What is an NFT? How do NFTs work? – Adviser Forbes UK

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The viral internet clip known as ‘Charlie Bit My Finger’ will be removed from YouTube after being sold as a non-fungible token (NFT) for more than £ 500,000 this week – which will lead many to wonder what what NFTs really are. Here’s everything you need to know about the new phenomenon.

What is an NFT?

An NFT is a digital asset that represents a real world object like, for example, the Charlie Bit My Finger video. NFTs are bought and sold online, often with cryptocurrencies, and are typically encoded with the same underlying software as many cryptocurrencies.

Although they’ve been around since 2014, NFTs are gaining notoriety as they become an increasingly popular way to buy and sell digital artwork. A narcotic £ 123 million has been dedicated to NFTs since November 2017.

NFTs are also generally one of a kind, or at least one of a very limited series, and have unique identification codes. “Essentially, NFTs are creating a digital scarcity,” says Arry Yu, chairman of the Cascadia Blockchain Board of the Washington Technology Industry Association and CEO of Yellow Umbrella Ventures.

This is in stark contrast to most digital creations, the offer of which is almost always endless. In theory, cutting supply should increase the value of a given asset, assuming it is in demand.

But many NFTs, at least in those early days, were digital creations that already exist in one form or another elsewhere – like the viral Charlie Bit My Finger music video, or secure versions of digital art that are already floating around Instagram.

For example, famous digital artist Mike Winklemann, better known as “Beeple”, created a composite of 5,000 daily drawings to create perhaps the most famous NFT of the moment, “EVERYDAYS: The First 5000 Days”, which sold at Christie’s for almost £ 50 million.

Anyone can view the individual images – or even the entire image collage online for free. So why are people willing to spend millions on something they could easily capture or download?

Because an NFT allows the buyer to own the original item. Not only that, it contains built-in authentication, which serves as proof of ownership. Collectors value these “digital bragging rights” almost more than the object itself.

How is an NFT different from cryptocurrency?

NFT stands for non-fungible token. It’s usually built using the same type of programming as cryptocurrency, like Bitcoin or Ethereum, but that’s where the similarity ends.

Physical money and cryptocurrencies are ‘fungible’, which means they can be traded or traded against each other. They also have the same value – a pound is always worth another pound; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a reliable way to transact on the blockchain.

NFTs are different. Each has a digital signature which makes it impossible to exchange or equal NFTs (therefore not fungible). Charlie Bit My Finger, for example, is not equal to EVERYDAYS simply because they are both NFTs.

How does an NFT work?

NFTs exist on a blockchain, which is a distributed public ledger that records transactions. You are probably most familiar with blockchain as the underlying process that makes cryptocurrencies possible.

Specifically, NFTs are typically held on the Ethereum blockchain, although other blockchains support them as well.

An NFT is created or ‘knocked out’ from digital objects that represent both tangible and intangible elements, including:

Art

GIF

Sports videos and highlights

Collectibles

Virtual avatars and video game skins

Designer sneakers

Music

Even tweets matter. Twitter co-founder Jack Dorsey sold his very first tweet as NFT for over £ 2million.

In essence, NFTs are like physical collectibles, only digital. So instead of getting a real oil painting to hang on the wall, the buyer gets a digital file instead.

They also get exclusive property rights. NFTs can only have one owner at a time. The unique data of NFTs makes it easy to verify their ownership and transfer tokens between owners. The owner or creator can also store specific information inside. For example, artists can sign their works by including their signature in the metadata of an NFT.

What are NFTs used for?

Blockchain technology and NFTs offer artists and content creators a unique opportunity to monetize their work.

For example, artists no longer need to rely on galleries or auction houses to sell their art. Instead, the artist can sell it directly to the consumer as an NFT, which also allows them to keep a larger portion of the profits.

Additionally, artists can schedule royalties to receive a percentage of sales each time their art is sold to a new owner. This is an interesting feature because artists generally do not receive any future income after the first sale of their art.

Art is not the only way to make money with NFTs. Toilet paper maker Charmin has auctioned off themed NFT artwork to raise money for charity. Charmin has named its offer “NFTP” (non-fungible toilet paper).

Nyan Cat, a 2011 GIF of a cat with a pop-pie body, sold for nearly £ 424,000 in February.

Even celebrities like Snoop Dogg and Lindsay Lohan are getting on the NFT bandwagon, releasing unique memories, artwork and moments in the form of secure NFTs.

How to buy NFTs

If you want to create your own NFT collection, you will need to acquire some key things:

First of all, you will need a digital wallet that allows you to store NFTs and cryptocurrencies. You will likely need to purchase a cryptocurrency, such as Ether, depending on the currencies your NFT provider accepts. You can buy cryptocurrencies using a credit card on platforms such as Coinbase. You can then move it from the exchange to your wallet of choice.

You’ll want to keep the fees in mind when looking for options. Most exchanges charge at least a percentage of your transaction when you buy cryptocurrency.

Popular NFT Markets

Once you’ve set up and funded your wallet, there is no shortage of NFT sites. Currently, the largest NFT markets are:

OpenSea.io: This peer-to-peer platform presents itself as a supplier of “rare digital objects and collectibles”. To get started, all you need to do is create an account to browse NFT collections. You can also sort the pieces by sales volume to find new artists.

Rare: Similar to OpenSea, Rarible is a democratic and open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform allow holders to influence features like fees and community rules.

Foundation: Here, artists must receive “upvotes” or an invitation from fellow creators to publish their art. The exclusivity and cost of entry to the community – artists also have to buy “gas” to make NFTs – means they can boast of higher caliber artwork. For example, Nyan Cat creator Chris Torres sold the NFT on the Foundation platform.

It can also mean higher prices – not necessarily a bad thing for artists and collectors looking to capitalize, assuming demand for NFT stays at current levels, or even increases over time.

While these and other platforms are home to thousands of NFT creators and collectors, be sure to do your research carefully before you buy. Some artists have fallen victim to identity thieves who have listed and sold their work without their permission.

Additionally, the review processes for creators and NFT listings are inconsistent across platforms – some are more stringent than others. OpenSea and Rarible, for example, do not require owner verification for NFT ads. Buyer protections seem limited at best, so when purchasing NFT, it may be best to keep in mind the old adage “caveat emptor” (which the buyer is wary of).

Should you buy NFTs?

Just because you can buy NFTs, does that mean you should? It depends, Yu said.

“NFTs are risky because their future is uncertain and we don’t yet have much history to judge their performance,” she notes. “Since NFTs are so new, it might be worth investing a small amount of money to try them out for now.”

In other words, investing in NFTs is largely a personal decision. If you have the cash to spend, it may be worth considering, especially if a room makes sense to you.

But keep in mind that the value of an NFT is based entirely on what someone else is willing to pay for it. Therefore, demand will determine price rather than fundamental, technical or economic indicators, which typically influence stock prices and at least generally form the basis of investor demand.

All of this means that an NFT can be resold for a lower price than what you paid. Or you might not be able to resell it at all if no one wants to. Do your research, understand the risks – including that you could lose your entire investment – and if you decide to take the plunge, proceed with a fair amount of caution.

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