What is an NFT?

NFT stands for “non-fungible token.”

Each NFT is a unique piece of digital data stored on a blockchain. NFTs can come in a variety of formats, but most often are images, audio, or video files. What makes them different from any other digital file is that each NFT has specific code that verifies where exactly it is on a blockchain, or who has ownership.

You can think of an NFT as a one-of-a-kind trading card. If you create an NFT, you have ownership over it. People can make digital copies of it, just as prints are made of famous paintings. But only you will have the original, unless you decide to eventually sell it.

How does an NFT work?

Now that you have the groundwork of what an NFT is, you probably want to know how they work. As previously mentioned, you’ll need to have a digital wallet to store cryptocurrency. Ethereum (ETH) is the most common cryptocurrency used to buy, mint, and sell NFTs. There are various NFT marketplaces, which let people buy and sell them. Popular ones include OpenSea, Rarible, and Nifty Gateway. These marketplaces often have one-time initialization fees.

To make an NFT, you have to mint it. Minting an NFT essentially means turning a digital file into a token on the blockchain that makes it sellable or tradeable. These marketplaces allow you to upload the file. Then you’ll make decisions on what to name it, write the description, determine pricing, add it to a collection and more.

In order to properly mint your NFT, you’ll have to pay a gas fee which completes the authentication process. Gas fees can vary depending on the market. If you want to avoid paying the gas fee, you can “lazy mint,” where the purchaser of the NFT becomes responsible for the gas fee.

Once the NFT is minted, it’ll be recorded on the blockchain with a code. That code acts as authentication and determines ownership. The blockchain also records each subsequent transaction, so you can see who previously owned, sold or traded it.

You can also put a royalty fee on your NFT. In doing so, you’ll get a certain percentage each time it sells. So if your NFT is a hot commodity, you can continue to make money even after you sell it.

To share information about your NFTs beyond the marketplace, artists can also learn how to make a website or a digital art portfolio (then monetize said website) that showcases their NFT work. For example, the artist Beeple shows off his sold and available NFT on his website.

The pros and cons of NFTs

For some, it’s an exciting time. Others are a bit more wary of the NFT craze. So of course, there are a variety of pros and cons of NFTs.

The benefits

A new marketplace for artists. NFTs marketplaces have created a new market for digital art, cutting out the middleman and allowing artists to sell directly to collectors. Even traditional artists can learn how to make an NFT version of their paintings or sculptures and place them on the marketplace for purchase.

Possibly the future of art collecting. With any burgeoning technology, such as the metaverse and emerging definition of what is web3, it’s unclear how much of a shift it will cause in the larger world. Some collectors see NFTs as the future, treating them as assets, hoping they appreciate in value and can eventually be sold for a profit. And while creating an NFT is not a taxable event, it’s important to remember that NFT transactions can be taxed as income, short- or long-term capital gains, collectibles or as dividends, depending on the NFT and selling situation.

Anyone can make or invest in NFTs. Overall, NFTs have introduced many to blockchain technology and provided early investment opportunities. People beyond the typical artist can also create NFTs and can contribute to the marketplace, which brings in new collaborators to the art world.

The downsides

They can be a volatile investment. As with many new products, there is no historical data to inform where the NFT marketplace might go. 2022 saw a big drop in the average price of an NFT sales, so jury’s still out on how profitable the NFT world can be in the long run.

Negative environmental impact. The blockchain uses substantial energy and leaves a considerable carbon footprint on the environment. There’s been plenty of climate controversy concerning NFTs, but there are efforts in the web3 world to reduce energy consumption.

The blockchain isn’t foolproof. While the blockchain touts itself as extremely transparent and safe, hackers and phishing scams still pose a threat to NFTs.

NFT examples

“Quantum.” Kevin McCoy’s “Quantum” is an NFT that was minted in 2014, making it the first NFT that was ever created. Before the NFT craze calmed down, McCoy sold “Quantum” for $1.4 million at a Sotheby auction in 2021. The piece is a pixelated image of an octagon with circles flashing a variety of different colors.
The Bored Ape Yacht Club. The Bored Ape Yacht Club (BAYC) is a collection of 10,000 unique NFTs. These algorithm-generated animated apes have been bought by a flurry of celebrities, including Jimmy Fallon, Paris Hilton, Steve Aoki, Eminem, Snoop Dogg and more.
Marvel. In August 2021, Marvel launched an NFT collection featuring Spider-Man, selling more than 60,000 NFTs in less than 24 hours. The entertainment company soon followed up with an NFT collection of Captain America and one featuring a series of classic Marvel Comics.
Nike. The iconic shoe company released Cryptokicks, a collection of 20,000 NFTs, in April 2022. These NFT sneakers are customizable with “skin vials,” which add on different patterns and special effects. One NFT designed by artist Takashi Murakami sold for $134,000.