What is an NFT and How Does It Work?

    NFT (Non-Fungible Tokens) are special digital assets that differ from other tokens (for example, cryptocurrencies) in their uniqueness and indivisibility. Although the technology for assigning uniqueness to digital assets was developed around 2016, a surge of interest in the NFT market occurred in 2020-2021, during the period of growing popularity of the first tokens with digitized music and art.

    You don’t have to be involved in art to create an NFT. It can be made by any Internet user, and then sold on a special platform – the NFT exchange. In addition to various fields of art, NFTs are actively used in metaverses, GameFi projects, and even in copyright registration.

    In this article I will explain how NFTs work, how they connected to blockchain, what one need to do to create first non-fungible token and how to put it up for sale.

    The Technology Behind NFTs

    NFT tokens cannot be created without using the blockchain. Let’s delve into the technical part and figure out how NFTs differ from other tokens and how they relate to cryptocurrency.

    Blockchain and Cryptocurrency

    The first NFTs were created using Ethereum blockchain with smart contracts of the ERC-721 or ERC-1155 standards. However, due to the high cost of gas, the tokens were very expensive. Today, it is possible to create NFTs in a more cost-effective way on various blockchains. Among the Ethereum alternative networks are: Polygon, BNB Chain, Polkadot and Cosmos.

    The two main characteristics of NFTs are uniqueness and indivisibility. These properties distinguish non-fungible tokens from cryptocurrencies, where each coin is equivalent to another coin (non-unique) and may have fractional parts (such as satoshis in BTC).

    • Uniqueness is ensured by a special digital signature of the NFT token. Such a signature cannot be replaced or copied, which helps preserve the authorship of the token creator;
    • Indivisibility ensures the integrity of the token.
    Like cryptocurrencies, all NFT tokens created are recorded on the blockchain and transmitted as records within transaction blocks.

    Ensuring Uniqueness and Ownership

    The authorship of an NFT token is fixed at the creation stage, and no one has the ability to change it, even if the token itself has been sold several times. Using blockchain technology, it is possible to track the history of the transfer of a token from the moment of its creation. A digital signature ensures that the authorship of the token creator remains with him, and the right to dispose of the NFT is transferred to whoever currently owns the token (for example, if it was purchased from the author).

    The Appeal of NFTs

    The NFT market is considered to be highly volatile and speculative. The most popular at modern stage of its development are art and musical works (games with metaverses are also gradually gaining interest). Because of this fact, main market participants are traders, collectors and artists.

    For example, singer and artist Grimes sold a collection of 10 NFT tokens with video and art for $6 million in 2021. Among the most expensive NFTs to date is Everyday’s: The First 5000 Days by artist Beeple. A token of just one collage was sold for $69.34 million.

    Rare NFT music albums are also popular. For example, the album Ultraviolet by American DJ 3LAU was released in 33 copies and sold for $11 million.

    One of the largest acquisitions in the metaverse sector was a plot of land in The Sandbox, which was sold in 2021 for $4.3 million.

    How to Create and Sell an NFT

    You don’t have to be a popular musician or famous artist to make (mint) and sell an NFT. It is enough to know the sequence of steps to create a token and have a crypto wallet connected to a minting service (for example, to an NFT marketplace). Let’s look at the process of creating an NFT using the example of the Metamask wallet and the Opensea NFT marketplace.

    1. Create a Wallet and Connect to OpenSea

    1. Go to official website Metamask and download the wallet by clicking Download on the main page;
       NFT in simple words
      Metamask mainpage
    2. Create a new wallet by clicking Create new wallet, create a password and generate a 12-word seed phrase (be sure to save it in a safe place);
       Confirmation of the created seed phrase
      Confirmation of the created seed phrase
    3. If the wallet was created successfully, a welcome screen will appear;
       Metamask welcome screen
      Metamask welcome screen
    4. The Ethereum network is automatically added to the new wallet by default. To pay lower commission for creating NFTs on OpenSea, you need to connect the Polygon (MATIC) wallet as an additional network;
       Appearance of the new Metamask wallet
      Interface of new Metamask wallet
    5. To automatically add the Polygon network to Metamask, go to polygonscan.com → scroll main page down → click Add Polygon Network → confirm the connection in the wallet;
       Automatic connection of the Polygon network
      Automatic connection to the Polygon network
    6. Make sure that Polygon network is active in your wallet → click Buy → indicate the country and select one of the available replenishment methods → replenish your wallet with MATIC coins;
    7. Connect your wallet to the Opensea service. To do this, go to official website and click Login → from the list wallets, select Metamask → confirm the subscription in the wallet.
       OpenSea home page
      OpenSea homepage

    2. Create your own NFT

    After creating a wallet and connecting it to the Opensea marketplace, you can begin creating your first NFT token. For this:

    1. Click on the user profile icon → Studio → Create → Mint an NFT;
       NFT creation menu
      NFT creation menu
    2. Upload a video, image or music file → enter a title, number of tokens and description;
       NFT creation
      Creating NFT
    3. Click Create a new Collection → enter the name of the collection and add an image to its avatar → select Polygon as the network for minting → Continue → pay for the creation of the collection in your wallet;
       Creating a collection
      Creating a collection
    4. Check the information in the NFT creation window → click Create → confirm payment.

    3. Sell NFT

    Once the NFT is created, you can sell it on the marketplace. The process looks like:

    1. Once the first NFT is ready, OpenSea will offer to put it up for sale. To do this, click List Item;
       Screen offering NFT placement for sale
      Screen with an offer
    2. Select a pricing option (Fixed Price – set price, Sell to highest bidder – auction), enter the starting price, time to sell the token → Complete listing.
       Submitting a sales application
      Filling selling order

    Risks and Сriticism of NFTs

    The main criticism of NFTs focused on issues of eco-friendliness of non-fungible tokens, some unresolved copyright issues, and high financial risks.

    Environmental Concerns

    One of the main complaints about NFTs is their environmental footprint. Tokens created on high-power networks (typically PoW blockchains) are very expensive in terms of electricity costs. The more electricity needed, the more fossil fuels need to be burned. Creating NFTs in this sense is considered not the most rational way to use resources. On the other hand, most NFTs are created on the Ethereum network, and after its transition to PoS, this issue is no longer so pressing.

    Copyright Issues

    Copyright is a complex area that varies widely from jurisdiction to jurisdiction. The issue of NFT authorship is clearly resolved thanks to a unique signature, but using the token after the sale involves many nuances. For example, can the new owner of an NFT use it commercially without paying royalties or commissions?

    Some of these issues are already being resolved. For example, by adding an algorithm to the smart contract of the token, which transfers a certain percentage of coins to the author (royalty) from each resale of the token. However, there are no generally accepted solutions on this issue yet.

    Financial Risks

    Due to the high market volatility and speculative interest in NFTs, you can easily lose money (especially during the hype market stage). Unfortunately, there are many cases where users have bought NFTs for millions, only to have their price drop to just a few dollars. When buying well-known or new NFTs, you should always carefully study both the project itself and pay attention to the news background around it.

    Conclusion

    NFTs are non-fungible tokens with a digital signature, which makes them unique and indivisibility. Most often, with the help of such tokens, objects of digital painting, music, small videos, manuscripts, books, documents or game objects of metaverses and GameFi projects are digitized. Any Internet user can make their own token: just create a crypto wallet, create some valuable asset, go to the NFT marketplace and mint a token. Although there is a lot of money to be made from NFT tokens, this market is considered to be highly volatile and very risky. The most expensive NFT token is the Merge piece by artist Pak, sold in 2021 on the Nifty Gateway platform for $91.8 million.

    FAQ

    Why are NFTs valuable?
    From a technical point of view, NFTs are valuable because they retain copyright with the token creator. This is ensured by a special digital signature that cannot be replaced or copied. As for the cost of NFT tokens, it is largely related to market volatility, marketing and speculative hype, as well as current supply and demand.
    How to make money with NFTs?
    The 2 main ways to make money from NFTs are: create your own token and sell it on an NFT exchange or invest in other people's tokens in hopes of their value increasing.
    Is NFT a good investment?
    Some NFTs actually represent value, offering ownership or control over unique digital content. It is important to understand that NFT market is a highly volatile and speculative area. In this context, it is necessary to carefully assess the risks, determine a reasonable amount of funds for investment and adhere to the chosen strategy for managing the acquired tokens.
    What is the most expensive NFT ever sold?
    The most expensive NFT ever sold was a token by artist Pak called Merge. It was sold in 2021 on the Nifty Gateway platform for $91.8 million.
    Can anyone create an NFT?
    Yes. To do this, you can use special NFT marketplaces, for example, OpenSea, Nifty Gateway, Rarible and SuperRare.
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    Agatha Redich
    Agatha Redich
    Articles author, editor
    Articles author and website editor. Works with texts for over 12 years. Among Agatha’s clients: Rossman, Zara, Bosch, ING Bank, Lexus and others. Crypto journalist since 2018. She wrote more than a hundred articles about cryptocurrencies and the crypto market. Agatha's professional credo is to reveal complex topics in an accessible and simple way.
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    Emil Rabin
    Emil Rabin
    Site expert
    Cryptocurrency expert and financial analyst. Emil has working experience in Bain and KPMG, collaborated with PayPal and Revolut, organized more than 30 educational events about blockchain and cryptocurrencies in Eastern Europe. An expert of the TGDRatings.com portal since 2022.
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