What Are NFTs, and How Do They Work?
Updated: Oct. 17, 2022
According to a recent RD.com survey, most respondents (73%) don't know what "NFT" stands for. Are you one of them? Read on to find out what NFTs are.
There’s a lot of new tech that can be confusing these days. What is the metaverse? What is web3? What is VR? Where’s a good crypto explainer? Somewhere among all the newly hyped tech, you’ll hear a lot about NFTs, including how NFTs affect the environment.
If you’re among the Reader’s Digest readers who don’t know what NFTs are, you’ll definitely want to keep reading.
First, let’s break down the NFT definition. What does NFT stand for? NFT stands for “non-fungible token.” The token is a digital item that represents a physical or digital item as information. Non-fungible means that the token is unique and doesn’t have the same value as another token. For example, a penny always has the same value as another penny, so it’s fungible. An NFT doesn’t have the same value as another NFT, so it’s non-fungible.
Still confused? Keep reading and we’ll sort it all out for you.
Is an NFT a cryptocurrency?
To understand what are NFTs and how they work, you need to also understand cryptocurrency. Both are digital assets, but they aren’t the same thing.
NFTs are akin to digital proofs of ownership. Cryptocurrency is a type of money that is only in digital form (like Bitcoin or Ethereum). Cryptocurrency is the thing you use to make a purchase, while NFTs are the thing you purchase. You use cryptocurrency to buy NFTs.
Also, remember how we said that NFTs are non-fungible and can’t be traded at the same value as another NFT? Crypto is fungible. One Bitcoin, for example, is worth the same amount as another Bitcoin.
What are NFTs used for?
NFTs can be made for just about anything. Remember, NFTs show ownership of something either physical or digital. This is particularly useful to the art world. Online, it is easy to right-click and save just about any image you see. Often, it’s hard to prove who the original artist was and who owns the piece. A NFT stores the information so that it isn’t lost.
“In my view, I see NFTs as a way to authenticate—not just art—it could be music, films, anything you possibly could think of,” Ja Rule, rapper and co-founder of the sold-out NFT collection Black Is Beautiful, tells Reader’s Digest. “People who spend money on NFTs see the long-term value of investing. Music artists fought so hard for royalties and rights to their own music, and now with NFTs, it’s become so much easier for artists and any content creator to own their work without the traditional gatekeepers.”
Does owning the NFT mean you own the legal copyrights to the artwork? Sometimes. It all depends on the conditions attached to the NFT by the creator.
Why would you want to own a GIF? Think of it like buying a painting, but the painting is a digital file. People buy paintings as investments or just to own something cool all the time. NFTs are no different.
What are some examples of NFTs?
People have made NFTs for things as simple as a GIF. Owning the NFT means you own the GIF. People can copy and share the GIF still, but you’re the owner. Sometimes, NFTs are paintings, though. For example, the Black Is Beautiful project features 1,000 NFT art collectibles. And perhaps one of the most famous NFT art collections is Bored Ape Yacht Club, which features digital paintings of, well, bored apes.
If you’ve scrolled social media, you’ve probably heard of some large NFT purchases. One major NFT example includes the sale of Twitter founder Jack Dorsey’s NFT of his first Twitter post. He made the tweet into a digital file and then stored it on a blockchain. The NFT sold for $2.9 million.
How to buy NFTs
NFTs are stored in the Ethereum Network, which uses blockchain technology. This network is essentially an online ledger in a database anyone can access to read who owns what. The owner’s name and address can be hidden with an alias to protect their privacy.
How do you get into NFT buying and selling? First, you’re going to need a digital wallet. That’s where the digital key to your NFTs lives. The key allows you to access your NFT securely.
There are many places online where you can sign up to get a digital wallet for NFTs, like Metamask or Math Wallet. The key is to choose a digital wallet that uses the same type of cryptocurrency as the NFT marketplace where you’ll buy your NFT. Your safest bet is picking a digital wallet that uses Ethereum cryptocurrency, since that is what most NFTs are purchased with.
Next, you need to get some cryptocurrency. Often you can purchase cryptocurrency at the same place you set up your digital wallet. How much do you need? Some NFTs are free, while others can be priced at thousands or even millions of dollars. The most expensive NFT ever sold was Beeple’s Everydays – The First 5000 Days. It sold for $69 million.
Finally, it’s time to browse some NFT marketplaces to find an NFT you like. Think of NFT marketplaces like the Amazon or Ebay of NFTs.
Once you link your digital wallet to the site, the rest is easy. You see something you like, you bid on it (you can often make an offer to purchase the NFT if you want a lower price) or outright purchase it using cryptocurrency, and then store the key to the NFT in your digital wallet.
“When it comes to purchasing NFTs, I would say to always go with your gut,” says Ja Rule. “Buy what interests you, but most importantly DYOR (Do Your Own Research). It could prove to be a worthwhile investment or it can be a worthless investment.”
Ja Rule offers these tips for buying NFTs if you want to make a serious investment:
- There are few experts in the NFT industry, as it’s still new, so use caution with anyone who claims to be an “NFT expert.” Chances are, they’re learning at the same pace you are. Of course, you should speak to people who have experience in the NFT industry, but we’re all still figuring it out together.
- If you are going to create an NFT collection, make it something you feel really strongly about. “For me, Black Is Beautiful was something I believed in from the jump,” says Ja Rule. “I always wanted to do something to highlight the highs and lows of the Black community, and this project felt perfect and fitting.”
If you’re buying NFTs with the intention of selling them, consider these tips from Ja Rule:
- Know what you’re offering people. Now that you found a collection you’re passionate about, be able to talk about it all day long. “I could go on and on about the importance of this Black Is Beautiful collection, because I believe so strongly in it,” Ja Rule says.
- If you plan on reselling the NFTs, understand who the purchaser is, including the demographics and their financial status. That will help you understand who to target and how to price your NFTs.
Where to buy NFTs
Some NFT marketplaces include:
Are NFTs worth buying?
If you ask many people who already buy and sell NFTs they’ll tell you that they are a great way to make money. Some people buy them as an investment, much like buying jewelry or real estate.
The problem is that NFTs are highly unpredictable. For example, that Jack Dorsey NFT that sold for $2.9 million? Its value fell 99% in just one year. While this is an extreme example, when it comes down to it, NFTs are only worth however much other people are willing to pay for them. That amount can change based on trends, fluctuations in the marketplace and the economy in general.
The success of NFTs also hinges on the success of cryptocurrency, since it’s used to purchase NFTs and it’s just as volatile. In the summer of 2022, the collapse of some of the most popular cryptocurrencies cost investors around $60 billion.
Still, the future of NFTs looks bright. Facebook, Twitter, Nike, Warner Bros. and other big companies are jumping on the NFT bandwagon, and there doesn’t seem to be a slowdown in the creation of new NFTs.
For most folks, NFTs are fun things to collect, like trading cards or figurines. Would it be great if they were worth something in the future? Of course, but don’t refinance your house to buy them. If you’re thinking they may be a great investment, make sure to treat the collection as a business and be smart about your purchases. This is also good advice for anyone thinking of buying real estate in the metaverse.
Sources:
- Ja Rule, co-founder of the NFT collection Black Is Beautiful
- Artnet News: “Here Are the Top 10 Most Expensive NFTs Sold to Date, from Beeple’s Record-Setter to Edward Snowden’s Court Transcription”
- Coinbase: “How Do You Buy an NFT?”
Originally Published: August 18, 2022
