What Is An NFT? Non-Fungible Tokens
The complexity of the NFT situation has only been on the rise since the year when NFTs’ popularity increased exponentially. Tens of millions of dollars have been spent on buying pictures of apes. Firms’ cash grabs move up and there is an endless supply of headlines on million-dollar hacks concerning NFT projects.
Due to huge sales to a new crypto-audience, digital artists envision positive changes in their lives. The popularity of NFTs was seen by celebrities as an opportunity to strengthen their connection with fans. Digital art is just one of the numerous ways in which NFTs can be put to use. NFTs can be used as a representation of any asset, such as a deed for any item in the physical or virtual domain.
So, you just may be thinking or asking yourself this question, what is an NFT?
What is an NFT?
An NFT which is an acronym for Non-fungible token, is simply a virtual asset that comes in various forms, such as art, in-game items, videos, gifs, music, and lots more. Assets are bought and sold online with cryptocurrency that is encoded with the same principal software as many tokens.
NFTs are used to tokenize unique items such as collectibles, art, and even real estate. It serves as a medium through which our ownership of those items is represented. The record of ownership of an NFT cannot be modified, nor can a new NFT be duplicated into existence. This is because the ownership of an item is secured using the Ethereum blockchain.
The defining factor of fungible items is their value and not their unique property, thereby making them exchangeable with one another. For instance, BTC or USD are fungible because 1BTC/$1 can be exchanged for another 1BTC/$1.
What Is the Difference Between an NFT and Cryptocurrency?
The similarity between NFTs and cryptocurrency lies in the fact that the same type of programming was used for their development.
Physical currencies and cryptocurrencies can be exchanged for one another, thereby making them fungible. They usually exhibit equality in value, meaning that one currency is always worth another. For example, 1 Canadian dollar has the same value as another Canadian dollar, and 1 Ethereum has equal value to another Ethereum. Cryptocurrencies have become a trusted means of making transactions on the blockchain.
Each NFT, on the other hand, bears a unique digital signature that makes it different from another NFT, thereby making it impossible for one NFT to be exchanged for another. For example, the fact that one NBA Top Shot clip and EVERYDAYS are both NFTs doesn’t make them equal (as a fact, there is no necessary equality between one NBA Top Shot clip and another NBA Top Shot clip).
How do NFTs work?
Each individual NFT is completely unique and indivisible, thereby making NFTs different from other ERC-20 tokens like LINK or DAI. NFT use the Ethereum blockchain as a public ledger in a manner that can be tracked to give the ability to claim or assign ownership of a unique piece of digital asset to a user.
- The Ethereum blockchain, which is a distributed public ledger that records transactions, serves as a residence for most NFTs.
- NFTs are simply individual, unique tokens that valuable information is stored in.
- NFTs can be bought and sold like other physical types of art because their value is usually set by the market and demand.
- Verification and validation of the ownership of NFTs and their transfer between owners is made easy due to the uniqueness of their data.
Examples of NFTs
The world of NFTs is still very new to most people. Some examples of NFTs that are in existence today include:
- Digital Collectibles
- Games and in-game items
- Domain Names
- Sneakers in fashion line
- Real Estate
What are NFTs Used For?
NFTs are often used by art collectors and people who are interested in crypto-trading. NFTs can also be used for other activities, such as:
- Digital Content: This is the most significant use of NFTs in recent times. Content creators profits seen to be enhanced by NFTs because the creators possess ownership of their content other than the platforms used in publicizing it.
- Gaming Items: Game developers have acquired a significant amount of interest in NFTs. Gamers get a lot of benefits from NFTs. Formerly, transactions in an online game were limited to buying items for your character’s use. In recent times, you can sell an item when you’re done making use of it with the aid of NFTs, thereby getting back the money spent on its purchase.
- Investments and Collaterals: Decentralized Finance (DeFi) and NFTs both share the same infrastructure. DeFi application allows you to borrow money with the use of collateral. In recent times, NFT and Defi have been exploring the use of NFTs as collateral instead.
- Domain Names – A name which would be easier to remember is provided for your domain with the use of NFTs. The name provided by NFTs based on length and relevance, works like a website domain name, adding more value to its IP address while making it more remarkable.
NBA Top Shot is a Hot NFT Use Case
The NBA Top Shot, which is a partnership between Dapper Labs (who are the developers of the CryptoKitties game) and the National Basketball Association (NBA) has recently become one of the most popular NFTs. Individual highlight video reels and other content are licensed by the NBA to Dapper Labs, who then makes the footage available for sale after digitizing it. Famous players’ basketball dunks are one of the many types of video clips shown in the reels licensed to Dapper Labs.
Digital artwork and different angles are sometimes featured in these reels to make each of them unique, thereby making a perfect copy of the video an easily recognizable counterfeit. A total of $230 million has already been generated in sales from this venture. And a group that Michael Jordan and Kevin Durant are members of has given the company funding of $305 million.
Should You Buy NFTs?
Having an investment in NFTs is primarily an individual decision. You can consider making an investment if you have the purchasing power and especially if you find a piece that holds a unique meaning for you.
It is always worthwhile to remember that the amount someone else is willing to purchase an NFT for is the sole determinant of its value. This means that, instead of technical, economical, or fundamental indicators, which usually act as determinants for stock prices and generally act as the foundation for investors’ demand, the price of an NFT is driven solely by its demand rate.
This simply means that an NFT may not be resellable after purchase or it may sell for an amount less than its purchase price.
Capital gain taxes are collected from NFTs-just as they happen when you make a profitable sale on stocks. They may not receive preferential long-term capital gain rates just as stocks do since they are considered collectibles.
Instead, a higher collectible tax rate may be imposed on them, though what they are considered for tax purposes is yet to be ruled on by the IRS. You should also check with a tax professional if you want to add NFTs to your portfolio because taxes may also be imposed on the cryptocurrencies used as a medium of exchange for an NFT if their value has experienced an increase since purchase.
You should approach adding NFTs to your portfolio like you would with any other investment: Research thoroughly, try to understand the risks associated with it – which includes the fact that you are may lose all your investment capital – and proceed with caution if you decide to continue with your decision of adding NFTs to your portfolio.