What is an NFT, and How Does it Work

What is an NFT, and How Does it Work

NFT was the word of the year in the UK. Although they have only been on the market since 2014, it has not been until recently that these digital assets have received a great deal of public and media attention, becoming the topic of the moment in the digital and crypto world. But what is an NFT? Why is this fuss over something still so new and unknown?

NFTs have produced a most interesting phenomenon in attracting public interest to the art market. Those who entered the world of collecting exclusively for digital art have now also been immersed in physical art. In other words, not that another has replaced one, but that one more dimension has been added. 

However, this is only one of the areas where we can find NFTs. Where else can we see them, and why are they so popular?

What is an NFT?

NFTs are the abbreviations or acronyms in English for non-fungible tokens (Non-Fungible Tokens). To understand precisely what this new concept constantly mentioned in the stock market means, we must break down the term itself. First of all, what does expendable mean? Something that can be easily replaced, for example, a five euro note. 

On the contrary, the first banknote ever printed is not fungible since being the first makes it unique and, therefore, more valuable. And tokens, what does it refer to? They are files with information located online in the decentralized server known as the blockchain.

Thus, non-fungible tokens are encrypted digital files based on the Ethereum blockchain. They always represent something unique, from digital art, music, video clips, video games, to even tweets. Social network co-founder and CEO Jack Dorsey’s first Twitter post became NFT, selling for a staggering $2.9 million.

One of the most notorious and successful cases of NFTs is that of the Bored Ape Yacht Club (BAYC). A collection of apes generated by a random algorithm that, as the name suggests, have unfriendly faces. According to its creators – Yuga Labs – there are approximately 10,000 unique models, with a value of 446,000 Ethereum, representing a total of 1.4 billion dollars.

In 2017, around 100 NFTs were sold every week around the world. Today, sales are between 15,000 and 50,000 weekly, which means that purchases have increased by 131% between 2020 and 2021.

To put it as simply as possible, NFTs are “bits of the internet for sale.” Intangible products are listed on the market and bought mainly with cryptocurrencies. 

Something very characteristic of these crypto-assets is that blockchain technology allows the owner of that NFT to validate that only he is the author of it and thus obtain benefits every time it is sold. This makes them even more prestigious, so remember: if you are thinking of investing in blockchain through NFTs, they can only have one owner at a time.

Now, who is buying these NFTs? We are mainly talking about digital natives, new technology startup entrepreneurs, collectors, and, in some cases, online speculators.

How Does an NFT Work?

In general, most of the NFTs work and are based on the Ethereum blockchain standards. However, more and more networks like Cardano and Solana are making inroads into the NFT space. Ethereum is the second-largest cryptocurrency by market capitalization and is used to purchase these digital assets. 

And how does this blockchain work? Each NFT is programmed with what is called a smart contract or intelligent contract; a kind of digital certificate of authenticity in which all the information of the purchased piece is found, as well as the acquisitions that have been made, its author, the starting value and the guarantee of its authenticity. 

With this technology, each transaction is recorded in different databases since it is decentralized.

Such transactions are made from one owner to another using blockchain technology, which creates a digital trail from the seller to the buyer, and the exchange is then verified. This codifies the individual ownership rights of the buyer to the new owner of that NFT.

The Ethereum platform is mainly used to create tokens because of its ability to execute smart contracts. Through blockchain, it allows for safe, efficient, and intermediary-free operations. Tokens created on Ethereum are generally known as ERC-20 tokens, such as Tether.

Each NFT is programmed with a smart contract or intelligent contract, a digital certificate of authenticity in which all the information of the purchased piece is found.

Even so, many will continue to wonder where to buy these NFTs. Today, the leading marketplace is OpenSea, with more than 150 payment tokens available and racks up billions of dollars each month in trading volume. Although it is built on the Ethereum network, it also cross-supports other blockchains, such as Polygon and Katyn.

How are they Different from Bitcoin?

NFTs have become quite an attraction in the investment world, but it is important not to confuse them with cryptocurrencies. The main difference lies in the non-fungible aspect of these tokens. 

They are digital objects that cannot be changed, replaced, or exchanged for others, thanks to the uniqueness that each one of them has in the blockchain. This means that each NFT is a one-of-a-kind item in contrast to cryptocurrencies. 

As its name suggests, Bitcoin is a fungible, divisible and portable virtual currency that can be exchanged, sold, and traded in pieces. Meanwhile, NFTs are unique, indivisible, transferable, scarce, and exclusive.

Why they are Essential to Access the Metaverse

NFTs and metaverses are closely interconnected. Although still a relatively new concept, NFT games are becoming increasingly popular among video game consumers and cryptocurrency users. So much so that all IGO – Initial Games Offering – NFT collections have been sold out.

If we understand a metaverse as a digital environment that operates on the blockchain, where technologies such as virtual and augmented reality act as providers of visual components, NFTs constitute the bridge to those 3D universes. 

They facilitate identity, community, and social experiences in metaverses, in such a way that they can alter the traditional paradigms of interaction, socialization, and transaction among their users. NFT avatars, for example, give players total freedom to build virtual identities that represent their real or imagined.

Although the metaverses are still in the early stages of development, they are one of the biggest bets of investors for the coming years, as you can read in the White Paper of APD and Vodafone Business ‘Ordering the metaverse.’ Metaverses and NFTs offer numerous social and financial opportunities and new ways to play, interact, meet, and transact.

Now, what is the actual value behind NFTs? Is it part of a bubble created by hype? What is certain is that, as the world has gone digital in recent years, NFTs are breaking down the distance barrier. 

Anyone can design their art and be financially appreciated no matter their country. The collecting industry is evolving, and now, instead of going to auctions, more people are turning to buy products online, including digital artworks.

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