FAQ’s About NFTs
What is an NFT?
At the most basic level, a non-fungible token is a one-of-a-kind, verifiable digital asset that can be exchanged between a creator and a buyer. The one-of-a-kind characteristic is important in distinguishing NFTs from other digital assets; one NFT is not interchangeable for another, like a dollar bill or a share of stock, but is unique and has its own value.
What makes an NFT valuable?
The value of an NFT comes from the property it represents, which is generally something that exists in the digital world like an original piece of art or digital memorabilia. The NFT itself doesn’t necessarily contain the digital property, but points to its location on the blockchain. Like a concert ticket or a deed to a physical property, an NFT reflects the value of the thing it represents.
Similiar to physical art, four factors contribute towards the value of an NFT art — how expensive it becomes.
The first is the “market-driven value”, which depends on the speculated resale value and popularity of the artist. The second is the “subjective value”. It involves the moral statement or political message that is conveyed by the art — how it makes you feel.
Another value determinant of NFT arts is the “objective value”. This involves the experience and technical skill by which it was created. Lastly is the “historical value” the piece of digital art has.
All these factors contribute to how people value NFTs. “The Merge” which sold at an auction for a whopping USD 91.8 million is the most expensive artwork ever. Each NFT created or minted is unique, and its right can be traced to the owner, and blockchain technology protects this right of ownership.
It was recorded by DappRadar that in the 3rd quarter of 2021, NFTs sales increased to $10.7 billion, from the $1.3 billion in the second quarter of 2021.
Because lately, a lot of crypto enthusiasts believe that to make money with NFTs, you have to have a lot of money to buy a valued NFT, including a gas fee. This is not entirely a lie because, in the business world, you need money to make more money. The higher your capital, the higher your profit.
In the era of decentralized finance, anyone with as little as $20 can buy a coin or a token that can make him $200,000 in a few months of hodling.
What’s the connection between NFTs and cryptocurrency?
NFTs aren’t cryptocurrencies, but they are built using technology similar to Ethereum and Bitcoin. Also, like cryptocurrencies, NFTs exist on a blockchain, which verifies their unique identity and ownership. The blockchain also keeps a record of all the transactions connected to the NFT and the property it represents. Many NFTs are held on the Ethereum blockchain.
Why would I want to own an NFT? Can I make money on it?
One reason to buy an NFT is for its emotional value, which isn’t so different from physical objects…unless you’re a total utilitarian. No one buys lip gloss because they need it. They buy it for the way it makes them feel. The same can be true for a GIF, image, video, or other digital asset.
The other reason is because you think it’s valuable…and will only increase in value. And yes, you can make money off of an NFT by buying and reselling it for more.
Why is there so much interest in NFTs?
Blockchain platforms and NFTs provide an opportunity for significant growth in a number of markets and particular interest has already been identified in areas such as digitalcollectables (eg sports trading cards) and artwork. Individual rights have traded for tens or even hundreds of thousands
of dollars and the volume of activity has been increasing.
The ability to access digital products globally with confidence that the product being acquired is verified in accordance with standards applied relative to that network and in accordance with arrangements accepted in the industry has resulted in some significant value creation in the form of NFTs. For some businesses a move to digital may replace the entire existing market whereas in other areas there may be an opportunity to open up new revenue streams or expand geographic reach. All these factors make NFTs an exciting product to follow in the near term
How do you buy an NFT?
Can NFTs be copied?
No, and Yes. While the technology “NFT” cannot be replicated because of security factors inherited from blockchain, the media can be copied.
Take, for example, the Mona Lisa painting done by Leonardo da Vinci, while there are many lookalikes and iterations of the original painting, there is no two original Mona Lisa artwork. The same goes for NFT, it’s impossible to fake the creator’s wallet even though copying the contents of an NFT can be done.
NFTs contain unique codes — stored on the blockchain in an immutable form — that makes it possible to trace them back to the creator.
How is an NFT created?
This process is known as ‘minting’ and is essentially the
same process as applied in other token formation such as cryptocurrencies however it will apply the functionality in the smart contract applicable to recognising and transferring NFTs for example as set out in the ERC-721 standard. This will have some similarities with ERC-20 standards (name, symbol, supply, NFTs owned by the address) and standards applicable to ownership (owner ID, approval to transfer, transfer, owner index). The new NFT will be created by attaching content (such as an art file) to the ERC-721 standard content and adding to the applicable token script typically using Solidity for storing in the relevant file wallet. The wallet can be connected to an NFT Marketplace such as Rarible or Mintable in order to enable the ability to sell the asset. Costs will relate to the gas charge resulting from purchasing a small amount of ether in relation to an Ethereum based token and any support required in the design and minting of the token if support services are required.
How do I hold an NFT?
As the token is digital, there is no physical ownership of an NFT. At the creation, or sale, of an NFT the ID of the creator or buyer is coded into the smart contract of the token making it clear who owns the token. The NFT is a record stored on the blockchain that directs you to where the associated content is kept, somewhere else on the internet. The reason for this off-chain storage of NFTs is because it’s too expensive to store all the data on a blockchain such as Ethereum.
The most common off-chain storage choices are: (i) Centralised servers and cloud storage facilities like AWS; and (ii) InterPlanetary File System (IPFS). IPFS is a peer-to-peer file storage system that allows content to be hosted across computers so the file is replicated in many different locations.
This ensures immutability and longevity for the token. This storage method is especially popular in the digital art space.
Who can I sell an NFT to?
- The buying and selling of NFTs is intended to most closely resemble any other purchase of a commercial product. It will be important that the NFTs are in reality digital products
and not investments in a collective investment scheme or securities, derivatives or other financial instruments the purchase and sale of which is regulated in the place of issuance or the place of purchase (see further below).
- Some marketplaces will only conduct transactions in crypto currency so you will only be able to sell to someone with a crypto wallet. There are no barriers to anyone creating a crypto wallet, so in essence you can sell them to anyone. There are however strict restrictions applicable to anti money laundering and using the proceeds of illicit activities in order to purchase crypto assets. This will typically require the parties providing exchange services being licenced or registered in a relevant jurisdiction.
Do I need to be registered with any regulatory body in order to buy NFTs?
No, you do not require any type of license to buy NFTs for your own account. If you intend to sell your NFTs to another person, then you will need to consider issues relevant to sellers of NFTs.
Can I buy NFTs using fiat currency and/ or crypto currencies?
There are currently no restrictions in the US, EU or the UK when buying or selling NFTs using either fiat currencies and/or cryptocurrencies.
• There are, however, anti-money laundering rules that apply to cryptocurrency exchange providers and custodian wallet providers. You should always use a reputable intermediary with a proven track record as there may be financial crime risks in the industry.
• The website, platform or other intermediary which lists NFTs and their prices may not be required to be registered if it doesn’t undertake a cryptocurrency business. By agreeing to buy or sell a NFT on the intermediary, you may be directed to your custodian wallet provider or a cryptocurrency exchange to initiate the transaction.
What questions remain about NFTs?
Many. Although NFT technology has been around since 2014, it is just beginning to be put to the real-world test. Because NFTs run on a blockchain, they could offer potential for uses beyond art and collectibles. Suggested uses have ranged from video games and fashion, to vehicle and real estate ownership. In theory, NFTs could offer efficiency and security through embedded smart contracts. However, the NFT market remains very new, and questions about rights, ownership, intellectual property, and more have not been fully explored. The final answer about what’s next may be … stay tuned.