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Created on 24.02.2022

What is an NFT?

561,000 US dollars for a moving picture of a cat? 70 million US dollars for a digital work of art you can’t put on your wall? For several months now, you’ve probably been seeing the same three letters, NFT, pop up every now and again on your social media accounts. But what exactly is an NFT? Before you start thinking about whether you should invest in an NFT, we reveal what’s behind the abbreviation.

Now that the crypto hype has gone around the world and across the metaverse in no time, many people are beginning to wonder whether to jump on the bandwagon as well. There are some who want to try their luck as digital artists and create NFTs, some who want to invest in these NFTs, and still others who bid for digital collectors’ items like Nyan Cat. Regardless of what you want to do with NFTs, you ought to have a clear idea of what the trend actually is. 

What exactly are NFTs?

NFT stands for “non-fungible token”. “Non-fungible” means that they are irreplaceable assets or units of value. They are digital tokens, they tend to be purchased with cryptocurrencies and can be any sort of virtual object that represents an individual, uncopiable item with unique characteristics.

But what does that mean? The counter-example of money, which is a “fungible token”, shows us exactly what a non-fungible token is. Unlike the unique NFT, fungible tokens are like money that can be exchanged. You could, for instance, exchange a CHF 10 note for two coins worth CHF 5 each, and what you get will always retain the same value. The same applies to cryptocurrencies like Bitcoin.

Artworks or musical pieces, on the other hand, are individual items that do have an original. The owner of an original cannot exchange the original item for a copy and expect to receive the identical value in return. It’s a similar story with NFTs, except they’re digital.

This means that, unlike with other digital assets such as Bitcoin, NFTs are not something that can be recreated again and again. Rather, there is only ever one version of an NFT. This is different from the countless number of digital products you find: theoretically, anything virtual can be copied an infinite number of times. With NFTs, this just isn’t possible.

Minting, tokenization, selling: how do NFTs work?

The way non-fungible tokens work is in fact by addressing the problem of infinite digital replicability, which does not allow for digital ownership.
To be more specific, NFTs are part of a blockchain that assign the digital object a TokenID. Once the object has been “minted” – i.e. created and stored on a blockchain – the TokenID tracks all transactions made with the NFT. This means it’s also possible to trace the owner of the token.

The whole process is similar to what you see with a certificate of authenticity. However, while certificates of authenticity for other products are stored in a centralized manner, e.g. a sticker of certification on a baseball cap, certificates of authenticity for NFTs are stored in a decentralized manner along the blockchain.

In this process, the objects are “tokenized” by the blockchain and protected seeing as nobody in the blockchain can alter the property rights or create an identical NFT. The digital image or asset, which has now become a token, can no longer be forged.

The first blockchain that supported NFTs was the Ethereum blockchain. Other blockchains are catching up, and increasing numbers of blockchains support NFTs in their script. It’s worth mentioning that while NFTs do transfer property rights to the digital object and TokenID, they do not automatically transfer the copyright of the original. This would usually mean that only the creator of an artwork could “mint” it into an NFT artwork.

With that said, there have already been occasions where an artist’s works have been sold online as an NFT without their consent.

OpenSea and the like: where and how can I buy NFTs?

As a rule, non-fungible tokens are traded on specific online platforms, i.e. marketplaces. If buyers want to get involved in NFT marketplaces, they need a crypto wallet that is geared towards the platform in question where they can keep a larger sum of the cryptocurrency they require.

Seeing as the majority of NFTs are still currently found on the Ethereum blockchain, buyers require Ether – the currency of this blockchain – in order to purchase this sort of crypto art. The best known marketplaces, to name a few, are OpenSea, SuperRare, Rarible, Axie Marketplace and Nifty Gateway.

To put it briefly, you need to register on a platform, create a crypto wallet, link the crypto wallet to the platform in question and have enough crypto coins in order to bid for an NFT.

NFT marketplaces: excerpt of the Bored Ape Yacht Club’s accounts on Open Sea

What to bear in mind if you want to invest in NFTs?

Innovations on the market come hand in hand with investment opportunities and chances to make your money work for you. However, before you decide to make an investment, in this case buy an NFT, there are a few things about non-fungible tokens you ought to bear in mind.

Supply and demand are what determine the value of an NFT

The value of an NFT behaves differently from that of a share or other securities. Whereas the value of shares and securities depends on company decisions, business strategies and the economic situation, an NFT is a commodity whereby the price, and therefore value, hinges on supply and demand.

In other words, your NFT is only worth as much as someone else is willing to pay for it.

A risky business

Seeing as NFT trading is a relatively new business, it’s very hard to make any assumptions about its future and how it will develop. Nobody can say when the hype will wear off. This is what makes it a risky business.

As such, if it’s a secure investment you’re after, then NFTs really aren’t for you.

What are the drawbacks of NFTs?

Apart from the investment risks and the high degree of uncertainty over their future, NFTs have a major social disadvantage: they have an enormous impact on the environment. This is due to the sheer amount of energy consumed by blockchains during the computing process to create blockchain assets.

If the demand for NFTs rises substantially, this could have an even greater impact on our environment.

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