Dispelling myths and getting to the crux of technology set to change everything
NFTs are all the rage these days, both in the crypto world and in the mainstream. Celebrities purchase them, collect them, and sell them. Preteens are making fortunes off them. But what’s all the fuss about? Keep reading to discover 10 things everybody should know about NFTs.
What is an NFT?
If you’ve lived under a rock for the past year and haven’t kept up with the NFT hype, know that the acronym stands for non-fungible token.
An NFT can represent a specific digital asset that holds value and is the digital certificate of ownership over it. As a non-fungible blockchain entity, it represents an asset’s rarity, uniqueness, and authenticity.
10 things everybody should know about NFTs
Here’s what you need to know about these increasingly popular crypto items.
1. NFTs are limited in supply and unique
An NFT represents a unique item that no one can replicate. Think of the difference between the painting of the Mona Lisa and a photograph of that painting. Or an autographed baseball card and just a regular baseball card of the same athlete. As such, NFTs generally come in limited supply.
2. There are different types of NFT standards
NFT standards are the underlying principles describing how NFTs function on a particular blockchain protocol.
When they first appeared, the underlying benchmark for all NFTs was ERC-721, which is still the most popular NFT standard. However, today, additional standards serve a wide range of purposes.
For instance, Ethereum also has ERC-998, ERC-1155, and ERC-3664 standards.
- ERC-998 tokens can be organized into elaborate digital assets. They can be valued, traded, or sold as a single entity;
- ERC-1155 allows users to register NFTs and fungible tokens in the same smart contract;
- ERC-3664 tokens are modular and can be combined, taken apart, or put together in an unlimited number of ways.
3. NFTs exist on almost every blockchain
Although many people consider Ethereum the only NFT-friendly blockchain, this idea couldn’t be further from the truth.
Nearly every blockchain supports NFTs, and some are even designed specifically for digital collectibles and games.
4. NFTs themselves aren’t environmental disasters, but the underlying blockchain can be
Although they save a significant amount of trees by not using paper, NFTs are not the most eco-friendly thing in the world.
This is mainly because their underlying blockchain might still require much energy to operate. Fortunately, the crypto world is hard at work devising a solution, and new protocols are popping up every day.
5. Ethereum will soon become 98% more energy efficient with PoS
Ethereum, Bitcoin, and other blockchains are built on a ‘Proof-of-Work’ (PoW) system to secure the users’ financial data. PoW uses a competitive validation method to validate transactions and add new blocks to the blockchain.
Although this is a highly secure mechanism, it requires users to expend a lot of computational energy and causes high greenhouse gas emissions.
With the upcoming Ethereum 2.0 upgrade, Ethereum will move from the PoW to the ‘Proof-of-Stake’ (PoS) consensus, ensuring 98% more energy efficiency.
The PoS consensus mechanism requires validators to put a certain amount of cryptocurrency as collateral for the opportunity to approve transactions successfully. These users have to ‘vote’ to approve legitimate transactions and gain rewards in the newly created cryptocurrency over time. It eliminates the need for robust computing equipment that consumes massive amounts of electricity.
6. NFTs are not exclusively .jpeg files
NFTs have become popular as digital art collectibles, but they can be many other things. They can represent ownership of a music file, trading card, utility item, identity card, or access key, for example.
In video games, they can represent in-game items such as avatars, skins, or swords, that players can use, buy, or sell. They play an essential role in creating virtual worlds in the metaverse, where people will spend more time increasingly in the future. Importantly, NFTs represent land plots on platforms like The Sandbox and WorldWideWebb.
7. NFTs can be interoperable
Interoperability is the ability for disparate systems and entities to interface seamlessly, which is one of the touted qualities of NFTs. NFTs usually have utility in one product but also be used in others.
Thanks to existing on a blockchain, digital ownership can be transferred from one context to another. This way, projects can use NFTs owned by others to grant the NFT owner some sort of benefit in the project.
8. NFTs can also cost $1; they don’t need to be $1 million
Although the mainstream media devotes much attention to NFT sales that generate millions, NFTs can vary in price. Yes, they can be worth millions of dollars, especially in crypto art, but they can also be very cheap.
The price difference is attributed to many factors, including the utility and quality of the project, data size, gas fees, transaction speed, etc. That said, the overall cost of an NFT is typically determined by its rarity. Prices can skyrocket based on the law of scarcity.
9. You store NFTs in your crypto wallet, to which you need to have private keys
Here’s where NFTs are, much like bitcoin, ether, and any other cryptocurrency – you store them in your crypto wallet. And just like with these fungible tokens, you need to have private keys to carry out any action with your NFTs.
A private key secures your crypto wallet and is used to sign transactions and decrypt data. This key needs to be kept secret at all times; otherwise, third parties could gain access to your assets.
10. The NFT metadata is usually stored on the blockchain, while its visual data often ends up in the IPFS
An NFT itself contains very little data, except its metadata in the form of a JSON document. This data typically includes the NFT’s name, description, traits, and the link to the hosted image.
In other words, the actual artwork is still one link away. You can check out the metadata of your NFTs with the DappRadar Portfolio Tracker tool.
But there’s a problem with links. When the visual data of the NFT you purchased is stored on a centralized server, the link to it can easily break. That can happen if the company hosting the server shuts down or moves to another domain.
For this reason, many NFT creators turn to the IPFS (InterPlanetary File System). Instead of identifying a file at a specific domain, this system allows you to find a piece of content if someone is hosting it somewhere on the IPFS network. Multiple hosts (instead of just one domain owner) guarantee these files stay online. IPFS also gives the buyer control – they can pay to keep the file online, as long as they remember to pay the hosting bill.
The more you know
It is clear that NFTs are more than just a fad and that they’re here to stay. And there are plenty of reasons for this. They’re a great source of income, create new possibilities for digital artists, and change the way video games are played – just to name a few. Now that you know the basics, you can explore them and experience all these benefits yourself.
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