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NFTExp is dedicated to helping you navigate the rapidly evolving NFT space, so we put together this monster guide with everything you need to know about non fungible tokens. Below we break down exactly what NFTs are before exploring all the inner workings of blockchain and other infrastructures that provide the foundation of the market.
NFT stands for Non-Fungible Token—a unique token representing a one-of-a-kind digital asset. Commonly traded assets like the dollar and even most cryptocurrencies are fungible, meaning people can equally trade one unit. One Bitcoin will always be equal in value to another Bitcoin, and one US dollar will always be equivalent to any other US dollar. NFTs, on the other hand, are more like works of art or human beings - even though they might share some characteristics or traits, each one is distinctive and singular.
From a technical standpoint, NFTs are data units stored on a digital ledger called a blockchain. They are usually bought and sold online with cryptocurrency. Blockchains store the token ID and related metadata for NFTs in addition to all transactions and transfer information. More importantly, the blockchain network permanently stores this data as a censorship-resistant and completely transparent public record of authentication and certification.
Most NFTs exist on the Ethereum blockchain. Until very recently, Ethereum has been the only blockchain provider powerful enough and fast enough to store all the data needed to support a rapidly surging NFT market. As a result, most NFT purchases require Ether (ETH), the cryptocurrency for the Ethereum network, although other blockchains are emerging to provide viable alternatives.
As mentioned, blockchain technology creates an immutable digital ledger shared publicly with a decentralized network of computers around the globe. For users on this network to communicate and trade effectively, standard protocols are implemented to create, buy, and sell NFTs representing everything from limited-edition digital art to gaming assets and collectibles.
ERC-721: The Ethereum community developed the ERC-721 token as a free, open standard to build non fungible tokens on the Ethereum blockchain. Essentially, it’s a format or template developers have unanimously agreed to follow for creating digital assets of this kind. If a project implements this standard, it uses an ERC-721 Non-Fungible Token Contract.
ERC-1155: This category refers to the revamped version of Ethereum’s ERC-721 standard, enabling smart contracts to facilitate fungible and non fungible tokens. These smart contracts allow developers to make gigantic token transfers which help to save on costly transaction fees. With this token standard, identifiers represent multiple classes of assets, not just NFTs.
Although most NFTs are ERC-721 and ERC-155 tokens, more and more non fungible tokens are being built on alternative blockchains. Non-Ethereum standards came into existence to maneuver around Ethereum’s issues with scalability and costly transaction fees. Examples of non-Ethereum blockchain protocols include Polygon (formerly known as MATIC), Tezos, JumpNet, etc.
Polygon is a blockchain scalability platform that provides a multi-chain ecosystem for Ethereum blockchains. The protocol aims “to create, issue, and manage digital securities on the blockchain” while offering secure, scalable, and instant transactions.
Tezos is a decentralized, open-source blockchain network that deploys smart contracts and executes peer-to-peer transactions. Tezos provides strategies for widespread blockchain adoption through smart contract safety, long-term upgradability, and open participation.
JumpNet is a private Proof of Authority blockchain that allows users to easily mint and port tokens onto multiple chains without worrying about gas fees.
FLOW is the enterprise blockchain created by Dapper Labs, which delivers blockchain-based experiences and digital collectibles like Cryptokitties and NBA Top Shot.
WAX stands for the World Asset eXchange and prides itself on being the “green NFT blockchain,” most notably known for decentralized video gaming and its entertainment network.
NFT metadata refers to information about a digital asset’s supply, origin, and authenticity. Therefore, NFT metadata must be represented either on a blockchain (on-chain) or references its whereabouts in a more conventional location like a database on a server (off-chain). Metadata provides a way for assets to be correctly identified and valued.
On-chain: This refers to metadata located in the NFTs smart contract. This is widely considered advantageous because the metadata permanently exists on a blockchain even if the platforms it was made or sold on cease to function. This means an asset is more likely to have a longer lifespan and hold its value if its metadata is stored on-chain in the smart contract, as long as the underlying blockchain continues to endure. It also makes it easier for the developer to retrieve and alter the internal state of the non fungible token.
Off-chain: This refers to metadata stored in a separate location instead of within the smart contract. Two examples of off-chain storage include centralized servers and the InterPlanetary File System (IPFS). Centralized servers and cloud facilities like Amazon Web Services offer the simplest way for developers to store metadata. An off-chain centralized server is usually employed if the original project is offline or the metadata is liable to change. IPFS is a peer-to-peer file storage system that allows replication of a file in numerous different locations, which guarantees the immutability of the metadata.
Although the value of any physical or digital collector’s item can be subjective, an NFT is largely determined by three characteristics; rarity, uniqueness, and indivisibility.
Uniqueness: It can be argued that uniqueness is the most valuable characteristic of non fungible tokens. This can likely be traced back to the fact that NFTs have a permanent information tab that certifies their uniqueness. The information is fully secured and genuine—many consider it the certificate of authenticity.
Rarity: The value of non fungible tokens are always a reflection of their scarcity or rarity. This is because developers in the NFT space prefer to increase interest by making modifications rather than duplications. Therefore, the rarer an item is, the higher the value is likely to be.
Indivisibility: Most non fungible tokens are indivisible, meaning they cannot be made into smaller units. When purchasing NFTs, you can only buy the entire asset, unlike a bitcoin or a dollar—which you can purchase fractions of. Think of non fungible tokens as all-or-nothing items meaning there are no pieces or parts.
NFTs are proving to have more real-life applications and use cases than initially thought. And thanks to the almighty processing power of blockchain, NFTs can exhibit proof of real ownership and even manage the rights of specific people on particular assets. With that in mind, let’s look at an overview of some of the most widespread use cases for non fungible tokens.
Digital art/crypto art: NFTs tokenize physical and digital art to promote authenticity and offer independent ownership opportunities for creators. Crypto art provides one of the most popular NFT use cases, evidenced by the sheer volume of digital art pieces on the market and the millions of dollars collectors have already spent on artistic items.
Fashion: Blockchain technology helps verify digital ownership information of luxury items and accessories, thereby reducing issues with counterfeiting and fakes. As a result, consumers can access important details related to their purchase, including the asset created, who held previous ownership (if applicable), and more.
Licenses and certifications: Non fungible tokens compute licenses and certifications to authenticate and preserve ownership. NFTs save time and eliminate the manual process of document verification, storage, and record-checking.
Collectibles: NFTs offer a strong use case for collectibles that feature one-of-a-kind algorithms and identify with added value. Digital collections like Cryptokitties are a good example of the market potential for collectible assets. They generated so much traffic back in 2017 that it clogged up Ethereum’s network.
Sports: When it comes to authenticating tickets or endorsing official memorabilia, NFTs and blockchain technology offer the sporting industry many tools to combat counterfeiting. Non fungible tokens also present lucrative opportunities for athletes to generate independent income.
Gaming: In-game elements can be tokenized and traded with peers, solving many difficult internal processes that the gaming industry cannot manage single-handedly. Thanks to blockchain technology, NFT items are instantly transferred and used by gamers around the globe.
Virtual worlds: Users can own, create, and monetize virtual land and develop elements and in-game NFT collections in the metaverse. Landowners can rent out virtual plots to advertisers while retaining ownership. Examples include Decentraland and The Sandbox.
NFTs have revolutionized the world of digital art. Below, we will outline three primary benefits of non fungible tokens.
Authenticity and trustworthiness: Non fungible tokens leverage blockchain technology to verify authenticity. Together they act as a strong layer of security and work to combat counterfeits while increasing trustworthiness. When dealing with thefts and fakes, this proves to be very valuable.
Easily Transferable: NFTs can be purchased, sold, and traded (for a small fee) on certain online marketplaces. Unlike traditional art, non fungible tokens are easily instantly tradable even from another platform, game, or publisher.
Maintain Ownership Rights: Blockchain technology validates ownership of assets like never before. Non fungible tokens use the blockchain to attach to the asset even if other copies exist permanently. Meanwhile, users can store analog assets with trust companies to secure assets moving around on-chain.
Although the NFT market is a relatively new trend, concerns about negative environmental impact are widespread. Every single transaction recorded onto the blockchain requires significant power to compute. Therefore, the more the NFT market grows, the more negative impact it will have on our planet (for now).
Mike “Beeple” Winklemann: When Beeple’s piece titled “Everydays: The First 5000 Days” went for a historic $69,346,250, it helped launch NFT art into the mainstream. Beeple has sold 845 total pieces worth over $113 million, making him the most profitable and popular NFT artist ever.
Trevor Jones: Jones is a visual artist that transitioned from canvas to augmented reality after exploring the relationship between art and crypto. Having sold a total of 5,284 artworks averaging $3,409.65 each, Jones has risen to become the second most successful NFT artist raising $18,083,354 so far.
FEWOCIOUS: This talented young artist’s work can best be described as pop surrealism. The 18-year-old has been garnering social media acclaim and turning it around to make serious cash. After selling 3,103 NFT pieces, which averaged $5,812.16, FEWOCIOUS is already worth $18,037,594.08 million...and counting.
CryptoPunks is the most valuable NFT collection on the market to date, valued at $349,981,345 as of June 2021. CryptoPunks is a wildly popular collection of 10,000 characters that helped to define crypto art as we know it.
Bored Ape Yacht Club is a collection of 10,000 Bored Ape NFTs residing on the Ethereum blockchain. It’s one of the most popular collections, valued at $30,715,386.62. Each Bored Ape NFT doubles as a Yacht Club membership card and grants access to members-only benefits.
Meebits comprises 20,000 unique 3D voxel characters that can be rendered and animated. They are brought to us by the creators of CrytoPunks and reside in a no-fee trading marketplace. At the time of writing, Meetbits were the second most valuable NFT collection, valued at a staggering $142,514,162.
Superare is the place where fine art merges with technology to produce unique single-edition digital masterpieces. Superare marketplace has over 25,000 worth $75,650,585 and counting.
Sorare is a fantasy sports platform where players can buy, sell, trade, and manage a virtual team with digital player cards. Sorare is the fourth most profitable collection currently, worth $64,796,895.
Understanding the inner workings of the NFT markets is essential for those looking to get involved with buying, selling, and creating non fungible tokens. Similar to traditional financial markets, there are two main market types—primary and secondary. Below we will briefly explain the differences before providing a few examples of today’s most popular NFT marketplaces.
The primary market refers to an NFT that has been minted and added to the blockchain for the first time. On the other hand, the secondary market refers to any subsequent trading. Remember that although many non fungible tokens are sold for a flat price, they can also be sold as auction items. Therefore, buyers can decide if they want to engage in bidding (usually in hopes of getting a lower price) instead of paying a set price. We suggest that anyone looking to purchase non fungible tokens conduct due diligence to determine which marketplace is the best fit. Some of the most popular NFT marketplaces are as follows:
OpenSea: The first and largest blockchain-backed peer-to-peer marketplace for rare digital goods like NFTs, collectibles, gaming items, and more. OpenSea is one of the most popular decentralized marketplaces offering a wide range of competitively-priced assets in more than 200 categories.
Rarible: A software designed to help digital artists and creators issue and sell custom crypto assets representing ownership in their digital work. Rarible is both a marketplace for those assets and a distributed network built on Ethereum that enables peer-to-peer trading without needing a middleman.
Mintable is an app and NFT marketplace where users can create, buy, and sell digital items using cryptocurrency. Mintable operates using a powerful user interface that allows users to mint any information as an ERC-721 token on the Ethereum blockchain.
SuperRare is a marketplace for collecting and trading unique, single-edition digital artworks. Each artwork is authentically created by an artist in the network and tokenized as a crypto-collectible digital item that you can own and trade.
NFTs’ increasing popularity draws in millions of people and even more money. But with it comes a slew of problems related to theft and security. The process of buying, selling, or trading NFTs should be approached with caution, just like when handling any other valuable item. Proper safekeeping is essential, albeit difficult when it comes to NFTs. Let’s look at a few of the most widespread ways to store non fungible tokens.
Hot wallets are connected to the internet and the blockchain at all times. When you use a hot wallet, the private keys to access your cryptocurrencies are stored on an online application. The problem with this is that since hot wallets are always online, your assets are always exposed to hackers. A good rule of thumb is to only store assets in a hot wallet temporarily. Like, for example, while you are making day-to-day transactions. Although hot wallets are good for buying, selling, and trading, they are not the best option for long-term storage.
Cold wallets offer more security in the long run because they store your private keys offline rather than online like a hot wallet. The downside is they limit liquidity and make it difficult to trade non fungible tokens on marketplaces. If you are in the process of buying and selling, store your NFT with a hot wallet. However, when you are done trading for the day, it’s best to hide your assets in a cold wallet for safekeeping.
Third-party hot wallets like MetaMask and MyEtherWallet might be the best option because the private key controlling your NFT remains safe offline. In contrast, your hot wallet continues to check your balance. It should state that although many people use MetaMask to store their NFTs conveniently, those looking to engage in trading can simply log in to their preferred platform to access their assets.
The Ledger Nano is another example of a wallet that allows you to connect with trusted third-party hot wallets like MetaMask and MyEtherWallet. Once you have connected your Ledger Nano to a third-party hot wallet, you can maintain control of your private key while also using your hot wallet to read your balance and manage it.
Also, remember that there is some risk involved with wallet storage, as evidenced by a recent attack where a hacker used a malicious .scr file to grant unauthorized access to a user’s MetaMask and steal all its contents. Click here to read more details about the public service announcement issued by OpenSea’s community manager, Pascal Marsolais.
Ethereum has been the most popular blockchain network used to mint NFTs, although platforms like OpenSea, Rarible, and Mintable now offer NFT-minting services. Ethereum also has increased competition in the blockchain scene as several other providers now support the NFT token standard, including Binance Smart Chain - Flow - Tron - Tezos - Cosmos - EOS - WAX - Polkadot.
Bearing this in mind, you should research each of the above platforms before deciding which one to mint on. Why you might ask? Because once you mint your NFT on any of the above blockchains, it can become very inconvenient to move it elsewhere. Each blockchain has its advantages and disadvantages, and it is your job to decide which platform is best for you.
Although the specific steps involved in the minting process vary from blockchain to blockchain, a few steps are relevant to most platforms. You don’t need much other than a wallet that supports NFTs (like MetaMask, Trust Wallet, Coinbase Wallet) and an account on a marketplace to complete the process.
For now, at least, Ethereum’s blockchain remains the most popular NFT minting hub. This is probably because it offers a fairly simplified approach to minting by allowing new creators to join without submitting an application or an invitation letter. Ethereum is followed by Binance Smart Chain, which provides transaction fees at a lower rate.
The only thing needed to buy and sell NFTs is a working computer and internet connection. After you have both of these things, the next steps are to acquire a digital wallet (MetaMask is the most popular) and purchase some ETH. Finally, sign up for (or log in to) an NFT marketplace and upload your asset or begin shopping.
Step 1: Install a MetaMask wallet for your browser
It’s as simple as going to the MetaMask website and following the instructions to set up an extension. Pro tip: Store your seed phrase and MetaMask password in a secure location. Without this information, you can not recover your accounts and assets. Click here to install MetaMask.
Step 2: Buy Ether or ETH
You can also connect MetaMask to Coinbase and buy ETH this way. Other ways to purchase ETH include PayPal. In some cases, once connected to MetaMask, you can buy ETH with your bank card.
Step 3: Join an NFT marketplace
Most marketplaces are compatible with MetaMask and will automatically connect with your account (as long as it has already been set up). Remember to have your seed phrase and password handy when making purchases with your MetaMask wallet.
Step 4: Either upload your created NFT for sale or begin shopping
Look for a button at the top, left, or right of your screen. Many of today’s most popular marketplaces (like OpenSea and Rarible) allow you to buy, create, and sell non fungible tokens.
Polygon (formerly known as MATIC) provides the biggest Ethereum layer 2 protocol yet. The layer 2 protocol is an Ethereum-focused blockchain solution that aims to lower transaction costs and increase transaction speeds by “bundling all of the transactions that happen on their platform and then rolling them up, before sending them all to the Ethereum blockchain at the same time.” This is beneficial for the buyer because their asset is still verified through the Ethereum blockchain, although they didn’t have to spend the time or money.
Note: Approach trading on L2 with caution as it’s set to emphatically change the NFT ecosystem as well as the trading experience on decentralized exchanges.
Keep in mind that the NFT market is incredibly decentralized, so incoming investors should take the time to do their research and due diligence before investing. There are many excellent marketplaces to choose from and a wide range of platforms that cater to different styles. A wise investor would take the time to familiarize themselves with the NFT market before jumping in. As with any type of investment, it’s best to enter at a lower price point, at least until you are better familiarized with new territory.
How much do NFTs cost?
According to OpenSea, the “average” price of an NFT sold on SuperRare is 2.15 ether or $5,800; the “average” price on MakersPlace is 0.87 ether or $2,400, and the “average” on Foundation is 1.27 ether or $3,500.
How much does it cost to mint an NFT?
The cost of minting a new NFT usually isn't too costly yet, and In some cases, it cost nothing. Creators can expect to pay between $70 and $120 for minting services.
What are gas fees?
Gas fees are basically transaction processing fees for the “computational effort” required to process transactions or execute a smart contract on Ethereum. Regardless of the wallet you use, you will always need to pay for gas when using crypto for NFT purposes.
What can you do with an NFT after you buy it?
After you purchase an NFT, you can hold onto it, trade it, or resell it. In some cases, you will receive copyright ownership, allowing you to make the artwork's derivates for profit.
Where can I resell my NFT?
You can usually resell an NFT on the same exchange you bought it. If not, there are a variety of alternative platforms you can use to resell your asset. Some of the most popular NFT marketplaces include OpenSea, Rarible, SuperRare, Foundation, AtomicMarket. Myth Market, BakerySwap, and KnownOrigin.
How do I make money on NFTs?
Participate in NFT auctions and make bids to get the lowest price. Then, resell your asset for a higher price after the value has increased. Another way to earn money would be to create, mint, and sell your own NFT. Finally, users engage in trading to earn money with NFTs.
Do I have to pay taxes when I make money on non fungible tokens?
Legislation is different for every country, and the regulations are constantly evolving. The best practice is to study the laws in your country and file taxes accordingly. As with crypto, paying tax on digital assets is a hot topic and should be approached cautiously. Specifically, NFTs are classified as crypto assets in the USA, and purchasing them is considered a crypto-to-crypto trade by the IRS. Therefore, you are subject to taxes when buying and selling NFTs in the USA.
What are DEX’s or decentralized exchanges?
Decentralized exchanges are a type of cryptocurrency exchange that allows for direct peer-to-peer cryptocurrency transactions to take place online, securely, and without the need for an intermediary. DEX’s are an alternative to centralized exchanges.
Can I buy NFTs with Coinbase?
You can purchase non fungible tokens on Coinbase if your MetaMask is installed and connected to your Coinbase wallet.
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