What is an NFT? (Simple explanation for beginners)

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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-fungible 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 the ownership is digitally mapped and can therefore be traded.

A token can be both fungible (exchangeable) and non-fungible (non-exchangeable). Basically, “non-fungible” in this sense just means that it is a unique digital asset, which cannot be exchanged for one with another.

The situation is different, for example, with Bitcoins: Bitcoins can be exchanged at will because they always have the same value. It is the same with cash: a ten euro note has the same value as another ten euro note.

Non-fungible tokens, on the other hand, can be compared to works of art such as paintings. These have an individual value. When you exchange them for each other, you usually do not get the same value as 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 possessions. It is important that the NFTs contain information that proves their uniqueness. In this way, the respective owner can always be traced back and can assert his claim.

Now of course the question arises, how to protect a digital asset? Finally, one can save a copy of any digital artwork to one’s own PC with a single right-click of the mouse.

How is ownership documented?

The scenario described above is true and is also often cited by NFT critics, but the matter is a bit more complex than first thought. Like cryptocurrencies, NFTs are based on a blockchain, that is, a decentralized database.

Simply put, this consists of blocks of information lined up as links in a chain. Each block in turn contains certain data as well as its own hash value and the hash value of the previous block. For example, the data stored in a block may include the transaction details for cryptocurrencies or NFTs: seller, buyer and the transaction amount.

The hash value can be thought of 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 chain (blockchain) is created. This is based on a peer-to-peer network, that is, a network of equal computers that all have a complete copy of the blockchain. When a new block of information is created, all computers on the network receive this information, compare it, and then confirm its inclusion.

If someone were to try to insert a block of misinformation into the blockchain, they would have to inject it into all copies 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 that is stored on the blockchain cannot therefore be copied – at least not within the blockchain.

Of course, digital works of art can be reproduced infinitely many times with any technical device, but they are in no way inferior to physical works of art (forgeries, 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 such as 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 where 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. The fact that digital assets are so popular at the moment is probably due to the hype surrounding cryptocurrencies such as Bitcoin or Ether.

In addition, the corona pandemic will have played its role. On the one hand, there are the artists and musicians whose sales have dropped overnight 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 withdrawn more and more into digital worlds during the many lockdowns and quarantines.

Added to this is the fear of a possible devaluation of money due to the high level of debt in the wake of the pandemic, which is currently worrying 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 that 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. Because for their value to remain stable or even increase, enough people have to 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 trading platforms on the Internet. The best known are OpenSea, Rarible and Mintable. In most cases, purchasing NFTs requires cryptocurrency, which in turn must be held in a digital wallet. Since most NFTs are currently still based on the Ethereum blockchain, you need to use the associated currency Ether (ETH) to buy them. A detailed guide to buying Ether can be found here.

Create and sell an NFT: How to do it

Now, if you feel like 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 automatically be converted into an NFT.

You can sell your works directly via the platforms. Note, however, that you must use a digital wallet for both uploading and selling.

For a detailed guide to creating 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. Depending on the type of electricity production, this naturally also results in high CO2 emissions. NFTs are no exception to this.

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 artworks that 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 guzzler. The question of whether a few colorful pixels are worth the trouble is therefore completely justified.

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