Beginner’s Guide: What is NFTs?

Yuvi
Yuvi
12 Min Read

Non-fungible tokens, or NFTs, are digital assets that are provably unique. They can be used to represent both tangible and intangible items.

Blockchains are great digital asset registries since they are secure and immutable. While cryptocurrencies have become synonymous with blockchain, the same technology can be used to store all kinds of digital items. The rise of non-fungible tokens, or NFTs, marks a step in that direction and opens the door to the digitization of many different assets.

Beginner's Guide: What is NFTs?

Let’s take a closer look at NFT crypto tokens, how they differ from traditional tokens, and how they will likely be treated from a tax standpoint for both creators and investors with our comprehensive NFT tax guide.

What Are Non Fungible Tokens (NFTs) ?

A non-fungible token (NFT) is a type of cryptographic token on a blockchain that represents a unique asset. These can either be entirely digital assets or tokenized versions of real-world assets. As NFTs are not interchangeable with each other, they may function as proof of authenticity and ownership within the digital realm.

What Are Non Fungible Tokens (NFTs) ?
Blockchain technology, simply put, is an un-hackable system based on the mathematics of cryptography. (Shutterstock)

Fungibility means that an asset’s individual units are interchangeable and essentially indistinguishable from each other. For example, fiat currencies are fungible, because each unit is interchangeable with any other equivalent individual unit. A ten-dollar bill is interchangeable with any other genuine ten-dollar bill. This is imperative for an asset that aims to act as a medium of exchange.

Fungibility is a desirable property for currency because it enables free exchange, and theoretically, there is no way to know the history of each individual unit. However, that isn’t a beneficial trait for collectible items.

What if, instead, we could create digital assets similar to Bitcoin, but instead add a unique identifier to each unit? This would make each of them different from all the other units (i.e., non-fungible). Essentially, this is what an NFT is.

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How do NFTs work?

There are various frameworks for the creation and issuance of NFTs. The most prominent of these is ERC-721, a standard for the issuance and trading of non-fungible assets on the Ethereum blockchain.

How do NFTs work?

A more recent, improved standard is ERC-1155. It enables a single contract to contain both fungible and non-fungible tokens, opening up a whole new range of possibilities. The standardization of the issuance of NFTs allows a higher degree of interoperability, which ultimately benefits the users. It basically means that unique assets can be transferred between different applications with relative ease.

If you are looking to store and gaze upon the beauty of your NFTs, you can do that in Trust Wallet. Just like other blockchain tokens, your NFT will exist on an address. It’s worth noting that NFTs can’t be replicated or transferred without the owner’s permission – even by the issuer of the NFT.

NFTs can be traded in open marketplaces, such as OpenSea. These markets connect buyers with sellers, and the value of each token is unique. Naturally, NFTs are prone to price changes in response to market supply and demand.

How do NFTs work?
Bored-Ape NFT

But how can such things have value? Just like with any other valuable item, the value isn’t inherent to the object itself but is rather assigned by people who deem it valuable. In essence, value is a shared belief. It doesn’t really matter if it’s fiat money, precious metals, or a vehicle – these things have value because people believe they do. This is how every valuable item becomes valuable, so why not digital collectibles?

Difference Between NFT and Cryptocurrency

Both NFTs and crypto are built on blockchain, using the same technology and the same principles. As a result, they tend to attract the same players. NFTs can be thought of as a subset of the crypto culture, and you generally need cryptocurrency to buy and sell NFTs.

Difference Between NFT and Cryptocurrency
Gold letter NFT and coin Ethereum on background of dollar.

NFTs and cryptocurrencies are as much alike as human beings and chimpanzees. While they share many similar characteristics, they are completely different species with common ancestry. In the case of NFTs and cryptocurrencies, that common ancestor is blockchain.

Cryptocurrency is what you use for any and all transactions on the blockchain. Cryptocurrency can be purchased or converted into fiat currencies (dollars, euros, yen, etc.) via crypto exchanges. By contrast, an NFT is a unique and irreplaceable asset that is purchased using cryptocurrency. It can gain or lose value independent of the currency used to buy it, just like a popular trading card or a unique piece of art.

NFTs, on the other hand, are non-fungible in the sense that no two are the same. Each NFT is a unique unit of data that cannot be replaced by an identical version because there is no identical version.

READ MORE: What is SafeMoon ?

How to buy NFT tokens?

Today, most NFTs are purchased with ether (ETH), the native currency of the Ethereum network, which can be converted from U.S. dollars on exchanges like Coinbase, Kraken and Gemini.

How to buy NFT tokens?
Opensea.io

Unlike bitcoin, which functions mainly as a payment network and cryptocurrency, blockchain networks such as Ethereum and Solana let users build apps that can store personal data and set rules for complex financial transactions. These are called smart contracts, which are digital contracts stored on a blockchain that are automatically executed when certain conditions are met, like when an NFT transfers ownership and the original artist receives royalties. In order to buy NFTs, you will need to establish a digital wallet to store your cryptocurrency. Examples include Gemini, Metamask, Binance and Coinbase, which you can connect to the marketplace where you plan to buy NFTs like at one of the marketplaces below.

NFTs are often sold through an auction system where you will put in a bid for the NFT. Some sites like OpenSea offer an option to buy the NFT now for a set price.

How To Buy NFTs in 2022?

1. Create a Web3 Wallet

To get started, you’ll need an Ethereum-compatible crypto wallet, in other words, a web3 wallet, and fund it with enough ETH. You can use a crypto wallet to purchase, sell, store, and swap crypto assets.

Create a Web3 Wallet
Metamask
  • OpenSea works with all significant Ethereum web3 wallets. However Metamask is the most popular one, that’s why we’ll use it in our instructions.
  • To download Metamask, visit metamask.io/download and choose your browser. Chrome, Firefox, Edge, and Brave are supported. Mobile extensions for iOS and Android are also available.
  • After choosing the extension, click on “Get Started.”
    Click on “Create Wallet.”
  • You’ll be prompted with a screen that shows a new seed phrase for your wallet. This seed phrase is a long string of words that Metamask automatically creates. You will require it in the future to recover your wallet. If you lose it, nobody can help you get your funds back. That’s why you should save it in a secure place.
  • Next, create your password. This password will be the only thing you’ll require to log into your wallet in the future, provided that you connect from the same device.
  • After this step, you’ll be prompted to confirm your seed phrase by choosing the words that appear on the screen in the same order as they appear in your seed phrase.
  • Your MetaMask download will be completed, and the MetaMask icon will be shown in the top right corner of your browser window.

2. Connect your MetaMask wallet to OpenSea

Once your wallet is up and running, head over to OpenSea.io.

Buying an NFT on OpenSea
OpenSea.io
  • Click on the wallet icon in the upper right corner and choose MetaMask. You’ll be requested to sign for approval to connect your wallet to OpenSea.
  • You can create a username, write a bio, and add your social channel links when your wallet is connected. But these steps aren’t required to buy NFTs. Connecting a wallet is enough for that.

3. Fund your Metamask wallet with Ethereum

To buy NFTs, you need Ethereum cryptocurrency. You can buy it on central exchanges like Binance, Coinbase, or Kraken.

Metamask wallet
Metamask wallet
  • Creating an account on these exchanges all work in similar ways. You need to undergo a verification process by providing an ID or Passport.
  • Once you’ve been verified, you can buy Ethereum. Depending on the exchange you choose, different payment options are possible. Usually, you’re able to pay with a credit card for the first time. Some exchanges also work with bank transfers.

Once your wallet is funded with enough ETH, you can search for an NFT to buy on OpenSea.

4. Buying an NFT on OpenSea

There’re millions of NFTs on OpenSea. It’s a good idea to know about the platform’s searching and filtering options.

You can view the results based on the status, price, blockchains, categories, and currencies you can use as payment methods.

Using search options allows you to find new NFTs based on various criteria. When you’ve found the NFT you want to buy, click on it to get to its own page from where you can purchase it.

READ MORE: What is Decentraland?

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Posted by Yuvi
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Co-founder of Xryptonation.com, Senior Author, Editor, Blockchain Expert.
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