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            What are NFTS & How do they ACTUALLY Work? Non-Fungible Tokens Explained

            August 24, 2022
            What is an NFT?

            Table of Contents

            • WHAT ARE NFTs? AND WHAT DO NFTs STAND FOR?
            • CHARACTERISTICS OF NFTs
            • Why are NFTs so POPULAR?
            • WHY DO NFTs HAVE VALUE?
            • WHY DO PEOPLE BUY NFTs?
            • HOW DOES AN NFT WORK?
            • WHY ARE NFTs IMPORTANT?
            • NFT & CRYPTO
            • WHAT ARE NFTs USED FOR?
            • 1. Ownership of digital assets –
            • 2. Digital collectibles
            • 3. Ownership of real-world assets
            • 4. Utility tokens
            • 5. Gaming applications
            • HOW TO BUY NFTs?
            • SOME POPULAR NFT MARKETPLACES
            • 1. OPENSEA
            • 2. SUPERRARE
            • 3. RARIBLE
            • FREQUENTY ASKED QUESTIONS
            • What are NFTs used for?
            • Are NFTs Safe?
            • How Can I Buy NFTs?

            WHAT ARE NFTs? AND WHAT DO NFTs STAND FOR?

            NFT is an acronym for non-fungible token – is a terms that has two parts to it. The first, tokens – tokens or a crypto is essentially a unit in a blockchain network that can be used to transfer value, eg. Bitcoin. A token by itself is fungible – meaning if you trade in a Bitcoin for someone else’s Bitcoin – you essentially have the same thing. Hence, each Bitcoin constitutes exactly the same value.

            Then comes the non-fungible aspect of NFTs basically says these are completely unique and non-replaceable, or rather it is the only unique token on the entire blockchain network. There can be only one piece of that NFT and no more. There can be collection of related ones but each one in that collection is totally unique. Another way to understand it is to think of it as a one-of-a-kind trading card.

            For example, one of the biggest and the most valuable NFT collection is the Bored Ape Yacht Club, or the BAYC. It is essentially a collection of bored looking apes, each of which are distinctly different from each other and represent different things. Many top celebrities own NFTS like Snoop Dogg to Justin Bieber own NFTs which give them access to a club of influential people and a suite of other benefits that come along being in such a company.

            CHARACTERISTICS OF NFTs

            Here’s a low-down on the set of characteristics possessed by non-fungible tokens that tend to make them valuable in the crypto world:

            • Uniqueness – as mentioned earlier, NFTs are completely unique and cannot be replicated on the blockchain and ownership lies with any one person at any point in time.
            • Rarity – NFTs also tend to be rare, which is what contributes a majorly to the value associated with them. Since there can be only one piece of each NFT to ever exist, it makes them valuable.
            • Indivisibility – this is one of the foremost characteristics of non-fungible tokens and NFTs are tailored in such a way to be indivisible by default to serve their utility. One real world example to relate is: you cannot buy a place ticket and divide it between two people because there is only one seat allocated for one of that ticket, hence is indivisible.
            • Authenticity – this is another very important trait of non-fungible tokens and has gained a lot of attention in recent times. Non-fungible tokens today provide representation for real-world objects, and thus is important to have authentic NFTs.

            Read more: How to Assess the Value & Worth of NFTs 

            Why are NFTs so POPULAR?

            WHY DO NFTs HAVE VALUE?

            Non-fungible tokens have inherent value thanks to the characteristics it possesses. As mentioned earlier, NFTs have characteristics and traits like uniqueness, rarity, indivisibility and authenticity. These primary traits of a non-fungible token contribute to the value it has. Anything that is unique, rare and authentic while at the same time is indivisible.

            Thanks to all of these utilities provided by non-fungible tokens, they tend to possess some inherent value that people are willing to pay for. At the end of the day, however useful something is, if nobody is willing to pay some about of money to buy it, then it has no value.

            WHY DO PEOPLE BUY NFTs?

            The reason behind people wanting to buy NFTs can be various. Some of the most common ones are as follows:

            • Flipping – some people buy NFTs which they think are available at an attractive value and think they will be able to flip it for a higher price later on.
            • Community – buying an NFT can make you a part of an online community who own NFTs from that particular collection and hence be a part of that.
            • Gaming – buying gaming based NFTs can provide certain kinds of exclusive access and benefits to gamers and hence becomes a very attractive for the person to own that

            There can be various other reasons behind buying NFT as more and more use cases for them emerge in the coming future.

            HOW DOES AN NFT WORK?

            Thanks to Ethereum being the most common blockchain to build a smart contract on – naturally it has become a home to some of the largest collections of these NFTs. Of course other blockchain networks like Solana, Terra and others have had collections completely unique to their ecosystems – Ethereum takes the top spot.

            Just like ETH is a crypto, and transactions done in ETH are tracked over the blockchain, transfers of these NFTs are also tracked over the same blockchain and thus a decentralised form of ownership of that asset is maintained and publicly viewable to all.

            WHY ARE NFTs IMPORTANT?

            NFTs are important basically due to the various use cases they provide. Anything that has any value in this world tends to have a use or solves some kind of problem. NFTs’ purpose is to play a part in increasing market efficiencies, including when dealing with cryptos. They enable you to turn physical assets into digital ones and thus ideally eradicate the need for all intermediaries and streamline supply chains.

            NFT & CRYPTO

            NFT CRYPTO
            These kinds of tokens are non-fungible, hence there only one unique copy of an NFT on the blockchain network These tokens are completely fungible, meaning each token can be exchanged for the other without any loss of value
            NFTs are indivisible, thus ownership of one NFT can be with in holder only Crypto tokens are divisible, for example, Bitcoins can be broken down into fractions of BTC known as satoshis, which is the smallest unit of a BTC
            NFT serve functions like proofs of ownership and the likes Cryptos are essentially a form of currency on the blockchain
            NFTs can have both economic and non-economic values Cryptos have a purely economic value and no non-economic value whatsoever

            WHAT ARE NFTs USED FOR?

            There are various use cases that NFTs cater to and here we’ll elaborate upon some of the most prominent ones that are being executed through blockchains in the world today.

            1. Ownership of digital assets –

            NFTs can represent the ownership of assets in the digital world, for example – Other deed is an NFT certifying the ownership of land in the Otherside metaverse built by the creators of the Bored Ape Yacht Club – Yuga Labs. The basic idea is that the NFTs can be used to certify that the virtual digital asset is original and certified by the creator. this helps to weed out piracy and creators are compenasated for their work

            2. Digital collectibles

            Much like in the real world, rare objects hold certain value for some people, maybe a Picasso painting or a bust by Michelangelo – similarly NFTs could be an art piece or a series of art pieces created by an artist who wants to sell to the highest bidder.

            3. Ownership of real-world assets

            NFTs can represent digital certificates for real-world objects too, for example a sale deed for a piece of land or a new home can be in the form of an NFT on the blockchain and thus removes the need for any paperwork in the middle.

            4. Utility tokens

            NFTs can also serve as exclusive passes or tickets doled out to a select few people to provide them with some kind of access or something of that kind. For example, BAYC NFT owners were exclusively airdropped ApeCoin crypto for free which they could instantly sell in the open market – thus providing a unique and exclusive money making access.

            5. Gaming applications

            An NFT can represent, for example a character in a game. The NFT would be stored on the blockchain and can be transferred to another player if the owner decides to sell it.

            HOW TO BUY NFTs?

            • Step 1: Create a wallet and fund it
              For the first step, you will need to create a crypto wallet, like Metamask and fund it with coins, most likely ETH since some of the biggest and most popular NFT collections are built on Ethereum.
            • Step 2: Visit a NFT marketplace and find an NFT you want to buy
              In this step, you will need to visit any of the top NFT marketplaces, like OpenSea, Rarible, Magic Eden, SuperRare and the likes. Find a collection and then a particular one from that collection that you like and feel will increase in value in the future.
            • Step 3: Make an offer, or buy!
              When you have finally found the thing you want or like, you can directly make an offer or buy NFT . While few have the option to place bids, few are direct buys. The ones with the place bid option, need the user to make an offer to the actual owner of the NFT to purchase them.

            SOME POPULAR NFT MARKETPLACES

            1. OPENSEA

            OpenSea is by far one of the top NFT marketplaces in the world, mainly due to its immense trading volumes that surpass its closest competitors by a large margin. The platform enables the users to mint, purchase, and sell an expansive range of NFTs. These digital tokens include digital collectibles, digital art, trading cards, virtual worlds, and much more. OpenSea was initially built on the Ethereum blockchain network but is now collaborating with Polygon to reduce gas fees on their platform.

            2. SUPERRARE

            SuperRare is an ‘exclusive’ NFT marketplace also based on the Ethereum blockchain. This marketplace deals only with a few select number of NFT artists and pioneers exclusive NFT artwork sales to preserve them and keep the culture of art collection alive in the digital world.

            3. RARIBLE

            Rarible is a unique NFT marketplace that is community-based and enables users to access a wide range of NFTs to buy and sell. The platform has an optimised user interface to enable easy minting of NFTs. And this is also one of the rare marketplaces that supports three different blockchain networks, namely, Ethereum Flow and Tezos.

            There are the top most popular marketplaces out there but not necessarily the only ones. There are many many more like Axie Infinity (which is actually a blockchain game but also serves as an NFT marketplace), Nifty Gateway, Binance, Magic Eden and many more.

            FREQUENTY ASKED QUESTIONS

            What are NFTs used for?

            There are various uses of NFTs that include ownership of digital assets, digital collectibles, ownership of real-world assets, utility tokens, and gaming applications. All of these different categories serve different needs of different people in different industries and thus solves a lot of problems with one simple solution. NFTs' purpose is to play a part in increasing market efficiencies, including when dealing with cryptos. They enable you to turn physical assets into digital ones and thus ideally eradicate the need for all intermediaries and streamline supply chains.

            Are NFTs Safe?

            An NFT is an encrypted token which is stored on a digital blockchain, just like crypto transactions. And since blockchains are, by nature, secure, as they use distributed ledger technology that anyone within the network can view. Thus, on the blockchain, cryptos are safe. However, that being said, there are various kinds of scams out there that investors need to be wary of. The NFT collection you might be looking at might not be authentic and could just be a means of stealing your money. Hence, thorough research needs to be done while buying NFTs.

            How Can I Buy NFTs?

            Buying an NFT is relatively simple these days. In the first step, you will need to create a crypto wallet if you don't already have one and fund it. Then you will need to head over to an NFT marketplace and choose a particular NFT out of a collection that you really like and think may appreciate in value in the future. You can then either buy the NFT on the platform or place a bid for the NFT on the platform and if the creator likes your bid, will process the transaction in exchange for the amount you bid.

            Additional Read: How to Create NFTs for Free
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            The information and material contained herein are subject to change without prior notice including prices which may fluctuate based on market demand and supply. The material available on the site is proprietary to CoinDCX, its parent, Licensor and/or its affiliates and is for informational purposes and informed investors only. This material is not: (i) an offer, or solicitation of an offer, to invest in, or to buy or sell, any interests or shares, or to participate in any investment or trading strategy, or (ii) intended to provide accounting, legal, or tax advice, or investment recommendations. Note Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.

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