Non-fungible tokens — or NFTs — are causing a paradigm shift across nearly every sector of society. They’re transforming everything from finance to art, and there’s good reason to suspect that almost no corner of society will be left untouched.
If that sounds like a bit of an overstatement, know that it’s really not.
Over the last few years, NFTs have proven to be one of the most significant contemporary innovations in tech, finance, fashion, sports, and the arts. Since going mainstream in 2021, NFTs have been the source of hype, confusion, and drama (yes, drama!) as they have taken their place as the latest cultural phenomenon.
If you’re new to cryptocurrencies and digital assets, it can be difficult to wrap your head around NFTs and everything that’s happening in the space. But don’t fret. We’re here to solve all your NFT woes. Here, we give you a crash course in everything non-fungible. We cover what NFTs are, how they’re made, the various benefits and drawbacks, and how you can determine whether NFTs are right for you.
And if you’ve finished reading and there’s something you’re still confused about, you can always shoot us a message. Let’s get started.
What’s an NFT?
A non-fungible token (NFT) is a unique unit of data on a blockchain that can be linked to digital and physical objects to provide immutable proof of ownership.
The data an NFT contains can be tied to digital images, songs, videos, avatars, and more. However, they can also be used to give an NFT owner access to exclusive merchandise, tickets to live or digital events, or be linked to physical assets like cars, yachts, and much more.
In this respect, NFTs allow individuals to create, buy, and sell items in an easily verifiable way using blockchain technology. But bear in mind that, unless otherwise stated, you’re not buying the copyright, intellectual property rights, or commercial rights to any underlying assets when you buy an NFT. However, all the legal details can get pretty complicated, so we’ll dive into this more in subsequent sections.
When it comes to creating and selling NFTs, the process is really rather simple. It works like this:
- An individual (or company) selects a unique asset to sell as an NFT.
- They add the object to a blockchain that supports NFTs through a process called “minting,” which creates the NFT.
- The NFT now represents that item on the blockchain, verifying proof of ownership in an immutable record.
- The NFT can be kept as part of a private collection, or it can be bought, sold, and traded using NFT marketplaces and auctions.
As you might imagine, the technical definition is a bit more convoluted. If you’re interested in that kind of breakdown, our NFT dictionary gives you a comprehensive overview of all the technology and infrastructure in the NFT ecosystem.
How are NFTs different from cryptocurrency?
Just like the money in your bank account, cryptocurrency is what you use for any and all transactions on the blockchain. Cryptocurrency can be purchased or converted into fiat currencies (dollars, euros, yen, etc.) via crypto exchanges. By contrast, an NFT is a unique and irreplaceable asset that is purchased using cryptocurrency. It can gain or lose value independent of the currency used to buy it, just like a popular trading card or a unique piece of art.
In this respect, NFTs are non-fungible and cryptocurrencies are fungible.
To better understand this, it makes sense to think of traditional fiat currencies. If we asked you to let us borrow a dollar, you wouldn’t open your wallet and say, “Which dollar bill do you want?” Doing so would be silly, as each $1 bill represents the same thing and can be exchanged for any other $1 bill. That’s because the U.S. dollar is fungible. Cryptocurrencies are also fungible. They’re not unique and can easily be traded and replaced.
NFTs, on the other hand, are non-fungible in the sense that no two are the same. Each NFT is a unique unit of data that cannot be replaced by an identical version because there is no identical version.
When it comes to NFTs, uniqueness, and scarcity increase their appeal and desirability. And as is true of all rare items, this scarcity allows individuals to sell their NFTs for premium prices.
Why own NFTs?
The demand for NFT art has exploded recently. However, there is still a lot of skepticism. After all, NFTs are generally tied to digital files. How is owning such an NFT different from a screenshot of a photo? Does “proof of ownership” mean anything? To help you decide, here are some of the main reasons why people own NFTs.
1) It empowers artists
Publishers, producers, and auction houses often strong-arm creators into contracts that don’t serve their interests. With NFTs, artists can mint and sell their work independently, allowing them to retain the IP and creative control. Artists can also earn royalties from all secondary sales of their work.
In this respect, NFTs have the potential to create fairer models by bypassing the gatekeepers that currently control creative industries, and many individuals buy NFTs because it’s a way of empowering and financially supporting the creators that they love.
2) Collectibility
Despite costing less than 5 cents to make, a 1952 Mickey Mantle rookie card sold for $5.2 million. This happened because of the history, rarity, and cultural relevance of the card. NFTs are, in many ways, the digital version of this. For individuals who want to build a collection of digital assets, NFTs offer a unique opportunity that hasn’t existed outside of traditional collectibles and art markets ever before.
3) Investment
Some NFT owners simply want an asset that will increase in value. In this respect, some collectors treat NFTs as an investment — much like traditional art. Want proof? Mike Winkelmann, a prominent American digital artist known professionally as Beeple, sold his Everyday: The First 5000 Days composite at Christie’s for $69 million in March of 2021.
This may seem strange to some, as everyone can see and interact with the image. However, as noted, there can only be one NFT owner. For some, this is enough. Yet, market volatility makes NFT investment a high risk, with the potential for major losses.
4) Community
NFT Ownership also comes with community. For many collectors, owning an NFT is a matter of identity.
Many creators have also turned their NFT projects into vibrant communities. The Bored Ape Yacht Club is, perhaps, the best example of community building in relation to an NFT project. Collectors get access to a members-only discord, exclusive merchandise, a vote on the future of the project, tickets to virtual meetups, and more.
The environmental impact of NFTs
Of course, the NFT boom isn’t without its downsides. One of the most frequent criticisms that come up relates to the energy that’s needed to operate a massive blockchain network like Ethereum. This blockchain consumes more electricity than many countries. Many argue that NFTs contribute to blockchain’s overall carbon footprint because they promote the use of the technology.
However, in reality, even if everyone stopped using NFTs tomorrow, blockchain would continue to use the same amount of energy. That’s because transactions don’t actually increase the energy consumption of the network. Why? Because blockchains keep running at the same speed and with the same energy consumption regardless of whether or not there are any transactions to be filled.
And even if this weren’t the case, numerous other technologies have similar energy needs. In fact, YouTube and Ethereum have roughly the same carbon footprint. That’s not an excuse regarding blockchains and the carbon footprint they leave behind, but it’s important to understand the issue in its proper context.
What’s more, some blockchains are already moving to solve the blockchain energy problem. For example, Solana uses a unique combination of proof-of-history (PoH) and Proof-of-Stake (PoS) mechanisms to substantially reduce energy use. And the Liquid Proof-of-Stake (LPoS) mechanism employed by Tezos uses about two million times less energy than Ethereum.
Taxes and NFTs
Tax responsibilities will vary by country, but due to the trading value for most NFTs, acquiring a large sum of money in this way is likely to be considered capital gains. If you’re an NFT creator — meaning that you’ve minted and sold your own NFTs — that income is likely to be considered some form of business income, and you’ll need to claim it when filing your tax returns.
The specifics will vary based on the legalities within your region, but NFTs are not a tax-free investment. Be careful if you plan to treat them as such.
But what about crypto philanthropy? We’ve seen a sharp rise in “intentional charitable donations” made via NFTs in recent years. The geopolitical crisis in Ukraine stands as a perfect example of how NFTs can be used to positively impact communities in need.
In fact, more than 1,300 nonprofits accepted crypto-based donations in 2021, which are considered tax-deductible in the U.S., among other countries. This means that taxpayers can get a tax-deductible write-off for donations they made in crypto or NFTs. But again, this will vary from country to country.
Are NFTs right for you?
So far, we’ve given you everything you need to better understand NFTs, how they operate in the market, the benefits and risks, and how to get started with them.
But are NFTs right for you?
It’s a hard question to answer. In the end, it really just comes down to your personal preference and why you want to get involved in the first place. But here’s what we can tell you:
- NFTs are perfect for hobbyist collectors who want to support a content creator, be part of a community, or own a little piece of something they’re passionate about.
- As an investment opportunity, NFTs are highly volatile and the market is speculative. As with art and other rare items, some NFTs have gained immense value over time while others have lost immense value.
- The value of community for NFTs can’t be understated. From Bored Ape Yacht Club and CryptoPunks to buying NFTs from your favorite brand or artist, NFTs can be a gateway to a different community and lifestyle.
- Despite the explosive popularity we’ve seen in the past few years, NFTs are still in their early stages, and it’s never too late to get started. You definitely didn’t miss the boat.
If you do decide to get into the NFT ecosystem, we hope you enjoy the ride – we know that we certainly have.
