What is an NFT: Complete Guide to Understanding Non-Fungible Tokens

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An NFT, or non-fungible token, is a unique and unrepeatable digital token , which uses blockchain technology to guarantee not only its authenticity , but also that it belongs to a single user. Furthermore, one of the characteristics of these tokens is that anyone can convert their creations, be they images, videos, audios, URLs, or even physical objects in the real world, into non-fungible tokens.

Unlike fungible tokens, such as Bitcoin or any cryptocurrency that can be divided into identical tokens or replaced by another with the same characteristics, NFTs are unique and indivisible.

What are NFTs and how do NFTs really work?

Blockchain technology allows the creation of smart contracts endowed with the necessary metadata to guarantee their authenticity. This metadata includes:

The author.

Characteristics: image, features ( traits ), rarity ( rarity ).

Contract address: allows to identify the authenticity of each piece.

Royalty: percentage of profit that the creator acquires for each time his NFT is traded.

In the same way, this metadata also allows determining its initial price, the last purchase-sale price in the market and the number of transactions in it.

The NFT itself is a digital certificate of ownership and authenticity, which indicates that this content is unique and the property rights are held by the person who has acquired it. All transactions are recorded on the blockchain , thus verifying indisputable proof of ownership and guaranteeing that the seller receives the corresponding credit for the sale. In this way, the authors of the works cease to have property rights once the work is sold. The creator will be able to continue benefiting from his creations by obtaining the royalties produced by their commercialization in the secondary markets, while the percentages of these royalties will be loaded into the metadata of the smart contracts.

Utility – The value will increase if the NFT development  use cases inside or outside the crypto ecosystem. In the event that the NFT can be exchanged for a tangible good for real use, it will be an added value that will directly influence its market value. This is the case of NFTs that allow you to enter events or are exchangeable for other real goods. The combination of the principle of scarcity together with the utility of the NFT will undoubtedly have a positive impact on its value.

Rarity – This feature plays an important role in the world of art NFTs. When a project or an artist creates a collection of NFTs, they have a series of characteristics that make them unique, which can be verified in a rarity table provided by the creators. This rarity index will directly influence the market value of each NFT. The rarer and more renowned the project or creator is, the higher its market value will be.

Scarcity : the value will be increased if the NFT collection has a reduced number of units. The lower the number of units available on the market, the higher its value and the more sought-after it will be among users.

Membership – One of the big factors influencing the NFT token price lies in the prestige and popularity of the project. As in the world of collecting, having an NFT of the largest collections released to date in your wallet gives you a reputation and a value for which any user would be willing to bid; this is the case of EtherRocks, Lobster Dao or CryptoPunks . In addition, there are collections that grant their users certain benefits for becoming a member of the project through the acquisition of an NFT.

These factors constitute an initial base that will allow us to obtain a broader vision when deciding which NFT collection is best to invest in.

What types of NFTs exist and what are the most famous projects?

There are several categories of NFT, each one has its own characteristics in terms of design, utility, community or sector to which they are directed, let’s take a brief look at the most popular: 

Crypto Art : as its name indicates, it is a current or discipline that focuses on the design of digital art turned into NFT; Its recent success is due to the fact that blockchain technology allows its creators to claim ownership of their virtual works and merchants to verify their authenticity, as well as the possibility of owning all rights once purchased. Both the ease of creating and marketing their works, as well as the benefits that blockchain technology brings in this case , make this sector a very accessible business niche. Some of the clearest and most popular examples that we can see in this sector have been the CryptoPunks, the Pudgy Penguins or even the Bored Ape Yacht Club.

Video games (virtual worlds/metaverse): this category of NFTs has been booming for a few months. Users can get hold  create an NFT that later grants them access or benefits, either in a virtual world or in video games. There are games that encourage their users to play following a classic play to earn mode; that is, the more you play, the more native tokens of that project you will earn and the more benefits you will earn. In this way, they lead these NFTs to be able to be used in a practical way and even be commercialised in the market. A clear example would be the popular Axie Infinity game or the classic CryptoKitties, or future projects that are yet to come applying this technology, such as Parallel.

Real Asset Tokenization – One of the first real-world uses of NFTs has been in real estate. Many companies in the sector have created NFTs that are equivalent to real estate titles, allowing sellers to claim ownership of real estate, and buyers to verify its authenticity through blockchain technology . The main contribution of this use case is to put aside all the negotiations and procedures inherent to the traditional system of buying and selling real estate.

Author Bio: 

Boopathi Krishnan is an executive of Marketing at NFT Development Company. With 1+ years of experience in SEO and marketing, he loves talking about Blockchain, SEO, and NFTs.