How Do NFTs Work?

Unless you’re living under a rock, you’ve probably heard of non-fungible tokens (NFTs). Even if you’ve heard of NFTs, many people don’t understand how they actually work. If NFTs interest you or you just want to learn about something new, keep reading. 

This article will explain what an NFT is, how NFTs work, how to buy and sell NFTs and how to create your own NFTs. Even if the chances of your creating a multi-million-dollar NFT are slim, it is still a fun experience and easier than you might think.

What Are NFTs?

NFTs are tokens that represent ownership of unique items. Assets that are the same and interchangeable are fungible. Something fungible would include a dollar bill, stock shares of the same company or Bitcoin.

Non-fungible, on the other hand, refers to something unique that has unique properties. Original, one-of-a-kind artwork would be considered non-fungible. A movie or concert ticket would also be regarded as non-fungible. Even though they look the same, the information contained on each ticket would be different and unique: a different seat, a different time, for two different movies or concerts. 

Here is a partial list of items that could be minted as an NFT.

• Unique digital artwork
• Video clips
• Virtual trading cards
• Virtual real estate (Decentraland, The Sandbox.)
• In-game items (weapons, skins, avatars, tools)
• Titles to vehicles
• Deeds to real property
• Pictures

Ethereum is by far the most popular blockchain for NFTs, but that doesn’t mean that Ethereum isn’t without issues. At times, the Ethereum blockchain can suffer from extremely high gas fees, making it almost impossible for people to complete transactions during these periods. Other blockchains have emerged that support NFTs, giving collectors and investors other options. 

Here is a list of other popular blockchains.

• Solana (blazing transaction speeds and very low-cost transactions)
• Avalanche (create NFTs from inside the Avalanche wallet)
• Flow (specifically designed to support NFTs and other consumer apps.)
• Tezos (eco-friendly; uses two million times less energy than Ethereum to mint an NFT)

How Do NFTs Work?

You have most likely heard of ERC-20 tokens if you are into crypto. It is the standard used to create fungible tokens (cryptocurrencies) on the Ethereum blockchain. But most people probably haven’t heard of ERC-721 or ERC-1155 token standards. The ERC-721 standard is primarily used to create NFTs. In comparison, the ERC-1155 standard was created to allow for multiple NFTs of different types to be sent in a single transaction. The ERC-1155 standard helps reduce the possibility of congestion on the Ethereum blockchain. 

NFTs differ from ERC-20 tokens in that each token is unique and not divisible. NFTs give someone the ability to claim or convey ownership of any unique piece of digital data. When an NFT is minted, unique properties are recorded permanently onto the blockchain. NFTs are minted through smart contracts that assign ownership and control its transferability. NFTs can only have one owner at a time. Ownership is managed by the unique ID and metadata given when it is minted that no other token can have.

Everyone who has been involved in crypto for any length of time knows the importance of safe crypto storage. NFTs are no different, and they are exposed to the same risks. The crypto space is advancing so rapidly that even the internet itself is in some ways becoming outdated, especially when it comes to NFTs.

The NFT token is stored on a blockchain, but because of the high cost of storing data on-chain, NFT metadata is often stored off-chain, exposing the metadata to the risk of tampering. The Interplanetary File System (IPFS) can be used to secure metadata files. IPFS protocol is a peer-to-peer network for storing and sharing data in a distributed file system. 

IPFS protects data by producing a content identifier (CID) directly derived from the data itself. This CID is permanently attached to the data in the IPFS network. Because a CID can refer only to one piece of data, no one can alter the data without breaking the link. You can’t say the same thing about https addresses. A server owner can modify or replace data, totally changing the NFT. 

How Do You Buy NFTs?

If you are interested in purchasing NFTs, you can find quite a few sites to buy them. You first need to decide what cryptocurrency you want to use for purchase. Most NFTs are on the Ethereum blockchain, but you can also find them on Solana, Avalanche, Flow and Tezos. Ethereum is the most dominant blockchain for NFTs, but it sometimes suffers from very high gas fees. In comparison, Solana and Avalanche have minimal transaction costs. 

Before making a purchase, you must ensure you have the proper crypto for the blockchain you are purchasing NFTs from. If you decide to purchase NFTs from the Ethereum blockchain, you must first buy Ether (ETH). You can buy ETH Gemini or eToro, and both are excellent exchanges with easy-to-use trading platforms. 

Once you purchase ETH, you transfer it into your MetaMask or Coinbase Global Inc. (NASDAQ: COIN) wallet. You can then decide what NFT platform to use. OpenSea was the first and is the largest NFT marketplace; it also has the most liquidity. You will find that NFTs are sold either in an auction or a buy-it-now style listing. 

All you have to do is connect your MetaMask wallet to OpenSea and choose the NFT you want to buy. Click on buy-it-now, review and complete the check-out and confirm the transaction in your wallet. 

Top NFT Platforms

OpenSea was the first NFT trading platform and is currently the largest. It’s compatible with Ethereum, Polygon and Klaytn blockchains. OpenSea also is compatible with 13 different wallets, including MetaMask and Coinbase wallets.

LooksRare is another Ethereum compatible NFT platform. It rewards traders, collectors, and creators with LOOKS tokens. Anyone who stakes their LOOKS tokens shares 100% of the trading fees. LooksRare is compatible with MetaMask, Coinbase wallets, and all WalletConnect wallets. 

Besides the crypto trading platform, you can also buy NFTs on FTX.US. The NFTs are on the Solana blockchain. There is no need to connect a wallet; when you open an account, you automatically have a wallet for NFTs. 

NFTrade is the first cross-blockchain NFT platform and acts as an aggregator of all NFT marketplaces. On NFTrade, you can easily create, buy, sell, swap, farm and leverage NFTs across different blockchains. NFTrade is compatible with MetaMask, Coinbase wallets and all WalletConnect wallets. 

Ho To Make Your Own NFT

NFT platforms have made it very easy to create your own NFTs. The first step is to decide what blockchain you want to use to create your NFT. Keep in mind that transaction fees can vary widely between blockchains. Gas fees can be $100 or more at times. Once you are on the NFT marketplace, the next step would be to connect your wallet. 

If you create more than one NFT, you may want to create a collection to hold your NFTs. To create a collection, hover over your profile picture and go to “My Collections” in the drop-down menu. Next, click on create a collection and fill in the required information. Once your collection is created, you can click on create in the upper right corner. Once again, just complete the required fields; you can also choose which blockchain you want to mint your NFT on. Once everything is filled in, click on create at the bottom of the page. That’s it – you just created your first NFT.

Keep Your NFTs Secure

Just as with cryptocurrencies, you need to keep your NFTs secure. The most secure way to store your NFTs would be in cold storage. Cold storage is when you hold your crypto or NFTs offline in a hardware wallet. Isolating them from the internet makes hacking a cold storage hardware device almost impossible. 

One of the best hardware wallets on the market is the Ledger. You can choose from two models, the Nano S and the Nano X. The Nano S is the least expensive but does not hold as many apps. The Nano X holds more apps and is also Bluetooth compatible. 

No matter which model you choose, you will be using one of the most secure wallets on the market. Ledger uses an industry-leading Secure Element chip for security. It is the same chip that is in credit cards and passports, providing the highest level of protection for a chip. 

Are NFTs a Good Investment?

Like cryptocurrencies, NFTs can be bought as short-term trades or held as long-term investments. Whether or not NFTs are a good investment is dependent on many factors like the NFT itself and who created it. Also, the overall state of the NFT market will affect the price of NFTs. If you purchase NFTs because you enjoy them, then whether or not they appreciate in value may not be as important. Regardless of your reason for buying an NFT, be aware that they are a highly speculative investment. If you acknowledge the risks, collecting NFTs can be an extremely enjoyable experience.