Home NFTs What are NFTs & how do they work?

What are NFTs & how do they work?


What are NFTs and how do they work? Well, NFT – ‘Non-Fungible Token’ are crypto asset that represent digital file like images, videos or text.

What are NFTs? – Meaning

Blockchain technology, simply put, is an un-hackable system based on the mathematics of cryptography. (Shutterstock)

NFTs, an acronym for ‘Non-fungible token’ are a form of crypto asset which records ownership of a digital file like image, video or text.

NFT has come to be one of the pioneering concepts of crypto currency even as it currently outperforms major crypto coins.

Some top crypto coins and tokens have also started embracing the metaverse and NFT is an integral part of that.

It is important to point out that, most NFTs are part of the Ethereum blockchain.

Ethereum is a cryptocurrency, just like bitcoin, dogecoin or Shiba Inu; however, Ethereum’s Blockchain supports NFTs.

The processing of having a Blockchain like Ethereum, Solana, Polkadot, Cardano store extra information which makes their functionality to be extendable is ‘Smart Contract’

How do NFTs work?

An NFT can be created or ‘minted’ from digital objects which could represent both tangible and intangible items.

These could be:

  • Images
  • Videos
  • Text
  • A Tweet
  • Sports
  • Video Games
  • Land
  • Avatars
  • Music
  • Sneakers

A digital representative of any of the above elements after conversation to a ‘digital item’ is regarded as an NFT in the crypto community.

So, imagine having a painting of an APE on a Canvas and you want to sell the same painting to 20 people with the intention of either growing your Artworks fan base online or make profit.

The first thing you want to do is to convert the physical artwork into a digital art or image. The process of achieving this is called ‘minting’. Here is how to Mint an NFT on OpenSea.

After minting your Ape NFT, you have a whole lot of options to either sell, allow people bid, collect a percentage as dictated by you when the artwork is resold.

You can even keep a proper track of your NFTs future resales through digital footprints on the Blockchain.

You don’t need to rely on any art gallery to display your artwork nor put up your artwork on bid at popular auctions.

Benefits of NFTs

NFTs through Blockchain technology provides content creators, artists and digital curators an avenue to monetize their artworks and content.

  • An Artist

An artist can sell his/her/their artworks directly to customers as an NFT with no visible intermediary or having to pay a broker.

This enables artists to make more from their artworks and they can also keep getting percentages (royalties) everytime the artwork changes ownership.

That is, when another buyer buys the artwork from the first buyer, you will receive a percentage (set by you for life)

So, if your NFT gets sold over and over again say 50x, you will receive royalties 50x as long as your artwork stays on the Blockchain with the exception of it getting burnt.

  • A Buyer

Aside a few of the benefits stated above, the main reason many purchase NFTs is to make profit.

Taking part in the hype could be very profitable in the short run or the long run; depending on your strategy and the NFT.

When a buyer buys an NFT, some factors should be considered:

  1. The rarity of the artwork (how many copies were minted, the lesser the better)
  2. The creator of the artwork (how popular the creators previous or current artworks are).
  3. The hype around the artwork – Yes, hype is the new rule and not necessarily value or importance. The hype around a digital work can turn the image of an ‘egg’ to a ‘Billion dollar venture’
  • A Collector

You can cement yourself as an NFT collector by buying various collectables.

Your ability to ride on trends, spot unique NFT artworks, buy on time, patience for the said artwork to gain attractions, etc will be key to becoming a great NFT collector.

As a collector, you must also have a strategy for your collectables – are you planning to HODL (‘Hold on Dear Life’, a term popularized by the crypto community to mean holding with no immediate intention to sell even in the midst of a price dive).

Disadvantages of NFTs

Every new technology faces it’s disadvantages, NFTs are not alien to a few visible downfalls too.

  1. Scams – There are a lot of scammers using NFT as a means of defrauding many in the crypto space. The said is also true of any genuine crypto coin and token.
  2. Theft and Unauthorized Replication – Some dedicated artists can have their NFTs stolen or even replicated by others without their consent and there are no centralized Institutions to control this, yet! – that is the essence of Blockchain technology after all.
  3. Hacks and Platform Breach – Some artworks have seen series of hacks and attacks which has cost millions on dollars.
  4. Gas fees – To mint an NFT on the Ethereum Blockchain is not free and could cost as high as $100 or even more for an artwork. All these will eventually drive the prices of the said NFT up.
  5. Value – There is always the question, ‘who dictates the value of an NFT’? These are mostly based on hypes, smart digital marketing and mind games! Yes.

Hope we have successfully answered your question on what are NFTs and how do they work? – Great!

What is the future of NFT?

There is no known scenarios the future of NFT holds, however, there is a whole world of new possibilities with the rise of NFT.

Yes there are some disadvantages but, in the grand scheme of things, the benefits seems to outweigh the demerits.

Is it too late to enter NFTs?

The answer is no – The concept of NFT is still very new. See how long it took to fully comprehend the importance of Web2.0 and all the positive uses thereof.

So, if you are reading this, you are not too late to enter the NFT race.

Make sure you do your own research before investing in any NFT.