Introduction to Cryptocurrencies and NFTs
Roger Lopez
Chief Marketing Officer & Chief Product Officer, Advisory Board Member , AI, Blockchain, Web3 junkie
Non-fungible tokens (NFTs) have taken the worlds of art and investment by storm. People from all walks of life, including celebrities and big brands, are investing huge amounts of money in NFTs. But what exactly are NFTs and how do they relate to cryptocurrencies. Let’s explore what constitutes cryptocurrencies, blockchain, and NFTs.
What are Cryptocurrencies?
A cryptocurrency is a virtual or digital currency that is secured by cryptography, making it almost impossible to double-spend or counterfeit. Unlike normal currencies controlled by governments, many cryptocurrencies are decentralized networks in blockchain technology (distributed ledger enforced by a network of computers). Some of the leading cryptocurrencies include Bitcoin, Ethereum, Cardano, Polkadot, Ripple, Terra, Shiba, and more.
Cryptocurrencies are unique because they are not issued by any central authority. This renders them theoretically immune to government manipulation or interference. The advantages of these currencies include faster and cheaper money and decentralized systems that do not collapse. However, they are criticized for high energy consumption from mining activities, price volatility, and use in criminal activities. Nonetheless, the technology behind cryptocurrency is what lead to the explosion of NFTs.
What is a BlockChain?
Blockchain is at the heart of the functionality and appeal of cryptocurrencies. As the name suggests, a blockchain is a set of online connected blocks or ledgers. A block in the chain comprises a set of transactions that can be independently verified by every member of the network. When a new member or block enters the chain, it must be verified by every node before being confirmed. This makes it almost impossible to forge the history of transactions on a blockchain.
Since every block is connected to the next one in a blockchain, the contents of the ledger must be agreed upon by the entire network of a node or the computer maintaining a copy of the ledger. Due to these features, blockchain technology can be used in diverse industries. Sectors such as crowdfunding and online voting can benefit tremendously from this characteristic of blockchain technology.
What are NFTs?
NFTs is an acronym for non-fungible tokens, which are digital assets being recorded and transferred on a blockchain. The term non-fungible means unique and cannot be replaced by anything else. For instance, a Bitcoin is fungible because you can trade one bitcoin for another and have the same time. However, a non-fungible token like a one-of-a-kind trading card cannot be traded with anything else. Trading that card with a different card will leave you with something completely different.
To put it together, an NFT is a unique digital asset that represents ownership of unique items like art, music, images, video clips, and more. Another way of defining NFTs is that they are smart contracts, which represent ownership of unique digital assets. Although they use the same blockchain that powers cryptocurrencies, they are not currency. They are speculative assets that creators make or investors buy with the hopes of selling at a higher price or keeping them as collectibles.
Characteristics of NFTs
Every NFT is a unique detail certificate, which is known as a token store on a blockchain. The token represents something unique, such as a piece of artwork, music, photograph, collectible, or game. It can also be an optional creation of something that exists only in digital format.
Several characteristics can be used to define NFTs:
1. Traded on Blockchain – NFTs are purchased and sold on a blockchain using the accepted digital token or cryptocurrency. Initially, all NFTs are created and traded exclusively in the Ethereum blockchain using ether tokens. More recently, other blockchains have been implementing NFTs, offering investors more options.
2. Contains Unique Metadata – After an NFT is created on a blockchain, its sales are tracked and recorded. This is made possible by unique metadata contained in the NFT, confirming the ownership and other terms applicable to that token.
3. Non-fungible – Every token is non-fungible because it contains metadata that cannot be replicated or duplicated. This means that an NFT cannot be interchanged with another NFT or any other asset. Even when multiple replicas are created with similar content, every NFT will have unique metadata.
4. Transactions can be Traced – Once the NFT is recorded on a blockchain, the unique metadata allows its provenance to be tracked, showing the current and previous owner, when it was created, and the number of copies made from the original.
5. Cannot be Divided into Smaller Units – An NFT cannot be subdivided or used like a fungible convertible cryptocurrency like Ethereum or Bitcoin. In other words, one NFT cannot be exchanged for another, or its value is divided into smaller units.
6. Traded Through Online Marketplaces – After creating an NFT, it is sold, bought in a marketplace. The marketplace platforms host the blockchain technology necessary for trading NFTs.
7. Require Crypto Wallet – For you to be able to trade NFTs, you will need a crypto wallet like MetaMask. The wallet is then connected to the NFT platform/marketplace, allowing transactions to take place.
What Makes NFTs Unique
The best way to think about NFTs is that they are records of ownership of unique digital assets. Although they can be bought and sold like cryptocurrency, they are unique and non-fungible. This makes trading NFTs more difficult compared to cryptocurrencies, but a more attractive option for investors. While fungible tokens like currency are identical and with the same attributes, non-fungible tokes are unique and non-interchangeable.
Why NFTs Have Become So Popular
NFTs have become extremely popular, especially after people could sell social media posts like tweets on the blockchain. The growing trend of people selling digital assets and verifying their ownership has lured more people into this space. Some people have even gone to the extent of creating and selling popular memes by creating them into NFTs.
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Although buying a meme or tweet will not transfer the ownership to the buyer, it gives them the bragging rights of owning the content. Sometimes, the information about the ownership, usage rights, and copyright are coded into the NFT. Unless that is done, the transaction is only the buyer paying the creator of the content at the price outlined for their work.
For most people, understanding the concept of NFT may seem difficult because no physical or tangible assets are involved. Since digital assets can be easily claimed by someone else over the web, the use of NFT serves to prove the ownership and authenticity of the asset. Therefore, people can maintain impeccable transaction records that indicate the ownership history.
Blockchain technology has been lauded for its ability to keep an irremovable and immutable ledger of a transaction, which is publicly available. This means that NFTs created and traded on blockchain represent the value of something that one can prove their ownership. Knowing that one can prove their ownership of a digital asset has encouraged many celebrities and digital creators to create and trade NFTs.
Why Do People Buy NFTs
Most people never get what an NFT is or how it works until they finally do. Just like any other fast-moving technology, NFT may look like something that only a genius understands. You may find yourself asking whether right-clicking an image and saving it makes you the owner. You may also wonder why you should buy an image that you can simply download.
However, people who understand NFTs and the craze surrounding them buy these digital assets for several reasons:
· A Piece of Art – You may buy an NFT because of the appealing art attached to it. After buying, you may go ahead and display it in your home using a digital frame or even your Apple watch to appreciate the value. Like any other piece of work, beauty is in the eye of the beholder. This also means that something will appear more attractive and valuable to one person than the other. Factors such as popular culture and trending topics also tend to influence the value of NFTs.
· NFTs as Luxury Items – Some NFTs go for millions of dollars while others attract prices of thousands or hundreds of dollars. With such high prices or values, NFTs can be classified as luxury digital items. A typical example is the replacement of Rolex with an Apple Watch with an NFT background. The option became popular for flexing purposes, with the latter being more highly valued. Since scarcity drives price, brands like Supreme have released clothes with a limited number of tokens. With people constantly looking for items that other people do not have, the Supreme t-shirts have gone up the ranks to become luxury clothing.
· NFTs as Collections – One of the characteristics of humans is that they like to collect things. From Pokemon cards, Beanie babies, to football stickers. While physical collections have always been a thing, digital collections are now a thing with NFTs. The reasons for collection can just be anything, including nostalgia for the diversification of wealth, pride in the collection, or even learning and relaxation.
· NFTs as Utility – You can buy NFTs to gain utility or value. For instance, buying one NFT can result in more NFTs being sent to your wallet in the future in a concept known as airdropping. Many creators do this as a way of showing support to their owner-base just in the same way a company offers dividends to its shareholders. Other forms of utility include access to a gated community, a pass to mint something different in the future, and in-person events.
· NFTs as Opportunity – Buying an NFT can create multiple opportunities for you. For instance, changing your avatar to your NFT on Discord or Twitter can be used as a signal of trust and membership in an exclusive club. In other words, you will be telling other members that you are comrades and open to partnerships or new work that would otherwise not have emerged if you did not own the NFT.
· NFTs as Sign of Ownership – Owning a digital item has the same satisfying feeling as owning a physical item. Some people in the digital native generation value and enjoy as many NFTs as possible, including cars, houses, watches, and more. You may also get intellectual property rights to the token, which can be useful if the brand takes off as you will be allowed to use the NFT however you see fit commercially. For example, you may print the NFT on a t-shirt for short-term gains or earn royalties in the long term.
· NFTs as an Investment – Investing in NFTs is an excellent way of making huge returns. When you mint an NFT, you get the opportunity to earn something worth more than what you incurred. Since most projects mint at a flat rate cost, you could obtain a rare NFT at the same cost as a common. However, it will attract a higher value because of its rarity. You may also buy a project that you feel is undervalued for speculative purposes, and choose to sell it later for a profit.
· NFTs for Income – Depending on the kind of NFT, you can earn a stream of income. Some projects offer token holders information through the ERC-20 token assignment. This token differs from the ERC-721 token because it is fungible and can be used as a currency.
· NFTs as Entertainment – One of the greatest use of NFTs is gaming. In a digital world like the World of Warcraft, the legendary sword can be stored in a blockchain, which is decentralized instead of the centralized in-game store. In this case, the sword is an NFT that you can prove ownership of and use for trading functions. At that point, no one, including the game developers, can take the sword from you unless they pay for it.
The Power of NFT Communities
Almost all NFT projects bring people together in a community. Interestingly, some people buy NFTs only to become members of such communities. The leading industry standard platform of choice for communities is Discord. The community offers chat services, which are usually part private and part public. This means that some content is public while some elements are gated and exclusive only for token owners. The main reasons for joining an NFT community include:
· Access to Information – You get to know the time when the next cool project will be minting or the next big drop. Getting such tips, including the horizon for an existing project can help inform your investment decisions.
· Learn from Others – Being in a community means interacting with people who are as open as the source code in smart contracts. People are willing to share their tips and other information in these communities, which can be most helpful to beginners.
· Access to Opportunities – When you enter a space of like-minded individuals, collaboration is bound to happen. Depending on the information shared in the communities, you can start as an investor and quickly build your own project. The communities are also ideal for developers, designers, and marketers to team up.
· Peace of Mind – Communities offer second opinions on almost anything, which is both comforting and reassuring. Whether you are concerned about a code, art, or investment, posing a question of the community allows you to do due diligence.
· Teach Others – As you grow into your NFT journey, it can be fulfilling to share what you know with others. As you share information and knowledge with others, you also get to learn from them and see different perspectives on issues.
· Teamwork – People in an NFT community may choose to invest together in a project. This can be communally through fractionalization or community sentiment, but with a shared win comes a bigger celebration. At the same time, a shared loss becomes a lesser burden.