When it comes to digital assets, NFTs are among the biggest trends on the cryptocurrency market. Skyrocketing from an overall value of $250 million in 2020, they’re expected to hit $1.3 billion by the end of this year.
At their core, NFTs have a double purpose: giving digital artists a way to put a value on their original work, and bringing the value speculations of the physical art market to the crypto world.
This spring, NFTs have figured prominently in headlines.
Paving the way, the Nyan Cat GIF – popular in the early 2010s as a combination of cat and poptart, trailed by a rainbow – sold for almost $600,000.
Grimes, Elon Musk’s girlfriend, sold over $6 million in digital artwork in a matter of minutes.
And most recently, the auction house Christie’s jumped on the bandwagon and sold a JPG file of a collage by digital artist Beepl for over $69 million.
But what exactly are NFTs? How do they work? And – if you’re an artist – how can you create and sell one? Here’s the run-down.
What are NFTs?
NFT is an acronym for Non-Fungible Token.
By definition, “fungible” means that quantities of a certain commodity can, by their nature, be exchanged with another equal part or quantity.
This may sound abstract, but currencies provide an excellent concrete example: No matter whether you have five twenty-dollar bills or one hundred-dollar bill in your wallet, the overall value will tally in at $100.
The same principle applies to crypto currencies such as Bitcoin.
However, NFTs are unique. You can’t exchange them for each other, because each one has a unique, individual value. This means that, even though they use the same mechanisms as cryptocurrency tokens, they are not currencies.
Both in theory and in practice, the closest analog can be found in the art market.
As the Wall Street Journal puts it: It’s like the difference between owning the Mona Lisa and buying a poster of the painting in the Louvre gift shop. The two images may contain the same information – the image of a woman smiling mysteriously – but they are certainly not interchangeable.
So what makes an NFT? What forms can they take?
Currently, NFTs are mostly used in the context of digital artwork – GIFs, image files, video clips, or music. In 2017, when NFTs started to take off, they did so in relation to items and avatars in the game CryptoKitties, which let you collect and breed the eponymous kitties, and, importantly, buy and sell them.
However, NFTs can also be used to sell ownership stakes in real estate and private companies, as well as partnership shares.
How to Create and Sell NFTs
NFTs are created the same way as cryptocurrencies – by adding them to a blockchain ledger.
When it comes to digital artwork, you can think of it like adding an artist’s signature. The ledger will contain metadata – such as the original creator – and the transaction history of the piece.
To create an NFT, you first need an item you want to sell – be it a single digital painting, or 3D model, or a collection of digital trading cards.
Then, you can sign up with a marketplace that provides the blockchain infrastructure to mint NFTs. At the moment, OpenSea, Rarible, Nifty Gateway, and Makersplace are among the most popular marketplaces.
The blockchain marketplaces use varies: Ethereum is currently the most commonly used for NFTs, but others like Binance Smart Chain, EOS, Polkadot, and Tron are gaining in popularity.
Next, you upload your digital items – and hit “create”. This also allows you to set the conditions of your NFT, such as royalties to be paid every time the asset is sold to a new owner.
Finally, you can place the finished NFT (or a “pack” of them) in your account and hit “sell”. This is called “dropping” your NFT. You usually have options to set a fixed price or hold an auction, optionally with a minimum bid. Plus, you can schedule your drop for a certain time.
Depending on the marketplace, you may have to pay at several points in the process before you can cash in on NFTs. On Ethereum, you’ll pay “gas” for transactions. Marketplaces themselves may charge for listing your items. And most of them also take a few percent sales commissions.
How to Buy NFTs?
If you’re in the market for NFTs, the process is a little more straightforward.
Scour the marketplaces that appeal to you, or investigate which artists sell where.
There are two different markets, depending on the seller: Primary markets, on which NFT creators sell directly, and secondary markets, where NFTs are resold.
When something piques your interest, sign up for the marketplace in question. Then, find out which conditions you need to meet. Some marketplaces let you bid and pay with credit cards. All of them, however, accept cryptocurrencies.
If you’re opting for crypto, make sure that you use a NFT-compatible wallet. You will also need to fill that wallet before a “drop” – usually, you can’t buy NFTs on crypto credit.
Finally, if this is a scheduled “drop”, you’ll need to be ready on time. Popular auctions can be over within seconds.
Once you’ve successfully bought an NFT, it will appear in your collection at the marketplace – and the ownership transfer is automatically written to the blockchain.
How to Re-Sell Them?
Reselling NFTs you bought isn’t much different from selling one you minted. You choose a marketplace, and list it for sale with the same auction mechanisms.
However, NFTs have become so popular that even traditional auction houses are now offering opportunities to buy and sell. Christie’s and Sotheby’s have both organized NFT auctions already, with spectacular results.
Another option beside outright selling your NFT is to tokenize it again. This means you create a new token that represents fractional ownership of the NFT.
The Bottom Line
NFTs represent a new booming application on the crypto market – one that is set to expand over the coming months. With artists and brands both flocking to create tokens, and competition to create NFT services between blockchains heating up, a wealth of opportunities lies ahead for collectors and investors.