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NFTs Explained: What Are Non-fungible Tokens and How Do They Work?

10 mins
Updated by Ryan Glenn
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In Brief

  • Non-fungible tokens are all the rage now.
  • The popular ones are selling for hundreds of thousands and even millions.
  • You can start trading NFTs even as a newbie.

Many people are still dazed with the NFT phenomenon. If you find yourself in their company, show them this article.

Proper Way to Understand NFTs

In hundreds of headlines about NFTs, the first thing one notices is that they are presented as your regular files — animations, images, texts, tweets, audio.

Therefore, you could simply download them and effectively have the same file as all those NFTs that have been sold for millions of dollars.

The logical question then is, why would anyone buy them for such exorbitant prices. Prices like Beeple’s EVERYDAYS: THE FIRST 5000 DAYS NFT that sold for $69 million?

Beeple, Everydays – The First 5000 Days NFT: Christie’s

After all, they don’t even confer automatic copyright protection.

To answer that question is to understand what NFTs are and why they are valuable. And the only way to understand it is if we place NFTs in contrast to traditional artworks.

Traditional Artworks

For instance, the most expensive and iconic artworks such as Mona Lisa or Interchange by Willem de Kooning can be reproduced just as equally as NFTs.

More specifically, here is a $300 million worth Interchange painting. Juxtaposed to it is Nyan Cat NFT by Chris Torres, sold for about $600,000 at the time (300 ETH).

Both are visible right on your screen, meaning that you can see them for what they are just as their buyers can see them.

what are nfts
Interchange and Nyan Cat meme

If that is the case, and it obviously is, what do buyers of art actually buy?

Simply put, they buy original traceability, which leads to social prestige.

After all, it is one thing to hold one of the millions of reproductions. However, another altogether when you hold a piece of cultural history that can be directly traced to its creators.

In ten years, Nyan Cat may be sold for tens of millions of dollars, just as Interchange began its cultural journey humbly, selling for merely $4,000 in 1955.

With physical assets — paintings, sculptures, photographs, books — specialists determine whether something is original, appraising them as worthy to be bought as unique assets.

With NFTs, all of that is handled automatically by smart contracts contained within a blockchain.

Smart contracts mint a piece of media known as Non-Fungible Token — NFT.

NFTs Explained on 3 Levels

So what are NFTs? There are many ways to explain them.

Level 1

Simply put, non-fungible tokens (NFTs) are unique digital assets that are not interchangeable. You most often will recognize them as digital art. However, NFTs are also music, videos, or even books.

They are unique because each NFT is one-of-a-kind and cannot be exchanged for another NFT or for any other asset in a one-to-one manner. This is in contrast to fungible assets, which can be exchanged for other assets of the same type, on a one-to-one basis, such as currencies which are a unit of account or medium of exchange.

Level 2

In essence, non-fungible tokens can represent unique real-world objects (like fine art or music) or a set of permissions in the: physical, digital, or legal world (like royalties). People unknowingly use tokens on a day to day basis, although we do not call them tokens.

For example, a deed to a house, a title to a car, or tickets to a concert can all be understood as “tokens”. Therefore, digital art only scratches the surface of NFT’s potential. In the future, NFTs could represent legal contracts, membership badges, shares to a company and virtually anything that you own.

Level 3

From a technical standpoint, NFTs can be likened to a webpage.

Metadata is the information that describes the characteristics and functionality of an NFT. It includes details such as the appearance of the NFT, its unique features, and how it differs from other NFTs in the same collection or game. For example, if an NFT is a book, the metadata would include details about the content of the book, the words on the pages, and the covers designs.

In this way, NFTs are similar to webpage files in the Web 2. Just as a webpage can be simple or complex, with various styles and layouts, an NFT can also contain a wide range of data and links to other datasets. In addition, NFTs have a token uniform resource identifier (URI) field. The token URI field serves a similar function to a web URL.

Furthermore, a webpage is just a collection of files stored on a server. Similarly, an NFT and its metadata are hosted on servers like IPFS, Amazon, or Google. In this way, NFTs are similar to modern webpages, which are likewise dynamic and responsive.

This means that digital media is reborn and begins its journey on a blockchain — a decentralized digital ledger that is incorruptible, unfalsifiable, and indestructible.

Bitcoin represents a fungible token, just like USD bills, while items that cannot be precisely divided and interchanged for the same value, such as diamonds or Pokémon cards, are non-fungible.

Once an NFT is minted, it becomes a part of blockchain, a digital asset with its ownership uniquely identifiable and traceable.

Where Are NFTs Stored?

Although NFTs are stored on a blockchain, not all blockchains are created equal.

Bitcoin’s blockchain was built for the specific purpose of creating a deflationary cryptocurrency, which is what made it grow to its current market cap of one trillion dollars.

Bitcoin’s blockchain is conservative and inflexible, but highly secure based on a proof-of-work (PoW) consensus algorithm.

On the other hand, six years after the launch of Bitcoin, in 2015, the Ethereum blockchain had been unleashed, eventually becoming the second largest cryptocurrency with its ETH token.

However, Ethereum (ETH) is much more than a cryptocurrency. Thanks to its flexibility and programmability, Ethereum made it possible to build smart contracts, also called decentralized applications — dApps.

The key feature of this blockchain innovation is that they eliminate mediators and all the costs accompanying them.

Smart contracts, as their name implies, are auto-executable programs that complete tasks within preset terms of the contract.

Consequently, Ethereum created an entire ecosystem of dApps locked in a DeFi (decentralized finance) ecosystem worth over $51 billion.

The world’s largest banks have come to recognize Ethereum’s DeFi as a much bigger threat than Bitcoin.

How to Start Trading in NFTs

NFT marketplaces are just some of Ethereum’s dApps. They allow you to create, sell, and buy NFTs.

Although there are other programmable blockchains that offer smart contracts, such as Wexchain, most NFT marketplaces are still hosted on Ethereum’s blockchain. As of date, across NFT marketplaces, the trading volume of NFTs surpassed $561 million.

Therefore, for both buying and selling NFTs, you must have a crypto wallet with some ETH in it, which is Ethereum’s native token.

Even if you are just selling an NFT, you still need to pay a 2.5% transaction fee in ETH gas, which is a denomination of the token called Gwei (one billionth of ETH).

And if you later decide to use NFT marketplaces outside of Ethereum, you will still be able to swap ETH tokens for alternative blockchain tokens.

Here is the simplest and fastest way to get your ETH funds. After which, everything else is easy.

1.) Get a Crypto Wallet

Download and install MetaMask crypto wallet. It supports all major web browsers.

what are nfts

Once the installation is complete, your browser will now have a new extension, a crypto wallet that will easily connect you to dApps, including NFT marketplaces. After clicking on “Get Started”, click on the “Create a Wallet” button.

what are nfts

First, you will be asked to create a password for the wallet itself. However, your seed phrase will be of critical importance, the only way you can restore your crypto wallet and all the funds in it if something happens to your device. Store it safely on a piece of paper or use a hardware wallet for cryptocurrencies.

With the 12-word recovery phrase completed and stored, your wallet is set up.

Protect your cryptos with StormGain’s multi-currency wallets. Get Access to StormGain Now!,

Before you add funds to it, you should also export your private key. Simply put, if you have your private key, you own your funds.

In other words, even if you lose access to the current wallet, you can access your funds within a new wallet when you import the private key.

Click on the icon in the upper right corner represented as three vertical dots, then click on “Account details”.

This will open a new window with which you can export your private key, after you have entered your MetaMask password. Quick recap, make sure you have safely stored your:

  • MetaMask password
  • 12-word seed phrase (also called recovery phrase)
  • Private key

If you don’t want to buy a hardware wallet, you can use one of the free password managers, such as Bitwarden, with 256-bit AES encryption. Likewise, don’t forget to read up on these security tips.

a.) Adding Funds to Your MetaMask Wallet

The most expedient way to do this is to open an account on a cryptocurrency exchange such as StormGain.

You will be required to go through KYC protocol — know your customer — in which you will have to either upload your national photo ID document or take a selfie with a code written on a piece of paper, or both.

Once complete, it’s only a matter of connecting your banking account/card to your crypto exchange account.

Moreover, your crypto exchange account will also serve as your secondary crypto wallet, but one without a private key.

Once you’ve connected your bank account/card to your crypto exchange of choice, buy a certain amount of ETH, let’s say $50 worth. Then, transfer it to your MetaMask wallet.

Clicking on the “View Account” button will open up your MetaMask’s address and QR code. Use this info to transfer the funds you bought on the crypto exchange. And that’s it! Now you have $50 worth of ETH in your MetaMask wallet which can connect to hundreds of dApps every time you visit them.

2.) Start Selling and Buying NFTs

There are dozens of NFT marketplaces. One of the biggest ones are OpenSea, Rarible, CryptoSlam, AtomicAssets, SuperRare. You can check the other ones here.

Whichever one you visit, you will now be able to easily connect your MetaMask wallet to each site without having to create new accounts. For example, if you were to visit Rarible that rewards you with RARI tokens when you sell and buy NFTs, in the upper right corner, you will see “Connect wallet”.

A window will open with a list of wallets, from which you can pick one to use. Since you have already installed the MetaMask wallet, select it. Now, when you click on the upper right icon, you will see your ETH and RARI token balance.

For more detailed info on the Rarible NFT marketplace and its RARI tokenomics, visit this guide. While you explore the site, you will notice that all the NFTs are listed in ETH, which you have in your wallet, which means you can instantly bid for them.

Otherwise, if you want to create and sell an NFT, almost all NFT marketplaces follow the same procedure:

  1. Selecting the “Create” option
  2. Choosing between single or multiple NFTs
  3. Uploading the file that will be minted as NFT, ranging from text to image, video, and audio
  4. Entering the info for the file to be minted — name, description, price, royalties
  5. Paying for the ETH gas fee — usually 2.5% — so that your NFT can be listed on the marketplace

Once you finalize the last step and click “Start”, a MetaMask pop-up will ask you to sign the funds allocated for the fee. Click on “Sign” and your newly-minted NFT is listed for everyone to bid on!

Tips on Making Sure Your NFTs Sell

There are many reasons people would buy NFTs.

Limited digital collectibles such as CryptoPunks have achieved stellar success in selling their pixelated portraits for millions of dollars.

Some NFTs sell because they are an integral part — in-game assets — of blockchain games such as Cometh or Axie Infinity.

Other NFTs serve as crowdfunding mechanisms for ambitious projects, as it happened with Bear Games.

For individuals who try to break through the scene, it’s all about leveraging cultural trends, which Beeple perfectly exemplified with his Crossroads NFT. The most important tip to remember is to leverage your social media presence.

Greater notoriety = greater cultural significance = greater value of NFTs associated with their creator.

Lastly, try to be imaginative. We live in turbulent times, at best, a dystopian novel at worst.

There is plenty of room for making predictions that turn out to be true. One only has to watch the UK show “Utopia” or “The Hamburg Syndrome” to notice the stark parallels with the real world. Transforming such patterns into comic book form may spike your NFT’s value.

NFTs can be hard to keep up with, so why not join BeInCrypto’s Discord server to ensure you’re on top of everything?

Top-level security. Full crypto options. Signup for StormGain’s multi-currency wallet. Get Access to StormGain Now!,

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Frequently Asked Questions

What are NFTs?

What are NFT marketplaces?

How do NFTs work?

What makes an NFT valuable?

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Rahul Nambiampurath
Rahul Nambiampurath's cryptocurrency journey first began in 2014 when he stumbled upon Satoshi's Bitcoin whitepaper. With a bachelor's degree in Commerce and an MBA in Finance from Sikkim Manipal University, he was among the few that first recognized the sheer untapped potential of decentralized technologies. Since then, he has helped DeFi platforms like Balancer and Sidus Heroes — a web3 metaverse — as well as CEXs like Bitso (Mexico's biggest) and Overbit to reach new heights with his...