In this post, we offer a beginner’s guide to NFTs. We explain the meaning of an NFT and how NFTs are be traded in marketplaces. We also discuss various types of NFT scams.
What does NFT mean?
NFT is an acronym for the term non-fungible token, a form of digital token. Most of us are familiar with cryptocurrencies such as Bitcoin and Ether. Cryptocurrencies are fungible tokens. That is, each Bitcoin is identical to one another and, thus, are valued exactly the same (you can read our post on tokenomics for further details). In stark contrast, non-fungible tokens are used to represent unique assets. For example, NFTs can certify ownership of things such as digital art, in-game assets, and event tickets. While there is more focus on digital assets at the moment, it wouldn’t be surprising for NFTs to become more relevant for physical assets in the future as well.
An important consideration when minting an NFT is its scarcity. One extreme is a 1/1 NFT (or 1×1 NFT) where there is a single token issued for a unique asset. Then, the owner of that single token is the owner of the asset. There can be multiple tokens issued for the same asset as well. For example in the case of a 1/100 NFT (or 1X100 NFT), a hundred editions of the same asset is issued. The number of tokens can’t be altered once the issue is complete, securing the scarcity.
For digital artists, the NFTs have the added benefit that they facilitate royalties by allowing a percentage of funds from all future sales to be transferred to them automatically. Clearly, this creates a passive income for artists beyond the original sale of NFTs, and help them earn a living from their work.
NFTs started attracting a lot of media attraction in the past couple of years. This culminated when the famous digital artist Beeple’s digital art piece titled “Everydays – The First 5000 Days” was auctioned for $69.3 million in March 2021. That is right, nearly $70 million! This was the first-ever NFT auctioned by the Christie’s.
Jack Dorsey, a co-founder and CEO of Twitter, sold the very first tweet on Twitter as an NFT for nearly $3 million around the same time. Here is a link to the bidding history of Jack Dorsey’s first tweet, which took place on a platform called Valuables.
In another widely-reported case by the media, Grimes, the famous Canadian singer and partner of Elon Musk, sold digital art worth around $6 million. The sale included two short videos: Earth and Mars. There were hundreds of editions sold with each edition priced at $7,500. Grimes pledged part of the proceeds to a charity dealing with reducing carbon emissions.
The growing interest in non-fungible tokens led to a proliferation of NFT marketplaces. A noncomprehensive list of popular NFT marketplaces includes (in alphabetical order):
- Async facilitates tokenization of layers (components) of a digital art piece as well as the master (the sum of components) piece.
- Myth.Market deals with digital trading cards.
- NBA Top Shot offers officially licensed NBA and WNBA digital collectibles
- Nifty Gateway is where Grimes sold her digital artwork as “nifties” (a play on the word NFT).
- OpenSea proclaims itself as the the “world’s first & largest NFT marketplace.”
- Rarible is another large player in the market, focusing on RARI tokens.
- SuperRare primarily focuses on single-edition NFTs
- Valuables is for trading tweets that are autographed by their authors.
Apart from the NFT scams, which we discuss below, NFT marketplaces have been subject to various controversies as well. For example, OpenSea destroyed NFTs worth $100,000 by error due to a bug in their system. And, Nifty Gateway was hacked with some users losing NFTs worth thousands of dollars.
In order to trade on an NFT marketplace, you would need a crypto wallet. Moreover, as NFTs can be built on different blockchains, your wallet needs to be compatible with the particular blockchain employed by the NFT you are interested in.
As NFT markets are still in their infancy, investors should be wary of various types of NFT scams. These scams range from artist impersonation to replica stores as we explain below.
For example, there have been various cases where artists’ works were minted and sold as NFTs without their knowledge. It is particularly worrisome that scammers have been able to generate verified profiles of those artists on NFT marketplaces. There have even been instances where fraudsters have sold digital art that belong to deceased artists.
Another type of scam is to create and sell fake artwork attributed to popular artists. One of these scams involved the sale of fake NFTs attributed to the famous street artist Banksy on OpenSea.
Investors should also be wary of fake platforms created solely to steal their cryptocurrencies or credit card information. In fact, some of these fake platforms are “replica stores”, which look the same as genuine marketplaces.
Overall, investors should conduct thorough research before buying digital art (or any other asset) through NFTs. Does the artwork really belong to the artist? Has the artist given consent for the sale? It would be wise to transact through more established and larger marketplaces and ensure that the site is not a replica store before getting involved.
Final word on NFTs
NFTs were born as a result of advances in blockchain technology and smart contracts. They facilitate ownership and transfer of unique assets. While they can be used for physical assets as well as digital ones, they have gained particular popularity in the domain of digital arts. Clearly, this is a very positive development for digital artists as NFTs open new avenues for such artists to monetize their artwork and earn a living.
Non-fungible tokens share pretty much the same pros and cons as cryptocurrencies. Like cryptocurrencies, they offer transparency and accuracy about ownership without involving intermediaries in the process. However, investors in NFTs and cryptocurrencies do not have the same level of protection offered by securities law to stock or bond investors. Moreover, given that digital token markets are still in their infancy, there is ample room for speculation, fraud, and theft. So, it is crucial for potential investors to bear these risks in mind before making an investment in NFTs.
What is next?
We hope you enjoyed reading this post on NFTs. If you are interested in how digital tokens (cryptocurrencies, NFTs) are priced in markets, we recommend you to read our beginner’s guide on tokenomics. If you are generally interested in investments, have a look at our free courses on investments and trading basics. If you have any feedback for us, you can leave a comment below or contact us.