What You Need to Know About Non-Fungible Tokens (NFTs)

What You Need to Know About Non-Fungible Tokens (NFTs)
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2021.11.13

Lately, NFT has become the hottest topic in the crypto world. Three years ago, the NFT market was only worth $42 Million. By the end of 2020, the market value of NFT has soared by 705% to $338 Million, according to NonFungible, one of the bodies that monitor the NFT market.

NFT is becoming increasingly popular and gaining a lot of traction. Yet, there are still many people who don’t know how NFT works, and most NFT buyers are still confused about what they buy and what they get after buying NFT.


What exactly is NFT?

NFT or its long name ‘Non-fungible tokens’, is a digital token that allows you to sell and buy ownership of digital assets. Each NFT must be tied to any unique digital asset and the two cannot be separated if they are already recorded on the blockchain network. Examples of NFT include, but are not limited to drawings, music, animated GIFs, videos, cosmetics in video games, and concert tickets.

 

How does NFT work?

Imagine you create a painting that has its own uniqueness, and then you upload the painting on the internet. Everyone can capture, copy and use the drawing without giving you any credit or profit. However, with the NFT, you can link a digital token with your drawing, which explains that the original and genuine drawing came from you. NFT allows artist-designers to protect their artwork, as well as place a price or value on their assets.

 

What is the connection between NFT and blockchain?

In a nutshell, a blockchain is a technology that allows the use of cryptocurrencies in its network of technologies. Among the popular cryptocurrencies are Bitcoin, Ethereum, Dogecoin, and many more. To date, most NFT management will use blockchain technology in Ethereum currency for authentication and record-keeping purposes. However, other currencies such as Tron and Bitcoin have also started creating NFTs on their own blockchain networks.

These blockchains will verify the authenticity of each NFT transaction so that buyers and owners of digital assets can know the difference between genuine and fake NFTs. Once the owner of the digital asset enters your purchase details into blockchain technology, the ownership of the token will become yours and it can no longer be deleted, altered, or exchanged.

 

Who owns the NFT?

What you get after buying or selling NFT depends on the agreement of you and the owner of the digital asset. Typically, the owner of a digital asset will sell a digital token along with ownership of the digital asset. However, there are also digital asset owners who only sell digital tokens because they still want to own ownership of their own work. This means, you will have no ownership and will not be involved in the profit or loss of the digital asset. Unless you have an additional agreement with the owner of the digital asset.

 

How is NFT assessed?

Traditional art such as painting in a museum has a very high value because the painting is genuine and may have a history, sentimental value or a hidden story. The way NFT is evaluated is similar to a painting hanging in a gallery or physical museum. The internal value and uniqueness of NFT are subjective, depending on the respective perspectives. So, what is unique to you is not necessarily unique to others.

The NFT you buy will likely remain relevant in the next one to five years. If this scenario happens to you, you can continue to keep your NFT and wait for high bids then resell to make more profit.

 

What are the risks of investing with NFT?


1. How NFT is assessed

One of the risks that exist in the NFT market is the uncertainty in determining the price or value of NFT. So far, the price of an NFT seems uncertain as there are no official guidelines for any NFT category. However, NFT is typically evaluated according to the following characteristics:

  • The credibility of digital asset owners
  • The uniqueness of NFT
  • Digital artist creativity
  • Number of NFT copies
  • Historical or aesthetic value
     

2. Forgery of NFT sales

If you have a digital asset and want to create the NFT of the digital asset in the market, most likely there will be parties who want to falsify your NFT. This is intended to confuse the buyer. This downside risk was emphasized by Nadya Ivanova, Chief Operating Officer of L’Atelie BNB Paribas. According to Ivanova, "anyone with access to the internet can fake NFT". This is because there are many cases where NFT sellers masquerade as owners of digital assets and sell replica NFTs instead of genuine ones.

As a digital asset owner, perhaps you can protect your digital assets by placing a watermark, signature, or technological verification so that buyers can review and review the details of your digital assets and NFTs. As a buyer, however, you are encouraged to purchase NFT through the right channels and deal with the owner of the original digital asset.
 

3. High NFT gas fees

To process NFT on a blockchain network, users have to pay various types of transaction costs, including gas fees. Gas is a unit of measurement that counts the amount of computer power needed to complete an activity on a blockchain network, much like a car needs oil to function. One of the uses of gas fees is to prevent spammers from clogging blockchain networks. In summary, NFT buyers have to pay for gas when purchasing NFT and digital asset owners have to pay for gas when accepting a purchase offer.

The price of this fee depends on the following features:

  • Blockchain network congestion at the delivery time
  • The size of the NFT you want to implement
  • The speed of your NFT process

Due to the growing popularity of NFT and increasingly busy blockchain activity, gas fees will tend to go up. So, you will probably spend your money by paying gas fees, sale and purchase fees including also the cost of converting cryptocurrencies. However, if your digital assets have the potential and uniqueness that can cover those fees, you can try investing with NFT.

 

4. You can lose your NFT

Each NFT is not stored in the same way. While most NFTs operate using the Ethereum blockchain, this does not mean every NFT is stored there. In contrast, most NFTs only have links to digital assets stored elsewhere in the internet space. This could be due to a number of things, perhaps a high resolution image, or the file is too large to be stored on the blockchain.

You run the risk of losing NFT if the application or platform that stores your digital assets fails to function or its use is banned. So far, the NFT industry is still looking for a solution and this method is still used for now. What you can do from losing your NFT is to find a stable and authentic application or platform so that your NFT is stored safely.

 

Should you use NFT?

While NFT has many risks, it still provides a bright opportunity for digital artist-designers to showcase their talents. Whether you should buy NFT or not, depends on the purpose of each individual.

 

1. Buyer or collector

If your favorite artists issue their digital assets in the form of NFTs, you as a fan can purchase the digital assets and then have proof of ownership of those NFTs. Not only that, if the NFT is sold together with the ownership of the original digital asset, you can use the digital asset exclusively for yourself.
 

2. Owner/designer of digital assets

If you are an owner or designer of digital assets, NFT is one way for you to sell or showcase your artwork.

After you create an NFT, you have the option to set the percentage of royalties that will be linked to the digital asset and the NFT. This means, if the NFT is sold, you will receive a percentage of the proceeds of the sale. If the person buys your NFT, then resells the NFT to someone else, you will still get a royalty percentage. Make sure you understand transparently about your NFT royalty percentage and ownership rights.

The current state of NFT can be likened to the internet phenomenon of the early 2000s. The majority thinks that the internet is only a temporary thing, but who would have thought that the internet is one of the greatest developments of globalization in the field of technology.
 

Conclusion

In any case, you should be careful and always do your own research on the crypto world. Consolidate your knowledge before investing, buying, or selling in the NFT market.