What does NFT mean?
NFT stands for non-fungible token.
A non-fungible token is an asset that is created and traded on a blockchain the additional information box (blockchain) just like bitcoin or ether. The main difference between a non-fungible token and a crypto asset (or “crypto”) like bitcoin is that the token represents a unique asset, which cannot be replaced by another. It is then said to be non-fungible.
Conversely, when a good or asset is said to be fungible, it is because it can be replaced by another identical good or asset without affecting its use. For example, a dollar coin is fungible because it is not unique (there are several dollar coins in circulation) and each of the dollar coins can be used for the same purpose. A bitcoin is also fungible because it is always equal and “identical” to another bitcoin.
How do NFTs work?
For any transaction involving NFTs, whether to create, buy or sell them, it is necessary to have a digital wallet for cryptos.
Creating a non-fungible token
When a person wants to market a non-fungible token, they can use a specialized platform that will be used to create and publish it. The person will need to connect their digital wallet for cryptos to the platform.
The wallet will be used to disburse the crypto transaction fee to publish the certificate of authenticity (the smart contract) on the blockchain. It will also be used to receive payment in cryptos if the NFT goes up for sale and another person acquires it.
Buying and selling non-fungible tokens
It is possible to buy and sell NFTs on specialized platforms. These transactions confirm the identity of the owner(s) of the token by updating the information on the blockchain. Only the history of transactions recorded in the blockchain indicates and confirms who owns it and who may have owned it before.
What are NFTs used for?
Non-fungible tokens clearly show their usefulness in the field of digital assets. They can be used to certify, then buy and sell digital objects. These tokens can for example certify videos, images or productions in MP3, GIF or other formats as unique.
NFTs are therefore a kind of digital certificate of authenticity. It is a form of contract (a smart contract), with rules defined by computer code. These rules can limit the number of copies for sale (for example, in the case of a limited-edition series), authorize a “reissue”, or even provide a system for retributing (paying) the original author of the work with each transaction.
Non-fungible tokens can therefore be created, sold or purchased in the digital world. Information is preserved through blockchain technology. The entire ownership history of an NFT is stored in a large digital repository where every transaction made, along with the price of the token, is visible to everyone on the Internet.
When you buy an NFT, you are buying a digital asset. Since NFTs have been in circulation, they have been associated with digital art, Instagram photos, songs, video game purchases and even cat GIFs, for example. Non-fungible tokens are also associated with more surprising purchases, such as land in a virtual space or even a virtual racehorse.
Are there any risks associated with NFTs?
The risks associated with NFTs are similar to those associated with cryptos. There is a growing popular craze and speculation, and some tokens sometimes skyrocket in value and then plummet just as quickly.
The risk of volatility is twofold, as the value of the cryptos used to procure NFTs can also fluctuate widely. The interest in “investing” in NFTs is currently phenomenal, and while some can win big, others can lose just as much.
Things to consider before venturing into the world of NFTs
NFTs are very sensitive to fluctuations in the value of cryptos, which themselves are extremely volatile.
Buying newly created NFTs from a highly anticipated collection is a very competitive process, with thousands of potential buyers hoping to buy at the same time as you. The principle of supply and demand then causes the value of the token to rise rapidly, with no guarantee that it will hold or rise further over time.
Exchange platforms and non-fungible token collections charge a fee for each transaction. These fees can be quite high, especially for a low-value token.
Many, many transactions will not go through, but the transaction fee, which is often very high, may still have to be paid.
Purchasing process can be complex
Some buyers are desperate to complete a buy/sell/trade transaction and even use robots (powerful software to place buy/sell orders), which makes the transaction even more uncertain, as it is difficult, if not impossible, to be that fast!
Often, only a very small group of highly experienced people will pocket the bulk of the profits from NFT collections.
Beware of fraud!
NFTs are not immune to fraud. You need to be vigilant.
For example, some malicious people are driving up the price of NFTs by using wash trading. In effect, these people are manipulating the market to make you believe that the token is in high demand and will increase in value dramatically. The idea is to get you to buy the NFT and pocket your money. After that, the chip will be worth little or nothing.
If you want to venture into the world of NFTs, make sure you understand how they work. Stick to your budget. Beware of misleading (too good to be true) ads or campaigns on social networks. Also, beware of compulsive purchases that may cause you to spend a lot of money. You might pay a lot of money for something that may lose its value quickly, or that you won’t be interested in after only a few days.
Would you like to create your NFT project? Contact Enkronos team today.