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What Are NFTs? Why are Some NFTs Valued in the Millions?

In recent weeks, the internet has been abuzz with blockchain news, especially regarding NFTs. Almost everywhere you go online on social media, there is someone talking about the latest NFT that is now worth millions. In some cases, clip art has sold for millions. However, for most people, it is still quite confusing. Below is an in-depth explainer on the NFT phenomenon.

What are NFTs?

NFTs simply refer to Non-Fungible Tokens. Its most unique feature is that each token is non-fungible, which means it cannot replace another NFT. This is the opposite of Bitcoin where each Bitcoin is fungible, which means that one Bitcoin has the same characteristics and value as any other Bitcoin.

Consequently, an NFT is proof of exclusive ownership of an item. Once you hold an NFT associated with a piece of art, you are the only one who holds that particular NFT in the world. It is thus proof that you own the piece of art associated with the NFT. Since it is non-fungible, its value is likely to fluctuate over time as interest and demand for the associated piece of art rise and fall.

How NFTs Work

Photo by Old Money on Unsplash

The first NFTs were launched on the Ethereum blockchain. However, unlike the ETH cryptocurrency or other tokens launched on Ethereum, each NFT is non-fungible. It simply means that each one is unique and has a different value compared to other NFTs. The value of each NFT is determined by market forces and how much a person is willing to pay for a particular NFT. Like cryptocurrencies, they are secured using the blockchain. That means that when one holds the private key associated with an NFT in their wallet, they have full custody of it.

Since only one person can have full custody of an NFT at any time, it means you have exclusive owners of the particular digital asset associated with it. However, that does not mean you have exclusive rights to view or share this digital art.

For instance, there are many NFTs that have been sold for millions of dollars. However, while you own this NFT that is valued at millions of dollars, people can still copy, paste, and share it across social media to millions of other users. A good analogy to an NFT would be purchasing an autographed print. It means you have exclusive rights to it when you hold the NFT. However, anyone can still view the work online.

Thus far, NFTs have included:

  • Tweets
  • Artworks
  • Domain names
  • Songs
  • GIFs
  • In-game items
  • Essays

Why do NFTs Have Value?

For most people who are new to NFTs, the concept is quite baffling. Thus, they wonder why anyone would spend money buying NFTs. There are a few reasons why NFTs have value. These reasons include;

  • Scarcity

One of the greatest reasons why NFTs have value is because of the perceived sense of scarcity. Since an NFT can only have one owner at a time, it means they are extremely rare. Besides that, this rarity is preserved and protected using the blockchain. It encourages potential buyers to buy an NFT since it makes them the exclusive owner of that NFT.

A good analogy would be limited edition sneakers. Major brands often release limited edition sneakers to their consumers. When consumers purchase these sneakers, they have an assurance from the company that only the exact stated number will be produced. Once they buy these sneakers, they can simply hold onto them and as time goes by, their value rises exponentially. The main difference between limited edition sneakers and NFTs is that it is easy to prove each NFT is unique based on publicly available data secured on the blockchain. This information is secure and will last forever without any alterations.

  • Collectability

A good analogy for the collectability of NFTs is Pokémon cards. NFTs can be compared to Pokémon cards, but for the super-rich. While the cards usually have no inherent value except a promise of their rarity by the company behind them, their value is determined by what the market ascribes to them. The fluctuating value makes their collectability like a high-risk betting game. Consequently, NFTs have closely been associated with the art world.

However, unlike art pieces, the collectors of NFTs do not have to rely on a major auction house or gallery to showcase their work and sell it. They can simply go to an online NFT marketplace and put the NFT on sale. One of the benefits of this model is that NFT owners do not rely on middlemen and associated costs, unlike creators of physical art. They do not need an extensive legal team to prove the provenance of a particular piece. All they need is the blockchain and the associated security it offers.

Today, there are millions of NFTs in the world but most of those are worth pennies. However, a few that do make it to the top have been valued at millions. Their value will generally depend on the associated piece of work. For instance, an NFT artwork by Beeple, a famous digital artist, sold for $69 million. On the other hand, if an ordinary Joe tried to create an NFT, they would have a hard time getting more than a few pennies for it.

Another reason an NFT might have value is the in-game item it is associated with. Today, numerous blockchain games are being launched. These games feature in-game items that are associated with an NFT. In the traditional gaming world, in-game items have no value outside the game. This is even though gamers can use a lot of money to purchase an item. However, when you purchase an NFT in-game item, you get full custody of that item and it can be sold outside the game on a secondary market. The rarer and more powered up an in-game character or item is, the more value it will have.

How to Create an NFT

Image Credit-nickyandell72- Pixabay

The process of creating an NFT is quite simple. First, one needs a crypto wallet. They can then visit a crypto exchange where they buy cryptocurrencies, the best option would be ETH. Once they have the ETH in their wallet, they can open an account on an NFT platform. The process of minting the NFT will involve uploading the prices of digital work on the platform.

It will then be encoded into the blockchain, which means it will have a unique digital signature. Once that is done, the NFT can be listed on a public marketplace. Anyone can purchase the NFT using digital currencies, whereby they will receive the private key associated with the NFT.

The fee charged for uploading a piece of digital art on a platform is called the gas fee. Gas fees will vary depending on how active the Ethereum blockchain is. Gas is used to pay those who maintain the security of the blockchain using powerful processors via a proof of work algorithm through a process called blockchain mining.

To get the lowest gas fees, one should wait for when activity is low on the blockchain. This could be early morning or late in the middle of the night. Anyone can view the entire history of the NFT from the time it was created, how many times it has been sold, when, and for how much. Since this information is both public and secure, it is impossible to make a copy of it. When a buyer decides to sell the art piece, they can list it on a public marketplace. Depending on the marketplace they choose, the original creator will get a small percent of all future sales.

Be Wary of the Pump and Dump Schemes

Since the value of NFTs depends on what value the market ascribes to it, some people have been working to mint NFTs and sell them via pump and dump schemes. For instance, they will hype an NFT through a massive social media campaign on seemingly unconnected accounts. Due to the Fear Of Missing Out (FOMO), many people will purchase the NFTs. Those behind the scheme will then sell off their NFTs and run off with the funds.

Since crypto is not regulated in most places in the world, the illegality of such schemes is not well-defined. It shows that NFT markets are still in their infancy. Most of the market is driven by sentiment and speculation. However, getting in early will ensure that one familiarizes themselves with the technology and keeps up with events in the space. At some points, the markets will no doubt settle down and prices will begin to reflect the actual demand.

Summary

 NFTs are providing a unique means by which to own digital assets within digital environments such as games, and the metaverse. It allows people to have full custody of digital items, which they can sell on secondary marketplaces. The business model behind them is viable and is likely to evolve and grow with time. Most people believe that these digital tokens could help pave the way for Web3.0.

What do you think?

Written by HackerVibes

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