Introduction to NFTs

You've probably heard or read about something called NFTs in news, on TV or on the internet because these digital assets have been making headlines and selling for millions of dollars. These tokens have captured the attention of artists, collectors, investors and the general public. But what exactly are NFTs, and why did they become so popular? This guide will break down the basics of NFTs, helping you understand what they are, how they work, and why they matter.

What are NFTs?

NFT stands for Non-Fungible Token and is a digital representation of non-fungible assets. They are tokens created and stored on a blockchain, which is a decentralized and secure digital ledger that records transactions. These tokens can represent anything unique or rare, like a piece of digital art, a video clip, music, a virtual item in a game, among many other things. The key point is that each NFT is one-of-a-kind and cannot be duplicated or replaced, making it distinct from other digital assets.

To better understand the notion of NFTs, first we need to explain the concept of fungibility. Fungible assets are those that can be easily exchanged one for another because they are identical and carry the same value. For example, a $100 bill is fungible because you can substitute it for another $100 bill, and they will hold the same value. Similarly, one Bitcoin (BTC) is equivalent to any other Bitcoin.

On the other hand, a non-fungible asset is unique and cannot be exchanged on a one-to-one basis with something else without a loss of value or uniqueness. For example an autographed baseball card, a Da Vinci painting, or real state have their own value and can't be simply swapped for another item of the same type.

How do NFTs work?

NFTs are created using blockchain technology, usually on the Ethereum blockchain. However, other blockchains like Binance Smart Chain, Flow, and Tezos also support them. When you create or "mint" an NFT, you're essentially generating a digital certificate of ownership for a specific digital item. This certificate is stored on the blockchain and can be bought, sold, or traded.

Here's a simple breakdown of the process behind NFTs:

1. Minting: When an NFT is created, it is "minted" onto the blockchain. This involves assigning it a unique identifier that distinguishes it from any other token. Although it is possible to mint the same item several times, each one of them would have a unique identifier and could be distinguished from the others.

2. Ownership: The NFT is stored in a digital wallet. Whoever holds it in their wallet is considered the owner of the associated digital asset. The use of blockchain technology makes it easy to verify ownership.

3. Buying and selling: The largest online marketplaces where NFTs can be bought and sold are OpenSea, Rarible, and Foundation. Before buying, it's necessary to have a digital wallet that allows you to store NFTs. Transactions are done using cryptocurrencies, typically ether (ETH). When an NFT is sold, the blockchain records the transfer of ownership from the seller to the buyer.

4. Smart contracts: NFTs often use smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. This ensures that transactions are automatically completed once conditions are met, such as the payment being received.

Why are NFTs important?

These are some reasons why NFTs are important in the crypto ecosystem:

Opportunities for creators: NFTs are a digital solution for artists and creators that wish to monetize their work directly without needing traditional intermediaries like galleries or record labels.

Authenticity and provenance: When an NFT is minted, the associated metadata, such as the creator or creation time, is recorded on the blockchain. Also, blockchain technology allows potential buyers to track the ownership and transfer history of the token in order to establish its authenticity.

Ownership: Information regarding ownership, the address at which the minted token resides, is publicly available because of the transparent and immutable nature of blockchain. NFTs allow users to claim ownership in a secure and verifiable way.