In this article, we explain to newcomers what an NFT is and provide an overview of everything there is to know about the digital assets.
What does NFT stand for?
NFT is the abbreviation for Non-Fungible Token in German: Non-replaceable token.
What is a token?
A token is the digitized form of an asset. So the token owns a specific value or function. At the same time, however, fixed assets such as real estate or music rights can also be tokenized by overwriting the associated rights and obligations on the token. This means that ownership is digitally mapped and therefore can be traded.
A token can be both fungible (replaceable) and non-fungable (non-replaceable). Basically, “non-exchangeable” in this sense just means that it is a unique digital asset, which can not be exchanged for each other.
The situation is different with Bitcoins, for example: Bitcoins can be exchanged at will, because they always have the same value. It’s the same with cash: one ten euro banknote has the same value as another ten euro banknote.
Non-fungible tokens, on the other hand, can be compared to art objects such as paintings. These have an individual value. When you exchange them with each other, you usually do not get the same value that you pass on.
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What does an NFT look like?
Artist Beeple’s NFT artwork “Everydays: the First 5000 Days” on a smartphone. Photo: mundissima / shutterstock.com
Theoretically, any asset can be digitized and become an NFT: drawings, digital artwork, video clips, or even real estate. It is important that the NFTs contain information that proves their unique nature. In this way, the respective owner can always be traced back and can make his claim.
Now, of course, the question arises, how to protect a digital asset? Finally, you can save a copy of any digital artwork on your own PC with a single right-click of the mouse.
How is ownership documented?
The scenario described above is true and is also often quoted by NFT critics, but the case is a bit more complex than first assumed. Like cryptocurrencies, NFTs are based on a blockchain, that is, a decentralized database.
In short, this consists of blocks of information lined up as part of a chain. Each block in turn contains certain data as well as its own hash value and the hash value of the previous block. The data stored in a block can, for example, include the transaction details of cryptocurrencies or NFTs: seller, buyer and the transaction amount.
The hash value can be perceived as an electronic fingerprint. It is always unique and is used to identify the respective block. Since each block also contains the hash value from its predecessor, a blockchain is created. This is based on a peer-to-peer network, that is, a network of equivalent computers, all of which have a complete copy of the blockchain. When a new information block is created, all computers on the network receive this information, compare it, and then confirm the inclusion.
If someone were to try to insert a block of misinformation into the blockchain, they would have to inject it into every copy of it. Since this is almost impossible, blockchain represents an extremely secure variant of data storage.
So what does this have to do with NFTs?
Since data can always be traced back on a blockchain, individual ownership can be documented very well. An NFT stored on the blockchain can therefore not be copied – at least not within the blockchain.
Of course, digital works of art can be reproduced infinitely often with any technical device, but they are in no way inferior to physical works of art (counterfeits, art prints, etc.). And like a real painting, they derive their value primarily from what we attribute to them.
I guess the only difference is that a Picasso or van Gogh painting is something tangible to hang up at home, while an NFT really only exists in the virtual world. But if you think about how much time we now spend in digital worlds like Facebook, Instagram and Co, the idea of purely digital possessions should not seem so far-fetched to us.
In addition, there are virtual worlds with Cryptokitties or Decentraland in which the purchased NFTs can be used.
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The hype about NFTs
NFTs can seem incomprehensible and useless to many. After all, they are in principle nothing more than information in a technical system. That digital assets are so popular at the moment is probably due to the hype surrounding cryptocurrencies like Bitcoin or Ether.
In addition, the corona pandemic will have played its part. On the one hand, there are those artists and musicians whose sales have declined during the night and who have discovered alternative income streams with NFTs (see Grimes and Kings of Leon). On the other hand, there are the buyers who have drawn more and more into digital worlds during the many lockdowns and quarantines.
In addition, fears of a possible devaluation of money due to the high level of debt in the wake of the pandemic, which currently worries many people. Cryptocurrencies and NFTs can therefore be understood as a means of keeping savings safe from such a scenario. And then there are speculators who hope their NFTs will increase in value in the future.
It remains to be seen whether the sometimes very high amounts are justified for some NFTs. For in order for their value to remain stable or even increase, enough people must believe in them.
Where to buy NFTs?
OpenSea is one of the largest NFT marketplaces. Photo: Rokas Tenys / shutterstock.com
NFTs are now offered on many online trading platforms. The best known are OpenSea, Rarible and Mintable. In most cases, the purchase of NFTs requires cryptocurrency, which in turn must be stored in a digital wallet. Since most NFTs are currently still based on the Ethereum blockchain, you will need to use the corresponding currency Ether (ETH) to purchase them. A detailed guide to buying Ether can be found here.
Create and sell an NFT: How to do it
Now, if you fancy creating an NFT artwork yourself, you can easily do so through a marketplace such as OpenSea or Rarible. The “Create” function can be found in the menu at the top of both pages. All you have to do here is upload a compatible file such as PNG, GIF, WEBP, MP4 or MP3, which will then be automatically converted to an NFT.
You can sell your works directly through the platforms. Note, however, that you will need a digital wallet for both upload and sale.
For a detailed guide to setting up and selling NFTs, see our guide.
Also read: How to sell NFTs tax free
Criticism of NFTs
It is no longer a secret that the technical processes behind a blockchain consume an incredible amount of power. The University of Cambridge estimates that Bitcoin alone uses more electricity per year than the Netherlands as a whole. This is because of all the hardware needed for the peer-to-peer network mentioned above. Of course, depending on the type of electricity production, this also leads to high CO2 emissions. NFTs are no exception.
The British artist and technologist Memo Akten has spent several months looking at the power consumption involved in creating and selling NFTs. With the approximately 18,000 NFT works of art he analyzed, the average power consumption of 340 kWh has been lying. This corresponds to almost ten percent of the average annual electricity consumption per household in Germany. According to the files, an NFT would have a CO2 footprint of 211 kgas much as a two-hour flight.
There are plans to optimize the Ethereum blockchain, on which most NFTs are based, in terms of energy consumption, but so far, each transaction has been a huge power-swallower. The question of whether a few colorful pixels are worth the hassle is therefore entirely justified.
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