What are NFTs and how do they work?

NFT stands for "non-fungible token" or "non-replaceable token". It is a unique digital asset that uses blockchain technology to confirm its uniqueness and authenticity.

Unlike cryptocurrencies (BTC, ETH, etc.) NFTs are not interchangeable with each other because each has its own unique code. 1 BTC = 1 BTC, unlike NFTs. Each NFT is unique just like any work of art: a Leonardo Da Vinci painting cannot be replaced by a Vincent Van Gogh painting, and a Sting song cannot be replaced by a Kendricka Lamar song. Each artwork is unique - also works with NFTs. Each NFT exists in a single copy, and the rights are held by a single owner. Information related to authorship, buyer and all transactions, one NFT or another, is stored in the blockchain.

Blockchain is a continuous chain of blocks. A block in this scheme is information about a series of transactions recorded in a distributed ledger. The blockchain is a continuous sequence of these blocks, allowing anyone to trace the complete transaction history of a particular asset from the very beginning of its existence.

The history of NFT begins in 2012, when the Colored Coins project was created. The essence of the project was that users could "color" BTC and add unique information to them. Why was this necessary? Thanks to such "unique" BTCs, users could make purchases, proving their ownership of them.

The next step to the NFTs that are widely used today was Counterparty, through which the Spell of Genesis game project created unique items for their game.

Counterparty is a system that applies Bitcoin technology to confirm ownership of digital assets such as artwork and collectibles.

The first NFT sold was "Quantum," created and tokenized by Kevin McCoy in 2014 on the Namecoin blockchain, and then released and sold in 2021 on the Ethereum platform.

In 2017, the first game to utilize the full capabilities of NFT was developed - CryptoKitties, based on the Ethereum blockchain. CryptoKitties represented unique digital kittens, each one unique and stored on the blockchain. This was the first large-scale use of non-fungible tokens (NFTs).

That same year, artist Mike Winkelmann, known as Beeple, began creating and selling his digital works as NFTs on the Ethereum platform. His work "Everydays: The First 5000 Days" was sold for 69 million dollars at Christie's auction in 2021. This is what brought the world's media attention to the world of digital art and NFTs.

In 2021, the world saw one of the most famous NFT collections, Cryptopunks.

The collection is issued on the Ethereum blockchain and consists of 10,000 NFTs. The creators of the collection are the Larva Labs team founded by Matthew Hall and John Watkins. They initially developed a program for automatic avatar creation, but in the summer of 2017 they suddenly decided to use it to form unique digital objects on the blockchain. After the launch of the project, the company created a marketplace for trading and analyzing tokens.

Bored Ape Yacht Club (BAYC) is a set of 10,000 unique NFTs with images of monkeys, each with its own unique characteristics. Some NFTs are particularly rare - this gives them a special value. A user who purchases an Ape receives exclusive access to upcoming collections, as well as other privileges within BAYC.

The full Cryptopunk set includes 10,000 characters, and each has their own unique characteristics and traits.

CloneX NFT is the result of a collaboration between RTFKT and Japanese artist Takashi Murakami. In November 2021, RTFKT Studios released 20,000 NFTs for sale under the name CloneX. This sale covered a variety of areas including social media, video games, movies, and other features both inside and outside of the Meta Universe.

Artists create digital works of art and transfer information about them to blockchain, thus monetizing their projects. How is this different from just downloading a picture from the internet? The value of such NFTs is that if you own it, you have proof of ownership of a specific digital asset. Also, anyone can digitally authenticate a work.

Imagine a one-of-a-kind vinyl figurine of your favorite character that belongs to you. Collectible NFTs can be compared to just such items. They are unique digital assets created on the blockchain that users can collect or sell.

NFTs in the music industry are similar to digital images or video files and are created when you link a piece of music or audio to an NFT. They serve as proof of ownership of unique sound or music content that can be purchased or sold.

This type of NFTs are digital assets containing animated images. They are growing in popularity because of the desire to own unique videos and keep in touch with their creators. Many people are also looking to build their own NFT video collections to monetize the content they create.

A special digital image on the cover of your profile is what an NFT avatar is. Each avatar is different from the other, but can be designed in the same style. The use of such avatars emphasizes the user's belonging to a certain community, and can also grant certain privileges and tickets to exclusive events in the meta-universe.

Created specifically for games, NFTs allow users to "stand out" in the game, increase their skills and open new opportunities. The user, within the game world, can purchase a rare game skin in the form of an NFT, and gain special abilities.

NFT trading cards are virtual versions of existing physical items. They are interesting to users due to the fact that they are easy to verify (especially in times of scarcity affecting the value of the cards). Also, the user gets permanent ownership reflected in the blockchain. And rare cards can be considered as investments.

And it happens. If you're a fan of creating memes, you can monetize your labor thanks to the NFT. The value of these memes will be largely determined by their virality, originality, and digital authenticity. For example, Zoe Roth (catastrophe girl), sold the original version of the meme for 180 ethereum. At the time, this amounted to approximately $430,000. In addition, each subsequent sale of this meme earns Zoe 10% of the amount.

As we have already mentioned, NFTs are based on blockchain technology, which ensures the uniqueness and authenticity of digital assets. Now let's take a closer look at each component without which NFTs could not exist.

Blockchain technology: NFTs run on the blockchain, which is a decentralized and distributed database - all information about a particular NFT is stored on the blockchain. Ethereum is one of the most popular blockchains for creating and exchanging NFTs.

Smart contracts: NFTs are created using smart contracts, which are programs on the blockchain that define the rules for creating, storing, and transferring tokens. These contracts define what makes each token unique.

Uniqueness through metadata: Each NFT has unique metadata that includes information about characteristics, properties, and other details that make it different from other tokens. This metadata may include artistic details, game item characteristics, or other features, depending on the type of NFT.

Minting process: The creation of an NFT often occurs through a process known as "minting". This means that a digital asset, be it an image, video, music or anything else, is linked to a unique token and recorded on the blockchain.

Transfer and ownership: NFTs can be digitally transferred from one owner to another. Thanks to blockchain technology, ownership of a token is confirmed by an entry in a distributed ledger.

Payments and consensus: the processes involved in the creation, transfer and ownership of NFTs are carried out using consensus mechanisms in the blockchain. Payments for NFTs occur in cryptocurrency.

All of these principles ensure that NFTs are unique, authentic and transparent. This makes them valuable to collectors, artists, game developers and other industries.

NFT for creativity!

NFT tokens are primarily used in the field of digital art: artists create unique digital works and present them in the form of NFTs. Collectors buying NFTs receive the entire list of rights to a particular work of art, just like buying a physical painting.

Music

Musicians release albums, tracks and audio files in the form of NFTs, offering fans unique digital objects and additional privileges. Anyone who is involved in music can release their works in the form of NFTs and earn money from it.

Gaming industry

Each game that uses NFT technology can use it in different ways, but mostly it is either virtual items (costumes, weapons) or character customization (users can purchase NFT items within the game and improve skins and skils).

Virtual events

Event organizers create NFTs as virtual tickets or passes to access exclusive events in meta universes.

Collecting

Some projects offer NFTs, which represent ownership of physical objects such as actual paintings or objects, which provides uniqueness and authenticity to collections.

Sports and fan ecosystems

Sports leagues and clubs create NFT digital collections with images and achievements of athletes. Such collections primarily emphasize a person's affiliation and commitment to a sport or team.

In fact, NFTs can be applied in absolutely any field, as they primarily emphasize a person's mastery of a subject.

A new type of token - JPG pictures - does not give the buyer all rights to it. Let's look at an example:

You have decided to buy an NFT on the NBA Top Shots marketplace featuring a thrilling moment from the LA Lakers game. Attached to this NFT is a shot of LeBron James shooting the ball. Yes, this video is yours, but anyone else can still find this video on the internet, download it to their phone and show it anywhere.

What can you do about this "moment"?

You can buy this moment, put it in your collection, and sell it if you wish.

What can't you do about this "moment"?

You cannot dispose of the rights to this video outside of the blockchain, meaning you cannot lend it, share it, or prevent it from being published on any platforms.

These "moments" are bought primarily by fans and collectors, but it's important to remember that the rights to them are restricted by the blockchain.

NFT blockchain platforms are the place where NFTs can be created, exchanged and managed.

Most NFTs are built on specific blockchain protocols that define standards for token creation and exchange. For example, Ethereum, with its ERC-721 and ERC-1155 protocols, is one of the most common blockchain platforms for NFTs.

YES!

What does it take?

1. A piece of artwork in digital format is required.
2. Register on the chosen marketplace or exchange where you plan to create and sell your NFTs.
3. Cryptocurrency: connect and fund your cryptocurrency wallet that will be used to conduct transactions with NFT.
4. Upload your digital artwork to the platform and create an NFT with the necessary information such as description and settings.

NFT creation is not free: OpenSea, the largest marketplace, charges a 2.5% commission on sales. To initially initialize your wallet on OpenSea, you will need to fund it with 0.05 ETH (approximately $65 as of October 2022) or pay a minimum "gas" amount of 0.02 ETH (~$26). On Binance NFT, the first 10 NFT tokens created can be created for free, but thereafter a fee of 0.000001 BNB (approximately $0.0003$) is charged.

What's interesting is that some of the marketplaces automatically create tokens from uploaded files and charge a commission on the upload, while others generate NFT only when it is sold.

NFT is another type of asset to invest in. Just like any cryptocurrency bought on SPOT for the purpose of holding and earning on the increase in its value. You can buy NFT on platforms such as OpenSea, Rarible, NBA Top Shot, Binance NFT, and Nifty Gateway. There are other platforms for trading NFT, but these are the most reliable according to Forbes.

Let's look at some of them in more detail.

OpenSea launched in 2017 and is now one of the largest marketplaces for trading non-fungible tokens (NFTs). The platform provides the ability to buy and sell a variety of assets such as music, photos, and artwork. Transactions require crypto, you can't spend fiat money to buy NFTs here.

Rarible is a decentralized NFT trading platform. It is not known exactly how many NFTs there are on this platform, however, according to the users of the platform, the diversity of tokens is one of the strongest advantages of the platform.

Among the available categories on the site:

• Art
• Photography
• Games
• Meta-universes
• Music
• Domains
• DeFi (decentralized finance)
• Memes
• Punks
• NSFW (for adults)

Binance NFT offers a diverse range of NFTs, including tokens associated with celebrities and famous brands. Users can also trade, auction and exchange the NFTs they own.

The answer is actually very simple: it all depends on supply and demand. It is the level of demand for most physical art objects that determines their price. Depending on how rare, useful, unique and speculative As demand rises due to factors such as rarity, usefulness and speculation, the price of NFT rises with them."

• You should start by learning as much as you can about the NFT field: if you are aware of the specifics of the assets and have the right knowledge, the likelihood of you getting caught in a scam is very low.
• If you're interested in a particular collection, it's worth checking out their official website, where you can find a link to the collection on OpenSea or another marketplace.
• If this company is well-known, when you search for the site in a search engine, they will have a check mark - so it's an official page that you can trust.
• What to do if there is no check mark? In such a case, you should check the number of holdings and revolutions - the higher the numbers, the higher the probability that the NFT is original.

NFTs are not only another way to invest in assets, they are also a collectible. NFTs are finding increasing use in a wide variety of applications in the real and virtual worlds. These tokens are also becoming popular because of the ability to express themselves. In addition, in the gaming industry, NFTs, besides their investment value, have functionality, providing players with unique features and becoming a useful tool in gameplay.

Let's remember not so long ago popular NFT-sneakers STEPN (who only did not "walk" in them), which bankrupted many people, and as always only those who were the first could earn money. Popularity was gained due to accessibility and quick money: you had to download the application, register, deposit Solana in the STEPN wallet and buy a pair of NFT-sneakers. The very essence resembles a pyramid:

The cheapest pair, in turn, started at $1000 (at that time +- 9SOL). At the same time, the opportunity to earn the maximum depended on what pair of sneakers you bought (your "energy scale" depended on it, which was spent on jogging).

You could also improve your sneakers to get more income. And sometimes you also had to repair them - a new unique game that attracted thousands of users around the world. Walking in the cheapest sneakers, the user could earn a maximum of $40 per day, and in the most expensive ones - $85.

Users could also mine their own sneakers - they could sell them or "race" them themselves. Such were the earning opportunities available to fans of long walks in the spring of 2022. The important thing, as in most blockchain projects, was to get in at the very beginning.

And now back to the Bored Ape Yacht Club and CryptoPunks: who wouldn't want to be part of a community of like-minded people - to get into a so-called "closed club"? These collections of NFT interested people, first of all, because of the "ticket" for membership in the club. And the bigger this club gets, the more people want to get in. Remember even the ClubHouse application, which "failed in our country" - everyone wanted to get into it, to get that invitation, to become a part of something special.

Analysts at the Nasdaq exchange believe that the NFT has a major impact on the art world first and foremost. They also identified three major trends:

Democratization of art: anyone can become a creator of works of art. And, more importantly, there is no need to visit art galleries to enjoy these works. It's all available right from home.

Royalty: Thanks to blockchain technology, art creators can receive a percentage of each subsequent resale of their token. This gives them the opportunity to earn money from their art for many years.

Freedom and independence: artists are no longer forced to conform to the expectations of brands or the demands of collectors. They can create art of their own inspiration, engaging their audience. Thus, there is freedom in the creative process and artists can successfully find their place in the art world.

There have been news stories lately with loud headlines that the NFT is a security.

The reason is a lawsuit filed by the Securities Commission against Impact Theory. The Commission considers the launch of NFT Impact Theory back in the fall of 2021 to be considered an investment contract - a security.

Most recently, Stoner Cats was charged with failing to register the securities that their NFTs act as.

Is the NFT really a security?

The answer can be either yes or no, depending on the context of the particular NFT.

Let's break down NFT by the Howey test, which helps determine whether an asset is a security. The main criteria are:

1. Have funds been invested? Yes, if the unique token was obtained for money. Free NFTs do not fall under this clause.
2. Have funds been invested in the joint venture? In most cases, no. Yes, if it concerns fractional NFTs, because there the value of fate depends on the price of the asset.
3. Did the investor expect a profit from the transaction? Ambiguous. The German regulator noted that a token could theoretically generate a profit, but this is not enough to classify NFTs in the investment sector. The U.S. Supreme Court also commented, "...if the purchaser is motivated by a desire to use or consume the goods [...] then the securities laws do not apply." It's hard to prove a desire for profit if you're buying a photo of a martini you really like. If NFT is art that can grow in value and make a profit, and there was no mention of a possible increase in the price of the asset at the time of purchase, the property is unlikely to be considered a security.
4. Are the expected profits related to the activities of others? This condition falls under almost all NFT collections for which there are companies, marketing, producers and others who influence the value of the assets, because they have a vested interest in growth and sales.

So 🤔

NFTs can and do attempt to hide actual investment contracts under the wrapper of NFTs in order to evade regulation. NFT is not subject to regulation except where it acts as a utility token.

There are also issues with factional NFTs and tokens where the seller publicly promises profit and facilitates it.

News from the bottom - the NFT sector is dead, or rather in a state of stagnation.

NFT sales volumes are reaching their critically low levels, and the value of the irreplaceable tokens itself has repeatedly plummeted by tens of percent recently, updating price lows.

A great example of an artificially inflated bubble that organically deflates. Many people believed in the miracle technology and high value of pictures that will give free money to everyone. These people became exit liquidity for those who were the first and knew what would happen next with a higher probability.

Just two years ago, this technology was being hailed as revolutionary and unprecedented growth was predicted, trading volumes were growing by thousands of %, many large and influential Influencers and media were PR'ing NFT, but everything happened as it was supposed to.

Question everything that is going on around you, the new "revolutionary technology" may be just another temporary phenomenon in which it will be too late to invest your own money. Critical thinking and cold reasoning will help you to soberly evaluate the new "promising" technology.

Non-replaceable tokens can be used in real life, simplifying and improving it, for example, a similar unique token can be added to your passport or concert ticket, which can be used to verify the document or ticket for authenticity very easily, NFT is the basis of tokenization.

The NFT sector is doing really badly now and the current state may continue for a long time, but it is important to take into account that the technology is still unique and has a place in our realities. What is happening now is the absolute norm and a natural result of the inflated bubble during the growth phase of the cryptocurrency market.

If market conditions are favorable, we may see a revival in the NFT market and a rise in asset prices. At such times, the media often starts to publish a lot of both real and bribed news to stimulate the market to growth, so it is important to assess the situation without emotions and not to make hasty conclusions.

Does the NFT have a future? Yes, there is, but will it be as colorful as it was at the height of NFT's fame? In the current market realities it is too unlikely, and in a growing market there is a possibility that new trends will take over and we will never see such growth and hype in the NFT sector again. Does this mean that the NFT sector is destined to disappear soon? No, it is and will be, you can still make money here now and you will be able to make money in the future, but it is not the same indicators that were at the peak of glory.

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