22 min read

What is an NFT? NFTs Explained

The Collins Dictionary announced NFT as its Word of the Year for 2021.

The recent phenomenon has become increasingly popular, with well-known brands including Taco Bell and Adidas launching creative marketing campaigns with NFTs central to promotion.

You may have heard the term floating around online and wondered what they are and why they’ve received so much hype. In this article, we break down everything you need to know about NFTs.

What is an NFT? NFTs Explained | Silverchip

Topics Covered:

- What is an NFT?

- How do NFTs work?

- How NFTs are stored on the blockchain?

- What is the purpose of an NFT, and how are NFTs used?

- Where can you buy NFTs?

- Should you buy NFTs? What you need to know before buying

- How is an NFT different from cryptocurrency?

- Why are NFTs controversial regarding the environment?

 

What is an NFT?

NFTs – also known as non-fungible tokens – are unique digital assets that can be anything digital, such as a piece of artwork, music, or a trading card. They are sold and bought online as a “one-of-a-kind” asset in the digital world but have no tangible form of their own. 

If you swap a £10 note for two £5 notes, it will hold the same value. However, if an item is non-fungible, it means that it has exclusive properties that cannot be exchanged for something else.

They are commonly encoded with similar software used with many cryptocurrencies. The digital tokens can be compared to official ownership certificates for the digital or physical assets. Unlike Bitcoin (which is identical and swappable), NFTs are unique as they are tracked and managed on a blockchain and aren’t interchangeable. 

An NFT can represent a digital asset, such as the Nyan Cat GIF, that sold for $600,000 to celebrate its tenth anniversary. NFTs are like any other type of collectors’ items such as paintings or antiques but instead of purchasing a physical object; you’re buying a digital file that comes with proof that you are the owner of the original copy.

 

How do NFTs work?

What is an NFT? NFTs Explained | Silverchip

For an NFT to be verifiable, it needs its unique identity and ownership to be confirmed via a blockchain ledger. The Ethereum blockchain was the first to launch NFTs and is the most popular. However, other blockchains such as FLO, Binance Smart Chain, and Solana also back them. Ethereum is a decentralised, open-source blockchain platform with smart contract functionality. 

Typical collector’s items, such as art pieces, are valuable purely because they’re one of a kind. The problem with digital files is that they can be quickly and infinitely be downloaded and copied, meaning it’s highly unlikely the image you see is the original image. NFT artwork has a process of being “tokenised” that creates a digital certificate to prove that you’re the rightful owner of the actual asset. 

Like cryptocurrencies, NFTs are stored on a shared ledger with a record of ownership, also known as the blockchain. It is almost impossible to forge the records as the log is upheld by thousands of computers worldwide. NFTs can also include smart contracts that may give the artist a cut of any future transactions.

 

How NFTs are stored on the blockchain

An NFT is stored on a digital ledger, called a blockchain, which can be sold and traded. The NFT can be associated with a particular digital or physical asset (such as a file or a physical object) and a licence to use the asset for a specified purpose.

NFTs are minted through smart contracts that assign ownership and manage the transferability of the NFT's. When someone creates or mints an NFT, they execute code stored in smart contracts that conform to different standards, such as ERC-721. This information is added to the blockchain where the NFT is being managed.

 

What is the purpose of an NFT, and how are NFTs used?

What is an NFT? NFTs Explained | Silverchip

This mainly varies depending on your purpose for interacting with NFTs. 

If you’re an artist

NFTs can be a great way to sell your work in a way that otherwise there might not be a current marketplace. The bonus feature of having smart contracts included is that you will be paid a percentage every time the NFT sells or changes ownership, meaning if your work goes viral, you’ll receive some of its perks. 

 

If you’re interested in being a buyer

The main perk is to be the only person with ownership rights. No one else owns your NFT in the whole world. You’re allowed to post the image online and set it as your display picture because it is rightly your property. It also comes with a form of community pride to be involved in this new and upcoming phase of the future digital world so early on, with the blockchain entry to back it up. 

 

If you’re after becoming a collector

Like with any other form of art and antiques, you buy it in the hope that you’re able to sell it for profit in the future or because you like to collect art and be the rightful owner.

NFTs are shaking up the way art is sold, even more so after an anonymous group of “art enthusiasts” pulled a stunt by burning an original Banksy piece to increase the value of an NFT. They aimed to “inspire” tech enthusiasts and artists in an expression of art itself; it’s said that they chose a Banksy piece as he previously shredded one of his pieces at an auction. 

NFTs have also become increasingly popular for brands; we’ve seen several brands jumping on the current trend by creating their own NFTs. Taco Bell is one of the brands that have used the popularity of NFTs to their advantage, creating 25 taco-themed GIFs and images, all of which sold out within just 30 minutes. Taco Bell even added $500 gift cards with each NFT, which could explain why they were snapped up so quickly. TacoCards are now for sale on the secondary market for up to $3,500 (and understandably without the gift cards included).

 

How much are NFTs worth?

What is an NFT? NFTs Explained | Silverchip

Realistically, anyone can tokenise their art to sell as an NFT. However, in most cases, your work must be backed by headlines or the NFT community to reach multi-million-dollar sales. 

For example, singer Grimes put some of her digital art pieces up for auction and earned around $6 million. And it’s not just art pieces that are being tokenised and sold. The founder of Twitter, Jack Dorsey, sold the first-ever tweet as an NFT for $2.9 million.

 

Where can I buy NFTs?

If you’re interested in purchasing NFTs, there are many websites where you can do so, but it will depend on what kind of NFT you are after buying. The most popular NFT trading website is OpenSea, which offers digital assets including art, domain names, virtual worlds and trading cards.

To buy an NFT, you’ll need a wallet with the platform you’ll be buying from, and you’ll need to fill that wallet with cryptocurrency. With the record sale of Beeple’s “Everyday’s – The First 5,000 Days at Christie’s” (the third-highest price ever paid for a work by a living artist), which sold for $69.3 million, NFTs are starting to appear in more mainstream auction houses.

Due to the high demand for many types of NFTs, they’re starting to be released in “drops”, which means if you’re planning on buying an NFT, be prepared to be joined by a bunch of other eager buyers when the drop begins. Also, make sure you’re registered and have your wallet topped up and ready to spend. 

If you’re considering creating an NFT collection, you’ll need to get a digital wallet that allows you to store NFTs and cryptocurrencies. You’ll need to purchase cryptocurrency that your NFT provider accepts. You can buy crypto on platforms like Coinbase. You will need to move it from the exchange to your preferred wallet. Most exchange platforms charge transaction fees when purchasing cryptocurrency, so be sure to research different options.

 

The meaning of ownership

To understand the true meaning of ownership, you must know that a digital asset is separate from the certificate of ownership. 

Like with music, we can access and listen to music for “free” via platforms such as Spotify and YouTube; however, aside from these platforms, there is someone who owns that music. It’s the same case with NFTs, a piece of digital art naturally doesn’t have information on who the owner is, but now we have a way of knowing who does.

 

Should you buy NFTs? What consumers need to know about NFTs

What is an NFT? NFTs Explained | Silverchip

Seeing brands and celebrities spend so much on NFTs may persuade you to want to participate in this industry yourself, but it is advised to do so with caution. Be sure to research the asset, confirm that the person or brand is trustworthy, and own the token they’re selling. 

As NFTs become more mainstream, it’s a prime opportunity for scammers to try and take advantage where possible. Some platforms haven’t nailed the best verification methods yet, so be wary of this when purchasing.

This isn’t the only risk NFTs impose; their future is still uncertain. Due to it being a fresh new phenomenon, it’s hard to judge its longevity. It is probably worth investing small amounts to start with, especially if you have money to spare and if a piece has meaning for you. 

It’s essential to remember that NFTs value is based solely on what others are prepared to pay for it. It works by demand, meaning if it’s popular, it will increase the price rather than technical or fundamental indicators. This usually affects stock prices and forms a baseline for investor demand. 

In short, if you were to put your NFT up for resale, you may end up not being able to resell if no one wants it. Do plenty of research and understand the risks involved, including the possibility of losing all of your investment. Therefore, if you decide to take the plunge, you’ll be more likely to spend a healthy sum with caution.

 

What stops people from copying digital art? 

Unfortunately, there is no way of stopping people from copying and sharing NFTs. In some cases, the artist preserves the copyrights of their work to continue to create and sell copies. However, the purchaser is the one who has official owner status as they’re the only ones with a “token” that shows they’re legit. It’s similar and often compared to buying an autographed print. 

 

Are NFTs safe?

Sadly, for the NFT community, scams are currently on the rise due to the increase in popularity. Security measures are still being worked on and tightened up, but unfortunately, several cases have lost a large sum of money. “Rug pulling” is known as a type of scam in which creators swiftly cash out their gains after debuting what seems to be a legit crypto project. 

The ”Big Daddy Ape Club” rug pull was one of the biggest scams in blockchain history, with the creators swiping around $1.3 million. It’s reported that an identity verification company had vetted the creators, but on 11 January 2021, when the tokens were supposed to be minted, the creators disappeared. The identity verification company are said to be working alongside authorities to try and track down the thieves to hold them accountable.

 

How is an NFT different from a cryptocurrency?

NFTs are built using similar programs as cryptocurrencies, like Bitcoin or Ethereum, but that’s the only similarity. As mentioned earlier in the article, real money and cryptocurrencies are “fungible”, meaning they can be exchanged for one another and hold the same value – one Bitcoin will always equal another Bitcoin. Crypto’s fungibility makes it more trustworthy during transactions on the blockchain. 

The main difference with NFTs is that each asset has a digital signature making it impossible to exchange or hold the same value as another NFT. The Nyan Cat, for example, is not equal to the TacoCards.

 

Why are NFTs controversial regarding the environment?

What is an NFT? NFTs Explained | Silverchip

There has been a cause for concern regarding the environmental impact NFTs cause. Many artists (including Beeple) are making a conscious effort to create carbon-neutral pieces; however, the problem lies more profoundly in how the blockchain works. 

Ethereum and Bitcoin are built on a complex system (like a challenging chain of puzzles) to make the records as protected as possible. The issue is that a system like this requires a humongous amount of power. Ethereum alone uses the same amount of energy as the entire country of Libya. 

This hasn’t gone down well with the public. ArtStation, a platform for artists to showcase their work, was also concerned about the environmental impact caused by selling NFTs. They decided to backtrack their decision after receiving backlash. 

The environment isn’t the only reason the public is unsure about NFTs; many people within the art and design community are furious that NFTs are being sold for enormous sums of money, and it’s often not going to the artist. NFTs were created so buyers would have official ownership of their assets rather than becoming an elitist bragging right. The buy-in fees are becoming unreachable and a marketplace for the super-rich only.

 

The Metaverse is the future

It’s no secret that we’re heading closer into a digital future, and with the rise of Metaverse upon us, it’s said that NFTs will have a significant role to play in it. We’re already seeing people sinking hours into playing games in virtual worlds and even artists performing in games like Travis Scott on Fortnite. NFTs will be a significant component in the broader Metaverse.

An example of the Metaverse and NFTs in action is The Sandbox, a blockchain-based video game known for NFT virtual land sales. A virtual plot of land was recently bought as an NFT for a record $4.3million by Republic Realm, an organisation calls itself a “digital real estate company”, on behalf of Atari, a video game company.

The Metaverse provides an opportunity for brands to reimagine virtual experiences with customers, find better ways to build communities, experience physical goods virtually and create more personal, AI-powered concierge-style services

 

Brands

When something becomes popular quickly, such as NFTs, it’s the perfect opportunity for brands to jump in and make it their own to boost their marketing strategy. We’ve seen several brands hop onto the NFT trend and create some extraordinary NFT campaigns and projects. 

 

Nike

A common phrase within the NFT world is that NFTs are being used as a “flex” on people in the Metaverse, similar to collecting sneakers. Nike took no time making this an official thing in the NFT world. They collaborated with a teenage artist called FEWOCiOUS to sell authentic sneakers alongside virtual ones. They managed to sell 600 pairs/NFTs in six minutes, generating over $3.1 million. 

 

Adidas

Adidas were on the ball when it came to the NFT game; they created 30,000 “Into the Metaverse” NFTs, all of which sold out within a matter of hours. This launch resulted in Adidas earning more than $22 million from sales. Adidas offered 20,000 NFTs in an early access drop to people who already own exclusive Adidas Originals tokens, Bored Ape Yacht Club NFTs, GMoney tokens, Mutant Ape Yacht Club tokens and Pixel Vault NFTs – making an already incredibly difficult NFT to buy accessible to select several buyers. 

 

McDonald’s

McDonald’s used NFTs differently from other brands; rather than entirely putting their foot through the door, they used NFTs as a way to promote the fast-food restaurant’s limited collection in November. The fast-food restaurant created a limited number of NFTs featuring the McRib to create excitement for the limited-time return of the previously popular menu item. The collection of 10 McRib NFTs was only accessible if you retweeted the chain’s invitation, which nearly 93,000 people had done by the close of 2022. 

 

Nifty Football

Here at Silverchip, we’ve partnered with UX Sequence, a blockchain and UX agency, to develop an NFT football management style trading card game on behalf of Nifty Football.

The game will be built on the Ethereum blockchain and allow players to purchase football player NFT cards to collect, trade, and play with friends. NFT player cards can be minted on the blockchain and traded or sold as a unique NFT. This gives players the incentive to train up their own players and engage with the game and other players. The game also features rare NFT player cards which hold more value.

 

NFT Summary

While NFTs are still in its early days, it is becoming more mainstream and proving to be an exciting opportunity for brands to reimagine how they interact with their customers; particularly with the early development of the Metaverse. Companies without an NFT strategy are similar to being a brand in the late ’90s and not developing a website strategy. It is proven that NFTs are more than just an ultra-niche sector for early adopters to play in.

If your company needs advice or assistance with the creation of NFTs or NFT strategy, get in touch here or by emailing hello@silverchip.com.