What are NFTs and How Do They Work

NFTs are a trending item in the crypto world, and their trade volume is at billions of dollars, with a slew of endorsements from celebrities and renowned investors. Collins Dictionary’s announcement that NFT was its 2021 word of the year created a buzz, and many wanted to know more about NFTs. This article will expound on what NFTs are and how they work.

What is an NFT?

The acronym NFT stands for Non-fungible tokens. NFT can be anything that is digitized and is assigned ownership using blockchain technology. Besides, NFTs have a special feature in that they carry a numerical identifier that is unique. NFTs are popular with pieces of art, memes, games, and even tweets.

NFTs exist permanently as a record on the blockchain. However, this does not imply that they are always static. There is now a genre of NFTs that we can say are living or dynamic. Simply put, these NFTs have the ability to transform or mutate. Living NFTs utilize smart contracts to make the shifting possible. One good example of a living NFT is a profile picture (PFP) that changes the hat it sports depending on local weather conditions.

How Do NFTs Work?

An artist who wants to trade their digital piece would first need to create or mint an NFT that attaches ownership to their digital item. The digital items could be representative of either tangible or intangible products such as; GIFs, Videos, collectibles, videos, and even tweets. This NFT would then be registered on the open blockchain ledgers, making it possible to trace ownership, previous prices, and the number of copies available. The security of blockchain technology makes it difficult to trade in tokens that are not authentic compared to the easiness of selling fake physical art pieces. Some of the factors that determine the market value of an NFT are its scarcity and popularity.

Each NFT is unique, and you can’t trade it with another. NFT value is unlike that of cryptocurrency, which is fungible, and you can exchange it for another. For instance, the value of each Ethereum is similar, but each NFT is different. Typically, one would buy NFTs on the NFT marketplace using cryptocurrency. The Ethereum blockchain holds NFTs in most cases, but other blockchains could also support NFTs.

The demand for an NFT will set its price, not technical, economic, or fundamental indicators. The value of an NFT is therefore determined by how much the buyer is willing to pay for it. The implication is that the NFT future price might be lower than your purchase price. You should therefore research and take calculated risks before investing in an NFT.

How do you buy NFTs?

To get started buying NFTs, you must have a digital wallet. The digital wallet is like the physical purse that will allow you to hold your NFTs and crypto. Subsequently, you will need to buy some Ethereum or other crypto that your NFT provider accepts. The next step after setting up your digital wallet and funding it with some crypto is to identify an NFT marketplace. The most common NFT marketplaces are Rarible, Opensea, and Foundation.app.

Conclusion

The human desire to mint more money will always propel new products such as NFTs. The use of NFTs keeps expanding into new markets such as gaming, automobiles, and the metaverse. On the flip side, NFTs are a new investment tool, and we lack a lot of data to project future performance. It may be prudent to invest small amounts and grow them with time.