What is an NFT and how does it work?

What is an NFT and how does it work?
13 min read

Something unique and unrepeatable" , this is how NFTs can be broadly defined, a very fashionable way of investing today.

And why do we say that it is fashionable? Well, just in the year 2021 the term was listed by the Collins dictionary as "word of the year". 

To put you in context, just with these figures you will begin to understand how brutal the NFT is: $92 million was invested in a number of tokens called The Merge .

There are many examples of these and their success is such that many companies worldwide have already decided to participate, launching their own Token collections among their audience. 

So, technology is more than art, it is a mechanism to invest. Are you ready to understand this term in depth? Well then let's start:

What is an NFT?

The acronym "NFT" refers to an acronym that means Non Fungible Token , in perfect English. 

Its first minting in 2015 is due to the work of art Quantum by the American digital artist Kevin McCoy, the creator of the first NFT in all history what an honor! It was auctioned in 2021 for 1.42 million at the auction house Sotherby's

NFTs as such represent a public and digital registry that certifies both the authenticity and ownership of an asset, also digital. 

To do this, they use the chain of blocks or BlockChain to guarantee both the property and the security that this token is unique, protected by cryptography and completely digital.

In addition, there is no possibility of it being duplicated, making the person who bought it its sole owner.

What is the relationship between NFTs and the BlockChain?

Non-fungible tokens are directly related to block chains thanks to the fact that this technology allows the transaction to be publicly and digitally recorded. 

It must be remembered that non-fungible tokens are like a great digital ledger in which all cryptographic transactions are recorded, previously analyzed and validated by the members of the network, which gives BlockChain technology a benefit: decentralization. .

With all this, the relationship between the BlockChain and the NFTs is that they use this technology to guarantee the security, as well as the confidentiality of the transactions to the participants in the negotiation of these assets.

For its management, they have been created under standards based on the Ethereum cryptocurrency .

Non-expendable: its most important attribute

For the purposes of this concept, token means “Asset”. However, as a non-fungible asset, an NFT is an asset that cannot be replaced , it can be movable or immovable, which is unique in value and does not have an equivalent that can replace it.

As in the physical world, where the clearest examples of something non-expendable are works of art or historical monuments, in the digital world, non-expendable goods are completely unrepeatable: there is only one of its kind or species .

Difference between NFTs and cryptocurrencies Non-fungible tokens and cryptocurrencies have a relationship with each other, based on the technology of smart contracts and blockchains. However, both terms are opposite. 

And where is their difference? In the fungible term. In the crypto world, cryptocurrencies come to represent fungible , replaceable goods whose price is affected by supply and demand. 

In addition, a cryptocurrency can be exchanged for another of the same value or for fractions of it, just like real currencies.

On the other hand, for non-fungible assets, as we saw in the previous point, this is not possible, since it is not possible to modify the NFTs, nor reproduce, divide or exchange them .

The other main difference is that they are not currencies. NFTs cannot be traded with each other as they are digital assets, they can only be bought or sold. On the other hand, cryptocurrencies can be exchanged for their fraction of value, bought, sold or mined.

Non-fungible tokens: their best attributes

In order to better understand the concept, you need to know what its most important characteristics or attributes are, which we define briefly below:

  • NFT Tokens are digital assets . Although they have real equivalents, their value is determined digitally.
  • They are stored on specialized servers.
  • In addition to being digital, NFTs are rare, rare, and rare assets .
  • The only way to buy them is with cryptocurrencies. 
  • They are indestructible because they can only be found digitally.
  • By having chain block technology, it gives them other special attributes such as online originality, which are traceable and non-falsifiable. 
  • They cannot be purchased in NFT fractions. When buying or selling, it is done entirely.
  • There are unique tokens and non-unique tokens . The latter are handled in digital games, especially those with cards or collection tokens. In these cases, each of the assets that are part of the collection are classified by their exclusivity or the rarity they contain. 

What is an NFT for?

The utility of a non-fungible token can be validated in two purposes or viewpoints: investors and creators.

When we buy an NFT we do not buy the good as such. As digital assets, non-fungible tokens represent ownership of an asset with a store of value. 

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In other words, as an investor you will not buy an image, a song lyric or a musical track, but you will buy the accreditation of the digital property that these files, unique and scarce, have as NFTs.

In other words, this token is used to prove or prove the possession of any digital asset as such, hoping that its future value will be higher, in the case of investors or those interested in collecting them.

However, from another point of view, for creators or digital artists, NFT technology allows the creation of unique content that attracts the attention of investors and additionally offers marketing facilities, without having to resort to third parties to carry out this process.

They even have the option to sell the property on a royalty schedule, whenever the content passes from hand to hand. 

How to know if an NFT is original?

As with physical goods such as art or anything else unique, and with immense technological advances, there is a risk of obtaining counterfeit or copied tokens, without the respective license from their creators. 

If you are an investor, we give you a summary of the most important steps to verify the authenticity of these valuable assets:

  • Verify the presence of the token in other markets , as a digital artist will only publish it on a platform for commercialization. If it appears on multiple platforms, it is no longer an NFT.
  • A digital artist will publicize their work and more through social networks. Therefore, it is good to follow him in his networks, and if possible contact him.
  • Check if the asset in question is a valid token; explore your data on the blockchain. There are apps like Etherscan. Very useful to know the profile of the artist and her data, either the official site or some of her networks. Another application is REV3AL, which verifies the authenticity, as if it were a diamond.
  • Fraudulent assets in general originate from centralized or personal servers. Therefore, it verifies that its origin is from certified servers.
  • The value of the NFT is also an aspect that influences its originality. A rare NFT with a low price is almost certainly fraud. It is opportune and convenient to review similar assets in the market and compare their prices. 

Make an NFT and become a digital artist

How to make an NFT without dying trying? Well it's simple. Almost anything in the digital world is convertible into a Non-Fungible Token . 

  • Art: movies, paintings, among others.
  • Games.
  • Songs, music videos or movies.
  • Social media posts, or else just ask former Twitter CEO Jack Dorsey. 
  • Images, GIFs and more.

Remember that what you are going to convert as NFT must have originality, be unique and rare, things that will make it attractive to investors. 

  • The first step is to choose a platform and wallet to trade the NFTs . Among the best known are OpenSea or Rarible, VIV3, among others and for wallets you have Rorus, MetaMask, Coinbase, Fortmatic and more. When choosing both platform and wallet, do not forget to interconnect them.
  • You must have cryptocurrencies to pay some requirements such as the generation of the piece on the platform and the registration fees. 
  • To publish, you can do it in various types of files , such as JPEG, MP3, WEBP; some platforms have defined sizes, for example 30 Mb. It is convenient to describe your work with a good title and an attention-grabbing description. Do not take this step lightly because it will be the one that captures the attention of investors.
  • At the same time you publish, you need to configure other aspects such as royalties for copyright and establish what is related to the auction of the same, among which you can choose fixed price, unlimited time or limited time auction for purchase by investors.

How to calculate the value of an NFT?

Let's review the 5 important aspects that establish the value of a non-fungible digital asset: 

  1. The utility, that is, what the NFT in question is for, if it is collectible or other aspects. 
  2. The property and its history, because it acquires more value when it has a good history of owners.
  3. That they are sponsored by artists, companies or recognized brands.
  4. The future value , which is generally established based on the well-known “speculative factors”.
  5. The existing liquidity in the network on which they are made.

Each of these points will have a different weighting, depending on investors or creators, some being more representative than others.

For investors, it allows you to discover if it is profitable to invest, and with respect to creators, they are essential because it offers them ways to improve the content they create, offering greater value and attraction.

Which platforms are the most suitable for trading NFTs?

A special point for investors. Although the platforms mentioned in the previous point are for creators, investors will be able to live on it to find out the most valued NFTs and invest in the one they like the most:

  • Rarible , the newest investment platform, focused on offering a fully decentralized space to create or trade non-fungible assets . In addition, it offers the best information on buying, selling and asset trends of the week.
  • OpenSea is the most widespread platform today, whose mode of operation is P2P . In it you will discover an infinite number of pieces, from works of art, collection cards, among other digital assets. 
  • Another of the most famous is Mintable , which allows you to buy or sell NFTs for those interested in offering their digital creations or for investors. In addition, it is a platform where you can publish without the need to pay expensive fees (or gas). 

And what are its risks and criticisms?

Regarding the risks, as we saw in the statement to detect its originality, these assets are also subject to false duplicates . 

In addition to that, the NFT business does not transmit security since what this market represents so far is only speculation.

As such, NFTs are not governed or supervised by entities or regulated by specific regulations. In case of problems, there is total uncertainty of a legal nature. 

Experts affirm that these goods are simply a passing fad, part of what are called "financial bubbles", where millions of dollars are paid for something ephemeral, with a very low essential value. And it is that the bubbles at some point can explode.

And regarding BlockChain technology , it can certify the authenticity of the operation and that it is a unique cryptographic value, but it cannot validate the originality of the production. Therefore, any file without verification can be an NFT.

Is it worth investing in NFT? Our final notes

We have given you all our knowledge about NFTs in this interesting article. 

This market is recent, and this only means that it generates many doubts in most of society, but it does not mean that there are no people betting on this economic segment. 

There are still years to go before this technology takes hold; Meanwhile, if you are going to invest, take our advice and pay attention to where you invest your money. 

 

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