide open while dealing with NFTs.

Union Budget Outcome 2022

  1. Every digital asset’s income from the transfer, including NFTs and cryptocurrency, will be taxed at 30%
  2. While reporting income from the transfer of digital assets, no deductions will be allowed, apart from the cost of acquisition.
  3. Digital asset losses are not deductible from other income.
  4. In the hands of the receiver, the gifting of a digital asset will be taxed.

Why Are Non-Fungible Tokens Important?

NFTs give artists and content creators a chance to commercialize their work; for instance, artists can sell their work online by sitting in their comfort. 

Moreover, NFTs allow them to retain a significant portion of their earnings.

As an alternative, artists can incorporate royalties into their works to earn a portion of the proceeds when their works are sold.

It saves them a lot of time and resources, which they would otherwise invest in putting up their artwork in galleries or auctions.

It is an exciting aspect because artists are often not paid for future sales.

However, art is not the only option for NFTs to generate revenue.

Even celebrities like Snoop Dogg and Lindsay Lohan took the plunge and issued securitized NFTs of their unique experiences, talents, and moments.

What Makes NFTs So Valuable?

Different vital factors determine what makes NFTs so valuable.

One is people can now more easily trust their sellers with NFTs. 

Since there are no middlemen, buyers don’t need arbitrators to trade with the seller.

The other vital aspects that add a feather to the cap of NFTs are:

  1. No Duplication - The most noteworthy characteristic of NFT is that it cannot be duplicated or transferred without the owner's authorization, including the NFT's issuer. NFT's unique working principle ensures its exceptional security, which is so "hot."
  1. Framework - The most well-known NFTs frameworks are ERC-721 and ERC-1155, which provide a standard for the issue and exchange of non-fungible assets on the Ethereum blockchain. They enable each smart contract to contain fungible and non-fungible tokens, allowing them to make a difference and introduce new exciting features.
  1. Storage - NFT is a token, which means you can store it in various wallets, including Trust Wallet.
  1. Trading Partner - You can trade NFTs on open marketplaces. These marketplaces link buyers and sellers, where each token has a unique selling point, and the NFT price is subject to market supply and demand fluctuations.

What Are The Benefits Of NFT?

The growing interest in learning about NFTs also draws attention to the benefits of NFTs in developing a deeper grasp of the different sorts of tokens.

While NFTs exhibit key characteristics like ownership, authenticity, transferability, their advantages inspire individuals to learn more about them.

Below are the detailed benefits of non-fungible tokens to help you better comprehend their potential.

  1. Ownership

NFTs operate on the blockchain network, which enables their assignment to a single account. 

Moreover, NFTs do not divide among several owners. 

Overall, NFTs shield buyers from worries about bogus NFTs.

  1. Authenticity

Non-fungible tokens have the potential to create value due to their uniqueness. 

They are fabricated on the blockchain, implying a unique identity. 

Additionally, NFT makers can release a limited number of NFTs to create a scarcity of supply.

  1. Economic Opportunities

The ownership of the content is embedded through the use of NFTs.

As a result, when artists sell their work, the proceeds immediately benefit them. 

For instance, if a new owner buys the NFT, the developer may be compensated through smart contracts while building the NFT. 

The token's original developer may be paid for each resale, as the NFT metadata provides the originator's address.

  1. Transferability

The transferability of NFTs helps NFTs trade freely on certain exchanges that provide various trading alternatives. 

For instance, in the context of games, NFTs might resolve the issue of 'walled gardens.

  1. Grow Inclusively

NFTs support equitable growth. 

NFTs open new prospects for inclusive growth by bringing together producers from various sectors. 

To begin, NFT artists may determine the true worth of their work and connect directly with their consumers. 

On the other hand, purchasers can access liquidity in various asset classes through NFTs.

Indivisible

Digitally Scarce

How do NFTs work?

Undoubtedly NFTs have opened new doors for artists to sell and promote their work without worrying about geographical boundaries or intermediaries.

But how does NFT work?

Here’s an answer to it!

  • NFTs are digital certificates—it allows a person to check/establish the authenticity of any digital asset.
  • NFTs use an Ethereum blockchain to store and record transactions. In essence, NFTs are digital replicas of actual collector's objects.
  • For instance, if you buy a painting from a famous artist who uses NFT, you will receive a digital image instead of a physical form. It’s vice versa for the seller.
  • When someone buys anything through NFT, they get exclusive ownership rights. 
  • NFTs can also have single/multiple owners at a time. 
  • NFTs have unique data—verifying their possession and exchanging tokens between owners is simple.

How Are Non-Fungible Tokens Used?

NFT will provide you with a platform to market your work and compensate you for each additional sale if you are an artist.

You can also purchase NFT to support the artist for their artwork. 

Buying NFT grants you the rights to the artwork, such as the right to post it online or use it as your cover photo.

Additionally, if you are an art collector, you purchase works of art with the hope that their value will increase in the future, allowing you to resell them for significant gains.

Why are non-fungible tokens a good investment in 2022?

There is no doubt that NFT is revolutionizing trade. 

It presents enormous opportunities to sell virtual jewelry, accessories, and clothes via NFT marketplaces and social media. 

Businesses and brands are also seizing this new opportunity. 

Taco Bell recently released animated gifs, which sold out within half an hour of their release. 

Pringles followed closely behind, and the NBA is killing it with its marketplace NBA top shot, which allows for the trading of digital artifacts.

And so it’s not wrong to say that we've just begun to scrape the edge of this trend. 

And the opportunities that lie ahead of us are limited to our imagination.

Should You Buy NFTs?

If you have extra cash to spend, investing in NFTs is essentially a personal choice, especially if a piece has special meaning for you.

However, before making any investment keep these points in mind:

  • First, NFTs are novel—it might make sense for the moment to test them out with small amounts of money.
  • NFTs are risky—since their future is unpredictable, and we lack sufficient historical data to evaluate their performance. 
  • The demand will only determine the price of NFTs, unlike conventional stocks whose prices are dependent on their economic wellbeing. 
  • NFT may be resold for less than its price or may be unable to sell if no one is willing to buy it. 

How To Buy NFTs

To store NFTs and cryptocurrencies, you'll need a digital wallet. 

Secondly, you'll need to open an Ether account, depending on your NFT provider's currencies. 

Then, using Coinbase, you can purchase cryptocurrency using your credit card. From there, you can transfer it to your preferred wallet.

If you're going to purchase cryptocurrency, keep in mind that most exchanges charge at least a portion of the transaction.

Popular NFT Marketplaces

NFT marketplaces that are currently the most popular include:

  1. Opensea.Io

This peer-to-peer marketplace sells "rare digital artifacts and collectibles." You can start exploring the NFT collections with an account in minutes.

  1. Rarible

Rarible is a free, open marketplace where artists and creators create and trade non-fungible tokens. 

RARI tokens let platform owners vote on fees and community regulations.

  1. Foundation

In these communities, creators receive "upvotes" or invitations to share their work with others. 

Still, because the community is scarce and has expensive admission, artists must acquire "gas" to mint NFTs, including higher-quality art.

Bottom Line — Are NFTs worth the investment?

The sudden rise of NFTs has crowded the market with trash and treasure. So, are non-fungible tokens worth the risk?

Investing in NFTs is worthwhile so long as you purchase a token that has value underlying it. The value represents the capabilities and value of the company or individual selling the token.

While NFTs may have a variety of practical uses in the future, they are now primarily employed in digital art. 

However, if you're contemplating investing in an NFT, consider that they might be very speculative investments.

It is impossible to predict what the value of NFTs will be. 

Some people made thousands or even millions from selling NFTs; others have spent a great deal on digital assets that will ultimately be worthless.

So do research, educate yourself on the risks—including the possibility of losing your entire investment—and proceed with a nice dose of caution if you want to hop on the bandwagon.

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