‘NFT’ was Collins Dictionary’s 2021 ‘Word of the Year‘. In this explainer, we’ll dig into the nitty gritty of all things NFTs. So what are they? Let’s dive in.
What does NFT stand for?
NFT stands for non-fungible token, a blockchain-based digital asset that represents ownership of art, video clips, music, real estate and much more. Sometimes they represent real items in the physical realm, but most of the time, they represent ownership in a single digital or virtual asset alone.
Some are valuable, others aren’t. Some are about communities and others are just for fun. There’s sometimes no rhyme or reason why a particular NFT becomes popular. Some have evolved from parodies into active and engaged communities.
What makes NFTs special is that they are one-of-a-kind – they’re ‘non-fungible’ in the sense that each digital asset is unique and the owner is the only person in the world to hold that particular NFT. They have been around since 2015, however the rise of cryptocurrency over the last few years has seen their popularity soar in tandem.
What does NFT mean in simple terms?
Non-fungible by definition is an item which cannot be replaced or exchangeable with another of equal value, similar to a plot of land or a second-hand car. Money is fungible because a $5 note is the same as any other $5 note. By contrast, a non-fungible item has unique traits or features that cannot be replaced with another item for equal value. Land is non-fungible because no two pieces of land are exactly the same.
NFTs are similarly non-fungible as they are one-of-one blockchain-based digital assets, which have unique characteristics. The diagram below illustrates the point.
How do they work?
NFTs are tokens that we can use to represent ownership of unique items. When one purchases an NFT, you are purchasing the certificate of ownership to a particular piece of digital content, whether it be a piece of art, audio or video clip. This may or may not be accompanied by goods, services, experiences or intellectual property rights in the physical world.
Ownership of the NFT is represented through a unique ID and metadata that can only be developed once – no other token can represent that same data. When someone creates or mints an NFT, they execute code stored in smart contracts that comply with different standards such as ERC720 or ERC721 – token standards used for representing ownership on the Ethereum blockchain.
This process means that each token minted has a unique identifier, they’re not interchangeable with another token and the ownership of the NFT is easily verifiable on the blockchain.
Every time that NFT is resold the transaction is reflected on the blockchain. This enables the original creator of the NFT to see how many times their NFT has moved around and the wallet addresses of those transactions.
This is particularly useful for NFT artists and musicians who are able to integrate a royalty structure into the original smart contract. This means that they can enjoy a royalty each time their creation is sold.
To further expand your horizon, we suggest having a look at our article ‘What is NFT Art’?
Use case example: the Australian Open
This year the Australian Open tennis tournament held in Melbourne teamed up Decentraland, Run It Wild and Metakey to create 6,776 AO Art Ball NFTs representing ownership of art tennis balls. These were produced from an algorithmic combination of different colours, patterns and textures, and updated with metadata collected from the Australian Open in real-time with match and ball tracking data.
Speaking to The Chainsaw, Ridley Plummer, the NFT and Metaverse Manager for Tennis Australia, said that he believed NFTs were a powerful tool to make sporting events more accessible to the entire world. The brainchild behind the NFT drop commented further that it aligned with the organiser’s objective to be the world’s most accessible and innovative sports event yet. In describing how it worked, Plummer added:
“The collection is made up of 6776 balls. Each of those balls is non-sequentially tied to a 19x19cm plot of the AO court. Every time there is a match winning point hit, we take the 3D ball tracking data and plot the exact location of the winning point. This is then tracked back to the corresponding NFT where the metadata is updated with the player’s name, the round and championship in which the match took place. We followed close to 400 matches, with the most winning ball taking three match point wins.”
Overall, the NFT release was heralded as a major success, reflected in a Cannes Lions award — the most prestigious international creative marketing award — for their “innovative use of tech and platforms in sport”.
Where to buy an NFT?
You’re keen to dip your toes into the market … what now? There are numerous NFT marketplaces where you can buy NFTs. Some require you to pay for gas fees (transaction costs) while others absorb that cost. Ultimately, it’s a matter of personal preference – as always, it is critical to do your own research.
The most widely-used platforms include:
- Opensea – the original and most prominent marketplace in the NFT world, it is home to some of the largest NFT collections such as Bored Ape Yacht Club, Mutant Ape Yacht Club, CryptoPunks and Doodles.
- Rarible – a prominent digital art gallery and NFT marketplace home to successful NFT collections such as Otherdeed, Arts Block Factory and Marvel Duel.
- Magic Eden – this is the leading NFT marketplace on the Solana blockchain and home to NFT collections such as Solana Monkey Business, Degenerate Ape Academy and Labscientists.
- Crypto.com – a simple to use platform suited for absolute beginners where they can use a credit or debit card. Users can buy and sell digital collectibles from brands, celebrities and artists like Snoop Dog, Aston Martin and UFC.
- NBA Top Shot – this is for the basketball enthusiasts, allowing users to to buy, sell and collect NBA NFTs that showcase influential moments minted on the FLOW blockchain.
How to buy an NFT?
Each marketplace has a different process. For the major crypto exchanges such as Crypto.com and Coinbase, the process is fairly straightforward. They are probably the most accessible to entry-level NFT investors. Both have detailed step-by-step instructions as to how to go about setting up an account, depositing funds and buying digital assets.
Crypto.com users can simply go onto their exchange, click on the NFT marketplace, choose their NFT and pay via credit card, existing crypto in their Crypto.com wallet or their external wallet. After setting up an account and depositing funds, users on Coinbase will then be required to purchase ETH and from there, they are free to go on an NFT shopping spree.
This is a deliberate simplification of the process and users ought to be aware of how to withdraw their NFTs into cold storage (i.e. offline into self-custody on a hardware device such as a Ledger).
For more information on purchasing NFTs, check out our ‘How to Invest in NFTs’ article.
How to make an NFT
Assuming you have an image, video clip or audio clip that you wish to turn into an NFT, what does that process look like?
Marketplaces such as Opensea and Rarible have made it easier than ever to turn your creations into NFTs. Both have intuitive user-friendly interfaces that walk users through the process, step by step. Some marketplaces are as simple as dragging and dropping your creation onto the platform and clicking ‘mint’ – quite literally. Some require you to pay to mint the NFT (known as gas fees), while others allow you to do so for free.
Tennis Australia’s Ridley Plummer suggested to The Chainsaw, that now more than ever, is the time to be exploring the NFT space and “making mistakes”. Adding further, he commented that
“It’s more a focus on the underlying technology, how we use this technology now and how this technology is used in the future.”
Creating one’s own NFT can be intimidating but it’s simpler than most people would think. To dive deeper into the process, visit our article ‘What is NFT Art?’ where we cover the topic in much more detail.
What does it mean to mint an NFT?
Minting an NFT means converting the digital file (whether image or video) into a digital asset stored on the blockchain. Once the digital files have been converted into an NFT, they cannot be edited, modified or removed.
The cost to mint an NFT varies tremendously from blockchain to blockchain and is heavily dependent on demand for blockspace. As mentioned above, some platforms allow you to mint for free, which is another way of saying they are subsidising the gas fees. Gas fees have fluctuated dramatically and are frequently below US$1 but have run into the thousands of dollars in some extreme cases.
What is NFT Art?
NFT art is a non-fungible-token representing ownership of digital art. Similar to one-of-one wall paintings, NFT art allows holders to have a certificate of authenticity and ownership to that specific creation. Remember, art needn’t be static – video, gifs and the like are also included.
NFT art has shown what’s possible in the art world in terms of evolution, by cutting out the middlemen such as art galleries and art dealers, and allowing artists to sell their art directly to consumers around the world. Even traditional global art houses like Christie’s are getting in on the act.
So what are the benefits to NFT art over its traditional form? NFT artists are able to set a royalty structure upon minting their creation to receive royalties on all future resales for the lifespan of the piece. This is something that artists have not been able to enjoy to date. With traditional art, after the initial sale the artist has no clue where it goes and never receives a cent in royalties. In fact, the sad reality is that most of an art piece’s value appears to accrue after its creator’s death.
NFT art has the capacity to change the dynamic between artists and the end consumer. To learn more about this fascinating space, dive into our ‘What is NFT Art?’ article.
How to invest in an NFT
Not financial advice but … similar to investing in any type of asset, it’s important to establish an understanding of the asset class, as well as your investment goals and strategy upfront. This is probably a wise move that could reduce the prospects of making a bad decision. Of course, no investment can guarantee a return. And that applies equally to NFTs.
There are literally hundreds of thousands of NFTs, each with a unique story, angle or point of difference. Some are environmentally-focused, others are collectibles, some have experiences attached to them and others are just for fun. Whatever your reason for investing in the space is, it’s always advisable to to research.
“The term DYOR – do your own research – always rings true in NFTs”Ridley Plummer, Head of Metaverse and NFTs, Tennis Australia
Once you’ve got your eyes on a particular NFT collection and have your marketplace account loaded ready to go, before you pull the trigger, Plummer has some words of advice: “People need to research the history of the project, the team behind the project, the roadmap and the legitimacy of the project”. He added further that the buyer also needs to understand why they’re buying in.
Much like crypto, NFTs are similarly prone to fear and greed cycles. They are equally susceptible to pump-and-dump schemes or ‘rug-pulls’, where the founders run off with the cash without delivering anything of substance.
It can’t be stressed enough, DYOR – do your own research – always.
Investing in an NFT is simple. Read more on how exactly that works in our ‘How to Invest in an NFT’ article. Here’s how to sell an NFT.
How to sell an NFT
The process for selling an NFT across the various marketplaces is similar and relatively straightforward. If your NFT is being stored in a hot or cold wallet outside of the platform, you will first need to transfer it onto the marketplace. From there, it’s pretty simple:
1. Choose the type of sale and the price
One option is to set a fixed price. In that scenario, it won’t be sold until the price is met. If however you would rather see what the market has to offer, you could set up a timed auction with a reserve price and minimum bid.
Another option is a so-called dutch auction, which is similar to fixed price listings, except the price falls over time. For example, you might set your reserve at 1 ETH and after 3 days without an offer equal to or greater than this price, the reserve will automatically drop to 0.5 ETH. This process can continue until you have a buyer that matches the reserve.
2. Complete your listing
Once you have set the terms of the sale, you’ll be asked to review the listing and publish.
3. Sale of your NFT
Once your NFT is listed and you receive a suitable bid, you will have the option to accept the offer. Once the offer is accepted, the digital asset will be transferred to the buyer automatically and the funds will be reflected in our account. You could either use those to purchase more digital assets or otherwise withdraw into an exchange or wallet of your choice.
What is the most expensive NFT sold?
The world’s most expensive NFT sale was Beeple’s Everydays: The first 5000 days for US$69.3 million on March 11, 2021.
According to Christies, the auction house who conducted the sale of his record-breaking digital art piece, there was a notable difference between the pictures from Day 1 (1 May 2007) and Day 5,000 (7 January 2021), revealing Beeple’s immense evolution as an artist.
Mike Winkelman, the man behind the Beeple, in May 2007 set out to create and post a new work of art online every day. He hasn’t missed a day since, creating a new digital picture every day for 5,000 days straight. Individually known as ‘Everydays’, collectively the pieces form the core of Everydays: The first 5000 days, one of the most unique bodies of work to emerge in the history of digital art.
In the process, he’s garnered a loyal online following, with over 1.8 million instagram followers, frequently churning out digital art across his social media platforms.
Who purchased Everyday: The first 5000 days?
Who was the deep-pocketed investor who took the plunge? Vignesh Sundaresan, known as Metakovan in the crypto world, bought the most expensive NFT sale to date – US$60 million for the artwork and almost US$9million in fees. According to The Australian Financial Review, Sundaresan buys them chiefly as investments and has compared owning them to having an autograph from your favourite artist.