Your Only Guide to NFT: What is Non-fungible Token (NFT) and How Does it Work

Digital assets have been growing fast with expanded popularity, along with the evolution of blockchain technology. Digital assets like cryptocurrency and Non-fungible tokens (NFT) are also selling millions of dollars, as promising investments in the financial sector. Examples like Musician Grimes’ recent sale on her crypto art has made her a revenue of $5.8 through NFTs. There is an accelerating number of people investing in NFTs and making income through them. However, that leads us to a question: what exactly is NFT?

What is a Non-fungible Token (NFT)?

Non-fungible tokens (NFT) can be categorized as one of the sectors in the cryptocurrency industry. As the name “non-fungible” implies, it refers to a unique digital asset that is irreplaceable by any other token, representing the ownership of a particular item. In other words, it constitutes singularity and scarce. It is often to see artwork NFT transactions reported on the news; yet, NFTs are not limited to artworks, but also any other physical and digital items, including collectibles, music, virtual items in games, real estate, and more things you can think of, even tweets!

NFTs have high compatibility with different blockchain technologies and platforms, as it is compatible with a wide range of platforms set up utilizing the Ethereum based blockchain. That said, NFT can be traded on different Etheruem marketplaces that investors can trade NFT consistently and explore a wider market across platforms. For instance, Binance Smart Chain offers an exclusively built-in NFT compatibility, which facilitates both trading and creating.

The creators of NFTs not only can benefit from the first sale, but also from secondary sales, and which is called NFT royalties. The creators will receive a percentage of the sale price every time the NFT is sold on the market. The payout is calculated automatically by the smart contracts and royalty percentage ranges from 5%-10%.

Although NFTs are counted as one of the bright investments, it has some constraints in trading due to their non-fungible features. NFT is unique, and it cannot be traded for one and another like cryptocurrencies and fiats. Therefore, NFTs can only be traded to another buyer who is up for paying the amount of value it is worth. There is no restriction on the copies which the owner decided to make. NFTs are like any other digital files that can be easily copied or even be shared in any file, as the copies version will not have the same value as the originals.

Comparisons Between NFT Internet and Usual Internet

Transaction/art minted of NFTTransaction on the internet
UniquenessNFT is unique. It cannot be traded for one and another like cryptocurrencies and fiats.It is duplicable and the replica is the same as the original.
Ownership verificationEvery listed NFT is owned by a verified owner on public record.Institutions have control over servers that store ownership records of digital items.
CompatibilityNFTs have high compatibility with different blockchain technologies and platforms.Companies with digital items must build their infrastructure.
AccessibilityIt is easy for NFT creators to sell their work anywhere, and traders have easy access to global markets.Bounded by geographical restrictions and terms of use.

How Does NFT Work?

The unit of data of NFTs is stored on a shared ledger, which is known as the blockchain. All the data on the blockchain cannot be forged under the maintenance and monitor of hundreds of computers around the world. It is easy to notice any attempt forging or any suspicious activity. Therefore, in principals, NFTs can never be changed, edited, and stolen on the blockchain. 

The majority of NFTs are operated and traded under the Ethereum blockchain, which owns its blockchain in supporting other cryptocurrencies as well, such as Bitcoin and Dogecoin. And that is also why the rising in NFTs is one of the driving fore for Ether’s price.

Trade NFTs on specific marketplaces

Even though NFTs are not listed on all centralized or decentralized crypto exchanges, investors can buy/sell on specific platforms that support NFTs trading. Investors usually trade on specific NFT marketplaces. There are a variety of marketplaces under the system where people create their NFTs. Here are the examples of the NFTs marketplace you might have heard of:

  1. OpenSea
  2. Rarible
  3. SuperRare
  4. Mintable
  5. Nifty Gateway

NFT is the digital creation of everything, therefore everyone can tokenize any work and item and sell it on the blockchain, as long as they go through the NFT minting process to supply information and costs needed creating the NFT, also to prove its value.

Nonetheless, not every token created by the owner is valuable enough for trading. NFTs are technically just a certificate of ownership for a digital asset. The value depends on how collectible that asset is, or the potential value one has in the future sale. Hence, it is not guaranteed the value of NFTs will be “to-the-moon”. 

Every investment contains a certain level of risk. You should always evaluate the associated risk level before investing in any of the investment options!

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