What are NFTs? This is The Explanation
vemuda.com - Everyone has been talking about NFTs lately, but what are they really? From people who say that they are the future of investing, to people who say it is just a trend and it will fade soon… Who’s right?
But the real question is: Is this an actual investing opportunity that you can make serious cash with, or is it just a big, fat, lie?
|Source: unsplash.com by Choong Deng Xiang|
This post will help you understand NFTs, and figure out whether you should check them out further or not.
1. What are NFTs?
NFT stands for non-fungible token. And they are, basically, what the name says: non-fungible tokens. Let’s look at it a little deeper. Non-fungible means you can’t interchange it. It’s something unique and cannot be replaced.
For example, imagine we’re buying a cup of coffee together, and I ask you for a dollar. The day after, I give a dollar back to you. Maybe it isn’t the same exact bill, but it’s still a dollar. It has the same monetary value, it hasn’t lost it’s worth, and it can still buy the same things. AKA, it’s fungible.
Now imagine you have a baseball card. It may have the autograph of a famous baseball player. Would you give that a way for any other baseball card that isn’t autographed?
Of course not, you wouldn’t, because that’s a unique card and you cannotreplace it. It’s far more valuable than a random card. AKA, it’s non-fungible.
Good, now you know what’s “Non-fungible” but what about token? Well, we call them tokens, but they aren’t real tokens. Those are digital assets that people can buy. In the case of NFTs, they are also cryptocurrencies.
They are basically just like Bitcoin, Etherum, and DogeCoin. But they have a fundamental difference: they aren’t fungible.
No one cares if you have this or that bitcoin, the market value is the same at all times. NFTs come in the form of… Anything really. Most people think about NFTs as digital art. Stuff like images and PDFs, drawing and designs, but that’s not really accurate.
You see, NFTs are actually just files. An NFT can be anything that can be digitally stored. Things like images, yes, but also music files or anything else. It’s like trying to buy a painting, but instead of that painting, you get a file. Makes sense so far? Good.
So. As I said, NFTs are linked to cryptocurrencies. How? NFTs are Ethereum blockchain. They are just some tokens, but they have some extra digital information, and that’s the important part.
But, what’s a blockchain then? Well, this gets pretty sketchy to explain, but here’s how it works in a nutshell. A blockchain is a type of database.
So, it contains information that can be easily filtered and searched, and it’s meant to be used by a large number of people and contain a lot of information.
Just like all other databases, computing power is needed to keep them running. Multiple computers are often used at the same time, to reach the necessary computing power.
The difference between a regular database and a blockchain is that a blockchain has a particular way of storing info. Data is stored in “blocks”. These blocks have a storage limit.
When they are full, the next block is used. It’s basically a “chain” of “blocks” getting filled with data, hence the name “blockchain”.
Back to NFTs: they are stored in these blockchains, just like Bitcoin and Ethereum, but they have extra information. That extra information is very important, because it’s what allows the token to have an usable format, such as JPG, PDF, MP3, MP4, WAV, PNG, and so forth.
They are like collectable items, and basically anyone can create one. But wait… Doesn’t all this mean that anyone can create an NFT, and copy-paste multiple NFTs and sell them? Well… Yes.
You could buy an NFT, and copy paste it and create another NFT. The difference, however, is that the copies of that NFT will not become more valuable than the original NFT.
This is simply because, only the original one will be seriously demanded by the market. It’s just like paintings. Why is the original Mona Lisa painting so valuable, while all the other copies of it are worth much less? Because they aren’t originals. It’s the same with NFTs.
And, since they are related to a blockchain, which has an immutable, permanent transaction history, it should be pretty easy for anyone to tell which is an original and a copy.
2. How do people make money with this stuff?
Just like you would with any other collectable item. You buy it, you hope that its value grows, and then you sell it. It’s like buying an expensive watch and selling it when its value doubles.
You buy NFTs, and you wait for their value to grow. Then you sell them again. Here’s a crazy example. This NFT was sold for 69.3 million dollars. It’s called “Beeple's Everydays – The first 5000 days at Christies”. Fast! Screenshot the thing and sell it for 60 million dollars!
If you were smart, you would’ve quickly Screenshoted the picture, and sold it for 60 million dollars! Just kidding, it makes no sense. You see, there’s a huge difference between NFTs and just random files. Your file won’t have the same value because, as I said earlies:
- It isn’t an original
- And, it doesn’t have the information that an NFT has
So, some people really think that this will become just like art collecting but just for digital stuff. There are many ambitious artists, making music and other forms of art.
But then there are also people selling random tweets and making millions. Like the founder of Twitter, Jack Doursey who made 3 million dollars selling his first Tweet.
Here it is: And then there are people selling GIFs, like this one, the Nyan cat. Or this one, which is called literally “Dogecoin isn’t an NFT. But this GIF of a dogecoin is..So, yeah, it has the potential to become something big one day, but realistically… I dunno.
NFTs are highly volatile, and right now you can’t tell with certainty if they will last. It has the possibility of lasting as an artform, but only time will tell.
It’s definitely not like owning physical original art. I think we can all agree that a copy is basically as good as the original NFT, while a painting is much different, since it has actually been touched by the painter and all that.
What I’m trying to say is that an NFT’s value is very much dependent on the “flex” of owning the original NFT. Which, obviously, is a very unpredictable thing, which makes NFTs’ value fluctuate. You’re basically betting your money on bragging rights.
Now you might want an answer to another question… Why? I mean, why make our lives harder, introducing new things like NFTs that are risky, and might even disappear in the next few years (or maybe not).
Well… It depends. If you’re a buyer, you might be buying one for a couple of reasons: You might want to support an artist or a brand. Maybe they release an NFT, and by buying it you would basically financially support their work.
The second reason is because you want to collect the item, and sell it for a higher price in the future. Here’s another example: This NFT sold for 36 hundred dollars, and the current owner is asking for 16,300 dollars. If you’re an artist, on the other hand, this might just be a way to make some cash.
3. Who pays for some files?
Well… A lot of people actually. And if it sounds kind of weird. Even Logan Paul made money with NFTs. It’s actually a huge meme, everyone is having fun with it. This doesn't mean that NFT doesn’t have serious uses, but right now it’s unlikely to be a very big thing long-term. But again, time will tell.
But why are NFTs controversial? Because they actually have an impact on the environment. These systems and databases are actually very advanced, and they require serious computing energy to be created.
Just think about the fact that, according to creativebloq.com a simple GIF can consume an incredible 192 kWh in its creation, which is equivalent to one European Union resident's entire energy consumption for two weeks. And thousands of NFTs, are created and traded daily.
Here’s another cool example of an NFT. This is “Mars House: The First Digital NFT Home in the World”. It sold for half a million dollars.
Lately, cryptocurrencies and other blockchain uses have been very controversial because of their heavy impact on the environment. Just think that Ethereum alone uses about the same amount of energy as the entire country of Libya. That’s a big impact on the environment.
4. Can anyone create an NFT?
Yeah, pretty much. There are some fees, like gas fees for creating and trading the NFT (since they use a lot of energy). There are also other fees, but mainly you should ask yourself this question: “Who am I and who would buy my stuff?” Should I invest in NFTs? I’m going to tell you how it is.
I’ve seen a lot of confusion around, so let’s make it clear. What makes NFTs valuable? Demand. If something is extremely demanded, it will have value (AKA you’ll sell it for a lot of money).
Scarcity plays a role in the demand of something. Since an NFT is unique and easily verifiable, it’s easy for it to hold its value. But here’s the thing.
Just because something is scarce, that doesn’t mean it will be demanded. I mean, anyone could create an NFT right now, but unless you are popular or create something very special, it won’t be demanded by anyone.
So, in summary, NFTs are kind of funny. There’s a lot of hype around them, but it’s unlikely that they will be a long-term investment in most cases.
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