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What is an NFT and How does it work?

March 18, 2021

7 min

What is an NFT and How does it work?
Beginner

The figures featuring the NFT market at the beginning of 2021 are all the talk online, and more and more celebrities are joining this trend that makes the whole crypto world rejoice.

To better understand the magnitude of the phenomenon, we’ll just mention that a work by the artist Beeple was sold for $6.6 million on 24 February 2021.

What does fungible mean?

Despite the suggestive term, we are still in the field of economics.

A medium is fungible when it is divisible into units, when its units can be easily traded, when it is common and when it can be easily spent. The euro is fungible, bitcoin is fungible, a gym token is fungible.

Consequently, non-fungible tokens are quite the opposite: they are indivisible, unique, scarce, and therefore difficult to spend.

What is an NFT?

NFT stands for Non-Fungible Token. It is a particular type of crypto-asset that has been around since the first crypto boom, but only took off in the mainstream in early 2021.

Remember when kids used to collect football cards, or spend recess looking for those rare Pokemon cards? Take that excitement and imagine it in adult crypto enthusiasts and bitcoin billionaires.

While technically an NFT is a unique asset registered on the blockchain, in fact it can be a work of art, a piece of music, a character in a video game, or even an insurance plan.

If (after reading this article) you open the most popular NFT marketplaces such as SuperRare, Rarible or the OpenSea aggregator, worlds will open up before your eyes.

The superpowers of NFTs

We have established what NFTs are non-fungible: they are indivisible, unique, scarce, and therefore not easily tradable. But they have other unique attributes, derived from the underlying technology: the blockchain. NFTs, in fact, are tokens based on smart contracts.

Thanks to the blockchain, the creator and owner of each NFT are written in stone, permanently recorded in the metadata of its smart contract.
In the metadata of the NFT, everyone can see the address of who created it and who bought it. No first and last names are given.

That is why NFTs are also fraud-proof. Their ownership is easily transferable through a transparent sale or on-chain transfer.

In addition to their economic and practical characteristics, a number of technical properties make NFTs particularly flexible and with great scope for technological development.

The NFT market segments

Art and Music

Over the last decade, many well-known names in the music industry have already decided to accept bitcoin payments for their albums and tracks, from Snoop Dogg to Bjork. It is therefore not surprising that the spread of NFTs has caught on in this sector, where the issue of copyright has a huge impact. With NFTs, we have a new way of claiming intellectual property rights for any content.

This was demonstrated by the eccentric artist Grimes, known to most for her relationship with Elon Musk, who earned $5.8 million with NFTs combining her music with visual works. On another note, the band Kings of Leon released their latest album as NFT in February 2021.

When it comes to so-called crypto-art, as a form of visual art, it ranges from highly detailed 3D works, to decorative pieces, to viral memes. Discussions on the conception of art and artist are now taking place on all social networks.

Videogames and Multiverses

From Atari to Ubisoft, the entire gaming sector is exploring the crypto dimension, but even more diverse are the projects born on the blockchain. The most interesting video games start from multiverses, i.e. virtual universes on the blockchain that can be explored and exploited for gaming experiences. The best-known example of a multiverse is Second Life, which was all the rage in the early 2000s.

The most interesting multiverses in the crypto world today are The Sandbox, Decentraland and Enjin. In these worlds, NFTs take the form of magic swords, characters and even plots of land. If you want to learn more, we have dedicated an article to The Sandbox.

Video games and virtual worlds, by their very nature, give ample scope for the application and exchange of these assets. Not surprisingly, it is the Gaming sector that dominates the NFT market.

Collectibles and Sport

It is known that fans are gadget lovers and passionate collectors since time immemorial. Knowing their audience, major sports companies such as the NBA, Formula 1 and teams like Liverpool, Real Madrid, Bayern Munich have seized the opportunity by releasing memorable match moments and player cards in the form of NFTs.

There are people who will collect anything, not just their idols. Proof of this are the CryptoPunk ‘figurines’, selling for 1-2 million dollars each. Even the fast food chain Taco Bell has released its own branded NFTs. In short, there is room for everyone.

How can I use an NFT?

Love for Art

There are several reasons for buying an NFT. As far as works of art are concerned, the motivations are often the same as for buying a physical painting: collecting, admiring the artist or the work, decorating the environment where you live or work.

Yes, NFTs can be displayed in the physical world and there are several brands that create frames, decorative screens and even wristwatches to better enhance your collection.

Other ways in which NFTs can be exposed are in virtual worlds: online art galleries or blockchain-based games such as The Sandbox.

Investment

If you are not attached to the work because of its artistic value or for personal reasons, you can resell it when it increases in value in order to make a profit in the long term. The increase in value can be dictated by the market, as with any good or cryptocurrency, or by changes made to the original token.

Gaming

Besides collectible and artistic NFTs, there are also NFTs that can be used in blockchain-based video games. In the article on The Sandbox we talked about how it is possible to earn money with NFTs in these games.

Utilities

A number of less glittering but more technologically interesting applications are the introduction of NFTs as lending collateral or the use of NFTs for smart contract insurance, of which Yearn Finance is the pioneering protocol.

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