Blog #1 from our series "NFTs and Crypto: The next big asset class?"
Until recently, NFTs have been a very mysterious topic that you hear about every now and then on the news. While most people like to talk about them, most do not understand what they are, how they are created and how they are stored.
In this short article, we will answer these questions directly. If you are interested in knowing more about NFTs, subscribe to our newsletter and keep an eye out for the next articles in this NFT series, and check our new NFT market analysis report!
What are NFTs?
To keep it short and sweet, NFTs, which stands for Non-Fungible Tokens, are unique blockchain digital tokens: they are a digital representation of ownership on the blockchain. Blockchain tokens are unique pieces of data. Think of a blockchain as a huge database of particular data points. Most NFTs exist on the Ethereum blockchain which can store huge amounts of information in its decentralized ledgers around the world. Finally, because of this "unique" characteristic, NFTs can be used to authenticate digital ownership of any asset.
NFTs are considered an emerging asset class and they can represent almost any type of tangible or intangible asset such as artwork, real estate, cars and even your reputation (think that Black Mirror episode). Currently, they are mostly being used to own cool images or videos minted digitally.
NFTs also have some advantages that other types of tokens don't have; they can be stored in a wallet like Bitcoin or Ethereum; they cannot be replicated by anyone else; and they provide a mechanism to track ownership rights without requiring lawyers to get involved.
How are they created?
In the NFT world, you have 2 types of players involved. The content creators are able to design their own NFT and put it up for sale in a marketplace. As a creator, you earn the sale price of your NFT and might earn "royalties" from your work as it gets transferred. On the other hand, buyers will use an acceptable cryptocurrency, such as Bitcoin or Ethereum, to purchase NFTs. Some buyers purchase NFTs as speculative assets and treat them like stocks (day-trading). Other users are collectors: they buy the art, hold onto it with a bullish outlook, in hopes to sell it at a profit in future.
For content creators, the process of creating an NFT is called "minting" and this can be done in several platforms, such as Mintbase. First, you create a "collection" to which you will add your NFTs. This is like an NFT folder. After, you can create and add NFTs to the collection using image, video and music files: essentially any type of digital content file. You can add a name, description and rarity to your NFT. By default, all NFTs that are created go on sale in the marketplace of your choosing. As a result, NFTs can be easily exchanged between players in a supporting marketplace.
Because NFTs are baked by Ethereum blockchain, participants are required to have an Ethereum wallet, such as MetaMask, in order to access a marketplace. For example, a very popular NFT marketplace called OpenSea operates on Ethereum. To access it, users use their Ethereum wallet as their username and password. Once connected, users exchange cryptocurrency for NFTs.
How are NFTs stored?
This brings us to the question... how are NFTs stored?
Given that NFTs are not tangible, you can’t just store them like artwork in your house or hangars. Like cryptocurrencies, NFTs represent a record stored on an NFT-compatible digital wallet. However, the digital file (image, video, gifs) that the NFT owner owns isn’t actually baked into the blockchain. Rather, the token represents a file that is located somewhere else digitally and which can be identified using a Token URI based on the ERC-721 standard, a tool which supports NFT storage on Ethereum. ERC-721 is an open standard that helps to build NFTs on the Ethereum blockchain. All ERC-721 tokens are unique, and they point to specific web addresses to identify the content that an NFT owner owns.
However, if the file an NFT represents is stored at an open web address, the NFT owner might not have full security that the file could ever be removed offline.
If you want to learn more about how to avoid NFT fraud, stay tuned for our future posts.
Next up... Understanding the different types of NFTs!