A Beginner's Guide to NFTs
Regardless of your experience with NFTs, here's all you need to know about them.
Non-fungible tokens (NFTs) have been here since 2014, when a New York digital artist, Kevin McCoy, and his wife, Jennifer, minted Quantum on Namecoin. NFTs went into oblivion after this period—not until 2017, when the Cryptopunks NFT launched with some acceptance.
With the mint of popular NFTs like Bored Ape Yacht Club (BAYC), Crypto Cannabis, and World of Women later in 2021, NFTs spread like wildfire. The market rose quickly into what would become a multi-million-dollar market today.
We know NFTs can be a confusing term for Web 3.0 newcomers. Some even get scammed or plunge into a ditchy project due to anxiety and naivety. In this post, we'll explain what NFTs are, including some common pitfalls to avoid as a beginner.
Ensure you do your research before investing in any NFT project. Any information provided by Moonly isn't financial advice. DYOR.
What Are NFTs?
NFT means non-fungible token. NFTs are unswappable tokens represented by digital commodities, including artworks, pixelated images, videos, clothes, music, games, and even written content, and many more. By unswappable, it means, unlike digital currencies, you can't trade one NFT for another.
For example, while you can exchange Eth for USDT, you can't swap a BAYC for a Cryptopunks NFT. To achieve this, you must liquidate (sell) your digital holding (non-fungible item) for a fungible token like Eth, Sol, or USDT. You can then purchase a Cryptopunks NFT using the fund realized from liquidating your BAYC.
When you create an NFT, you end up tokenizing an item. For instance, putting up your artwork for sale on OpenSea for some Eth means you've tokenized it on the Ethereum network and are ready to receive a named profit in Eth when someone buys it.
How Are NFTs Created?
While creating an NFT, you generate a unique token. Then store it inside a smart contract or an algorithm associated with your chosen blockchain. This can be Ethereum, Algorand, or Sol, for instance.
You'll then provide more information (metadata) about the digital asset you want to tokenize. This metadata adds meaning to your token since they're human-readable content. The metadata usually includes the tracked item's traits, name, access URL, and mint order, among many other descriptions.
Storing content like images and videos on the blockchain can be expensive. So the tokenized asset is usually stored off-chain. The access URL provided in the metadata is a link to each digital item's source.
So, for example, when someone clicks a listed pixelated image on OpenSea or Magic Eden, they're fetching the image from its source using on-chain metadata.
Hence, each NFT is a uniquely generated token represented by digital assets available via a URL provided in the metadata.
The smart contract containing an NFT can be dynamic, and the NFT creator can decide to embed branded logic or protocols within it. This is why innovations can be buried within an NFT, as each project owner decides what their product offers investors.
That's on the more technical side.
You can leverage no-code tokenization-as-a-service tools if you only want to create an NFT without any hardcore underlying algorithm. Most only require you to upload your asset and its metadata to tokenize it.
You can also upload and sell directly on a marketplace like OpenSea. It's pretty straightforward on OpenSea. You only need to upload your digital item and provide some background information about it, and you're all set.
Characteristics of NFTs
To qualify as an NFT, a digital asset exhibits the following characteristics.
1. NFTs Are Indestructible But can Be Burnt
NFTs are typically indestructible and persist on the blockchain. However, you can burn them by sending them to a voided crypto address provided by the associated blockchain. This process is irreversible.
When sent to a burn address, an NFT lingers on the blockchain. But it's inaccessible and unspendable in transactions. One of the primary reasons for burning NFTs is usually to make them scarce to increase their value. Sometimes, a burnt NFT can get transformed. This is common to most deflationary NFTs.
Burning doesn't apply to the new Bitcoin Ordinal digital collectibles, though.
Bitcoin Ordinals sets the record straight by insisting that digital collectibles should never be destructible and should live on-chain. Each Ordinal NFT is an inscription of a digital asset on a Satoshi, the Bitcoin unit.
Thus, Ordinals maintains that if an NFT tracks the unit of a blockchain's cryptocurrency, then there's no way to destroy it since each makes up the bulk available in circulation. However, the limitation of this concept is it can be rigid to innovations.
Unlike fungible tokens that have currency units and are subject to divisibility, NFTs remain whole on the blockchain.
Thus, you can't send, spend, or liquidate parts of your NFT like you would an Eth. For instance, while you can send or liquidate 2 Eth of 5 Eth, as for NFTs, you'll send the whole.
Each NFT is a unique cryptographic token. A smart contract might produce several NFTs. But they're all different regardless of how many there are.
This uniqueness makes verifying and tracking previous and current ownerships of each NFT on the blockchain easy—since it's the only one existing at a time. And that's why it's easy paying royalties to a base owner each time there's a trade on an NFT.
4. Transferrable and Tradable
An NFT must also be transferrable and tradable between crypto addresses. Although transferrable, you can't exchange NFTs cross-chain. For example, you can't transfer a Solana NFT to an Ethereum wallet or vice-versa.
While holders can't transfer across chains, a creator can move or branch out to other chains.
For example, Degods and y00ts NFTs recently branched to Ethereum and Polygon networks, respectively. You can now buy Degods using Eth on OpenSea.
How Much Does It Cost to Create an NFT?
The cost of creating an NFT depends on factors, including your chosen blockchain, project roadmap, crypto value, and determined NFT marketplace.
Creating a quick one-asset NFT directly on OpenSea is free as of writing. However, you might need to pay a gas fee for listing your item for sale. You can also apply for a collection listing via Magic Eden's Creator Hub.
Listing an NFT on the Ethereum network is relatively more expensive since the gas fee is typically high. Although it can be as low as 0.01 Eth on non-busy days, you can spend as high as 0.2 Eth when the Ethereum network gets busier.
Solana offers the cheapest transaction fee among all blockchains. You can expect to pay as low as 0.00001 SOL per listing. Cardano charges between 0.17 and 1.5 ADA per transaction, while Avalanche might cost you around 0.008 to 0.02 AVAX.
What you get charged per sale also depends on the marketplace. OpenSea charges 2.5% on all secondary sales. This is higher than Magic Eden's charge, which only charges 2% on each sale.
Utility and Innovative NFTs Cost More
If you plan to offer utility and integrate innovations in your NFT, the availability of expertise to implement your brand strategy is a cost determinant. This is because you need to hire a smart contract developer to achieve and implement your business goals on blockchain algorithms.
You might also need to partner with an NFT marketplace where your NFT community and potential holders can mint your tokens. Marketplaces usually charge some fees for NFT publishing. These vary widely and depend on the NFT marketplace.
Utility and innovative NFTs can set you back by hundreds to thousands of dollars, depending on your contract's complexity. Overall, the cost is hard to estimate. Ethereum uses the ERC721 token standard for NFTs. Smart contract development around the ERC721 or the Solana network can cost between $5,000 and $7,000 or more or even less, depending on your business needs.
What Is Minting in NFT?
NFT minting is the process of publishing NFTs on a marketplace. Thus, a mint defines the first time an NFT is available for investors to buy directly from its creator.
Secondary sales often follow minting. This is where those who bought an NFT directly from the creator list them on the marketplace for sale to interested buyers who either missed the mint or are hoping to buy at a floor below the mint price.
A mint can be free or have a price tag. Most popular mints come at a price. But there are still many free mints out there that do pretty well in floor value. For example, each Cryptopunks' NFT was free. Some are worth over 150 Eth as of writing.
How to Buy an NFT
First, you need a Crypto wallet to buy an NFT. You can buy an NFT directly from the creator by participating in a mint. But if you miss a mint, you can buy from the secondary listings on a marketplace.
To avoid missing NFT mints and never miss potentially profitable ones, start following the projects that catch your interest on Moonly.
While there are many Solana NFT marketplaces, Magic Eden list NFTs from other blockchains in addition to Solana NFTs.
OpenSea, Blur, X2Y2, and OpenSea Pro are some of the best marketplaces to buy Ethereum, BNB, or Polygon NFTs.
You'll see many NFTs listed for sale once on a marketplace. To buy or mint NFT drops, connect the marketplace to your crypto wallet. This could be an Ethereum wallet like Metamask or a Solana wallet like Phantom.
Once connected, all you need to do is to click the buy or mint button for a specific NFT. Then sign the marketplace contract on your wallet to mint. An NFT mint or a purchase comes at a cost, depending on the gas fee. So while minting or buying, you'll typically pay more than the original price of the NFT.
How to Avoid Getting Scammed via NFTs
There are many ways to spot fake NFTs and avoid scams. But as an idea, you can leverage tools like Moonly.
Scroll through the Upcoming NFTs section on Moonly or search for an NFT using the search bar at the top right. Click the NFT in question to reveal its stats. If the NFT hasn't minted, looking closely at its social stats, reading its roadmap on the linked website, viewing its tweets, and joining its Discord server to see what sort of things they discuss go a long way to tell if it's a great project.
And if the NFT has minted, besides reading its roadmap and studying its social stats, looking at its past sales volume, floor changes, and percentage holders can tell if it has growth potential.
Web 3.0 scams are diverse and can come in any form. Social engineering via phishing is growing exponentially in the NFT space. Unlike its centralized counterpart, where you might go through many security checks before approving a transaction, merely signing a contract in Web 3.0 can drain your wallet. All it requires is a click.
Overall, avoid clicking untrusted and unverified links feigning as a popular NFT. For instance, https://boredepeyechtclub.com/ isn't the same as https://boredepeyechclub.com/. While the former is authentic, the latter is missing a "t" and is fake.
Some Popular NFT Use Cases
NFT application has infested many industries today. Some of its use cases in everyday life include:
- Music and Video: NFT is applicable in music and video making to claim ownership of a song or a clip and earn rewards for streaming.
- Fashion: Some fashion industries offer brand-specific NFTs to grant customers certain product privileges. Nike, Gucci, Louis, and Prada, are notable fashion brands leveraging NFTs to promote their brands.
- Art: The use of NFTs in claiming art ownership is a use case you're probably familiar with already. Artists earn crypto rewards when they list their artworks for sale on NFT marketplaces.
- Gaming: We've seen several NFT use cases in gaming. Play-to-earn is an example of its use in gaming. NFT Gaming innovations are also springing. Such is Sony's cross-system NFT trading framework introduced in March 2023.
- Metaverse and Virtual Reality: Property ownership, gaming, and product inspection are among the Metaverse activities. Since most activities in the Metaverse revolve around digital ownership, the Metaverse, and NFTs maintain strong ties. For example, real estate properties, including houses and lands, sell as NFTs on platforms like Decentraland.
Should You Invest in NFTs?
Although you can make thousands to millions of dollars from trading NFTs, you can also lose hugely if the project plunges into a ditch. Since it's crypto, the NFT market is as unpredictable. So investing in NFTs is risky.
If you find an NFT project that interests you, ensure you do your research before investing. After researching and confirming that a project isn't a scam, use your discretion to decide if it's a financial risk you're willing to take.