What is NFT? The operating principle and role of NFT in the Crypto market

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In the cryptocurrency market, NFT has become a familiar term for investors actively seeking investment opportunities with attractive returns. The appeal of NFT stems from its rapid increase in value and growth, but at the same time, it faces varying opinions due to instability, high speculative nature, and the risk of fraud. In this article, we will explore the fundamentals of NFT at Tiệm Coin!

What is NFT?

NFT stands for non-fungible token, also known as “irreplaceable token,” which is a unique form of virtual asset representing tangible objects such as art, music, game items, and videos in the digital space.

NFT

The buying and selling of NFTs typically take place online and are conducted using cryptocurrency. Non-fungible tokens are usually encoded using underlying software, similar to other types of cryptocurrencies.

NFTs were first introduced in May 2014 by creator Kevin McCoy, who became a prominent figure in the NFT art scene. Kevin created the first NFT named “Quantum,” a piece designed by his wife.

“Quantum” is a looping video displaying an octagon composed of circles, arcs, and other shapes, all sharing a common center. By 2021, this unique NFT artwork had been sold for up to 7 million dollars, marking a historic milestone for the NFT market.

How is NFT created?

The first step in creating an NFT is the minting process. Minting involves converting images, videos, audio, and other digital files into encrypted assets on a blockchain. The existence of NFTs on the blockchain makes the process of editing and counterfeiting more challenging. The unique data of NFTs facilitates easy verification of authenticity and ownership.

When creating an NFT, the owner or creator also has the ability to embed specific information within the NFT, such as signing the artwork by incorporating the signature into the metadata of the NFT.

Characteristics of NFTs

Despite only emerging in 2014, NFTs have garnered significant attention and become a popular medium for trading digital artworks. From November 2017 alone, a substantial amount, totaling up to $174 million, has been paid for NFTs.

The uniqueness of NFTs lies in their indivisibility and distinct identification codes. Arry Yu, the Chair of the Cascadia Blockchain Council at the Washington Technology Industry Association and CEO of Yellow Umbrella Ventures, describes it as follows: “NFTs fundamentally create scarcity in the digital space.”

nft-la-gi

This stands in stark contrast to many other digital creations, often having an unlimited supply. The theory suggests that when the supply decreases, the value of a specific asset with increasing demand rises. However, many NFT works have taken various forms, such as iconic NBA video clips or digitally secured artworks on Instagram.

A notable example is the work of renowned graphic designer Mike Winklemann, also known as “Beeple.” His synthesized piece, “EVERYDAYS: The First 5000 Days,” composed of 5,000 daily drawings, achieved a record-breaking price of $69.3 million in an auction at Christie’s.

Everyone can easily view personal images or even entire albums online for free. So why are some people willing to spend millions of dollars on things they could easily obtain through downloading or taking screenshots?

The main reason is that NFTs allow buyers to own the original version of digital assets. Furthermore, NFTs provide built-in proof of authenticity for ownership rights. Collectors place a high importance on “bragging rights to digital ownership,” considering it more significant than the actual value of the item.

The only similarity between NFTs and cryptocurrencies is how they are often created through similar programs, such as Bitcoin or Ethereum.

Both cash and cryptocurrencies are fungible, meaning they can be bought, sold, or exchanged for equivalent value. For instance, one USD is indistinguishable from another; one Bitcoin always has the same value as another Bitcoin. This fungibility makes cryptocurrencies a reliable means of payment on the blockchain system.

NFTs, on the other hand, differ. Each NFT is characterized by a digital signature, making NFTs non-fungible, meaning one NFT cannot be exchanged for another NFT. For example, the NBA Top Shot collection (consisting of NFT cards, each NFT being a short video clip capturing historic basketball moments) cannot be swapped with the EVERYDAYS digital artwork, as both are NFTs. (Similarly, a video clip from this NBA Top Shot collection cannot be exchanged with another video clip from the same NBA Top Shot collection).

Operation Principles of NFT

NFT operates on the blockchain system – a public and decentralized ledger used to record transactions. You may be familiar with the basic process of creating cryptocurrencies through blockchain.

NFT work

Specifically, NFTs often operate on the Ethereum blockchain and simultaneously receive support from other blockchains.

NFTs are created or “minted” from digital objects, representing both tangible and intangible items, including:

  • Artworks
  • GIF images
  • Videos and memorable moments in sports
  • Collections
  • Virtual avatars and items in games
  • Designed sneakers
  • Music products

Even tweets on Twitter. Twitter co-founder Jack Dorsey sold his first tweet as an NFT for over 2.9 million USD.

The fundamental nature of NFTs is similar to physical collectibles, except they exist in digital form. Instead of owning a real oil painting to hang on the wall, buyers simply receive a digital file.

Buyers also have exclusive ownership rights, with each NFT belonging to only one person at a time. Thanks to unique data, verifying and transferring ownership between owners becomes straightforward. Specific information can be stored as an NFT, for example, an artist can directly sign their artwork by converting their signature into NFT metadata.

Applications of NFT in Daily Life

NFTs find widespread applications in four main areas:

  • Art: Blockchain technology and NFTs provide unique profit opportunities for artists and content creators from their works. This means artists are no longer dependent on galleries or auctions to sell their pieces. Instead, they can profit significantly by directly selling their works to customers as NFTs. Moreover, they can earn copyright fees each time the artwork is transferred to a new owner.
  • Gaming: NFTs have revolutionized the gaming industry by enabling the ownership and trade of in-game items and characters as unique digital assets. Gamers can truly own and transfer these assets across different platforms.
  • Digitizing Real-world Assets: NFTs have been applied to tokenize real-world assets, such as real estate, allowing for more accessible and efficient transactions in the property market.
  • Digital Content Development: NFTs offer opportunities for creators of digital content, allowing them to monetize their work uniquely. This includes writers, musicians, and other content creators who can sell their creations directly to consumers as NFTs, ensuring secure transactions and providing a new revenue stream.

Blockchain technology and NFTs create unique profit avenues for artists and content creators, transforming the way creative works are valued and exchanged. This extends beyond art to various sectors, where companies like Charmin and Taco Bell organize NFT art auctions for charitable purposes. Limited edition products like “Charmin” (Non-fungible toilet paper) and Taco Bell’s NFT art sold out within minutes, with the highest bid reaching 1.5 ether (WETH), equivalent to $3,723.83 at the time of writing.

Nyan Cat

Nyan Cat

Even cultural icons like the “Nyan Cat” GIF, originating from 2011 featuring a chubby cat, sold for nearly $600,000 in February. NBA Top Shot generated over $500 million in revenue by the end of March, with an NFT highlight of LeBron James fetching over $200,000.

Notably, celebrities like rapper Snoop Dogg and actress Lindsay Lohan have also joined the NFT market, converting their memories, artworks, and special moments into secure and protected NFTs.

How to Own NFTs?

Firstly, to enter the world of NFTs, you need a digital wallet to store both NFTs and cryptocurrencies. You may need to purchase some type of cryptocurrency, depending on the type accepted by the NFT platform you are using, such as Ether.

Currently, you can easily buy cryptocurrencies using a credit card on platforms like Coinbase, Kraken, eToro, and even PayPal and Robinhood. Afterward, you can transfer the cryptocurrency from the exchange to your personal wallet.

Once you have set up and funded your wallet, there are several NFT marketplaces you can participate in. Here are some major and unique NFT markets:

  • OpenSea.io: This peer-to-peer platform is known for providing “rare digital items and collectibles.” You can create an account to engage in “hunting” NFT collections and sort artworks by views to discover new artists.
  • Rarible: Similar to OpenSea, Rarible is an open, self-governed marketplace that allows artists and creators to release and sell NFT products. RARI tokens are issued on this platform, enabling owners to participate in decisions regarding fees and community rules.
  • Foundation: On this platform, artists need to receive “upvotes” or invitations from peers to be able to list their works for sale. Joining the community requires exclusivity, and buying “gas” to mint NFTs contributes to increasing the value of the artworks.

While there are many opportunities in the NFT market, it’s essential to note that not all platforms have the same verification and listing processes. Some NFT platforms may not require ownership verification. Therefore, caution and thorough research are important when purchasing NFTs to avoid risks and protect your interests.

Should You Invest in NFTs?

Just because you have the ability to buy NFTs doesn’t necessarily mean you should do so immediately.

“You need to remember that NFTs come with a lot of risks, as their future is uncertain and they have only emerged in the last few years, making evaluating their performance difficult,” she noted. “Currently, NFTs are still in a nascent stage, so investing a small amount to test the waters may be an approach.”

In summary, the decision to invest in NFTs is a personal process. If you have surplus financial resources, especially when an NFT holds personal significance for you, consideration might be a suitable option.

However, it’s crucial to keep in mind that the value of NFTs depends entirely on the willingness of buyers to pay. This means market demand can drive up the price of NFTs, not necessarily based on fundamental, technical, or economic indicators. These factors often influence stock prices and form the basis for investor demand.

It’s worth noting that an NFT may resell at a lower price than what you paid. Alternatively, you may find it challenging to resell if there is no buyer interest.

Additionally, NFTs are subject to capital gains taxes (applicable in the U.S. and some other countries), similar to selling stocks for profit. Although considered collectibles, NFTs may not benefit from long-term capital gains as stocks do. In fact, the tax rate might be higher for NFTs, though the IRS has not yet determined which NFTs should be listed on the tax schedule.

Remember that the cryptocurrency used to buy NFTs may also be taxed if its value increases after purchase. Therefore, seeking tax expert opinions is crucial when researching NFT investments.

Approach NFTs like any other investment: conduct thorough research, assess the risks – including the potential loss of the entire investment. If you decide to join the NFT community, do so cautiously and with understanding.

FAQ for NFT

There are various methods to sell NFTs. You can utilize suitable NFT marketplaces, share your artwork on social media, organize giveaway events, participate in AMAs/live streams, join NFT community groups on platforms, create a personal website, or even collaborate with influencers

For the majority of NFTs, each NFT typically has a single owner. However, the trend of fractionalized NFTs is gaining attention. Fractionalized NFTs involve dividing an original NFT into smaller parts, allowing multiple people to claim ownership of a specific fraction of the NFT.

NFTs generate carbon emissions, especially those utilizing proof-of-work (PoW) blockchain methods, known for their substantial energy consumption. To minimize the environmental impact, many NFTs are now created using proof-of-stake (PoS) models, reducing the environmental footprint compared to traditional methods.

Bitcoin and NFTs share some similarities; however, Bitcoin is not a type of NFT. While both Bitcoin and NFTs rely on blockchain technology and adhere to similar standards, they have significant differences. Bitcoin is considered a cryptocurrency, showcasing fungibility, something NFTs cannot achieve. Nevertheless, you can still use Bitcoin or other cryptocurrencies to purchase NFTs.

A common misconception is that cryptocurrencies and NFTs are the same. However, NFTs, as implied by their name, are non-fungible, while cryptocurrencies are fungible. For example, Bitcoin is fungible because each unit of BTC has the same intrinsic value as any other BTC unit. In contrast, each NFT unit is unique and cannot be replaced by another.