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What is NFT and How Does NFT Work? The Ultimate Guide

Non-fungible tokens – or simply NFTs, are digital assets that allow you to prove ownership of a store of value. This could be a non-tangible item like a virtual drawing or something physical such as real estate or fine art.

In this beginner’s guide, we explain everything there is to know about the best NFT tokens in the market. We’ll also explore how you can buy your first-ever non-fungible token today.

What Does NFT Stand For? NFT Definition

NFT stands for non-fungible token. Although we explain the fundamentals of how NFTs work in more detail throughout this guide, the key takeaway is as follows:

  • Non-fungible tokens are cryptocurrency assets that are represented in digital form
  • However, unlike Bitcoin – which is fungible, each NFT token is unique from the next
  • This allows both tangible and non-tangible assets to be tokenized
  • This is in stark contrast to fungible tokens, which are similar to cash
  • After all, one $10 bill is the same as another $10 bill – in terms of its ability to be used as a medium of exchange

Ultimately, the main concept with NFTs is that you can invest in something of value without needing to physically own or store the respective item. As such, this makes it a breeze when it comes to buying and selling NFTs in the open marketplace.

What is an NFT? NFTs Explained

NFT means non-fungible tokens (NFTs), which are generally created using the same type of programming used for cryptocurrencies. In simple terms these cryptographic assets are based on blockchain technology. They cannot be exchanged or traded equivalently like other cryptographic assets.

Like Bitcoin or Ethereum. The term NFT clearly represents it can neither be replaced nor interchanged because it has unique properties. Physical currency and cryptocurrency are fungible, which means that they can be traded or exchanged for one another.

 

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  • NFT stands for a non-fungible token, which means it can neither be replaced nor interchanged because it has unique properties.

Key Features of NFT – 

  • Digital Asset – NFT is a digital asset that represents Internet collectibles like art, music, and games with an authentic certificate created by blockchain technology that underlies Cryptocurrency.
  • Unique – It cannot be forged or otherwise manipulated.
  • Exchange – NFT exchanges take place with cryptocurrencies such as Bitcoin on specialist sites.

How do NFTs Work?

Now that we have covered the basics, we can now dive a little bit deeper into how the best NFTs work.

Crucially, if you’re thinking about buying NFTs yourself, it’s important that you have a firm grasp of how this niche blockchain sector works before risking any money.

Fungible vs Non-Fungible

Although we briefly explained the difference between fungible and non-fungible tokens in the section above, we’ll now elaborate in much more detail.

In a nutshell, the physical dollars and cents that we use every day to make purchases are fungible.

For instance:

  • Let’s suppose that you have a $20 bill, but you need some change for the vending machine – which only accepts $1 bills
  • As such, you ask somebody to swap your $20 bill into small denominations.
  • In turn, you are given a $10 bill, $5 bill, and 5 x $ 1 bills
  • Ultimately, although you now have different notes from your original $20 bill, nothing has changed in terms of value
  • This is because you still have a total of $20 at your disposal

As per the above example, cold-cash cash is a fungible asset class. And, this is also the same with virtually all of the cryptocurrencies in circulation today.

However, as we have established, NFTs are non-fungible asset classes. This means that you cannot swap one NFT for another and expect to retain the same value – as each token is unique.

For example:

  • Let’s say that an artist creates a new physical painting
  • The artist then decides to create an NFT, which represents the value of the said painting
  • This means that the NFT is unique only to the respective painting and thus – it cannot be imitated or copied
  • Once again, this is because each NFT can ve verified for its authenticity through a unique transaction hash

Naturally, and as we cover in more detail shortly, NFTs can represent pretty much anything that has perceived value. Whether that’s a virtual painting, house, car, or sporting moment – NFTs allow you to store ownership in a digital manner.

Blockchain Protocol 

All of the best NFT tokens are hosted on a blockchain protocol. To date, many creators of NFTs prefer the Ethereum blockchain, not least because it supports ERC-721 tokens. In a nutshell, this specific sub-set of the Ethereum blockchain is ideal for NFTs, as each ERC-721 token is unique from the next.

With that being said, several other blockchain networks have since begun supporting NFTs – such as the Binance Smart Chain. Many argue that the latter is more suitable for buying and selling the best NFTs tokens, not least because Ethereum transaction fees are often super-high.

NFT Minting 

When searching for the best NFT tokens to buy, a term that you will often come across is ‘minting’. In its most basic form, minting simply refers to the process of creating a new NFT token that is yet to exist.

This means that when you buy NFT tokens, you are purchasing a digital asset that has already been created by somebody else.

Crucially, if you have something unique that you wish to represent via a unique crypto-asset, then NFT minting is well worth exploring further.

For example:

  • You might have created a groundbreaking study on an independent basis, and wish to protect your findings.
  • You can do this with ease by minting an NFT on top of a blockchain network such as Ethereum or the Binance Smart Chain.
  • In doing so, your NFT verifies beyond all reasonable doubt that you are the true owner of the said study.

And, as soon as your NFT is minted – which often takes just minutes, it can then be traded in the open marketplace. In fact, you could even mint the NFT token so that you receive royalties on each sale that third parties generate

Fractional NFTs 

You likely know that standard cryptocurrencies like Bitcoin and Ethereum can be split into smaller units – which ensures that you don’t need to purchase a full token to gain access to the market.

For instance, if Bitcoin is trading at $30,000 per token and you invest $300, then you own 1% of a single BTC.

Now, many people are unaware that the process of splitting digital tokens into small units can also be achieved with NFTs. In fact, this is one of its greatest characteristics, as it allows multiple people to own something of value.

  • As a basic example, image a $1 million property that is represented as an NFT.
  • You are the sole owner of the property and thus – the respective NFT token
  • You wish to release some equity on the real estate so you decide to split the NFT 10 ways
  • You keep 6 NFTs (60% ) and decide to sell the remaining 4 NFTs on the open market
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Those buying each NFT would therefore own a percentage of the property – should the agreement be backed by relevant contract law.

Types of NFTs

Now that we have explained how NFTs work, we can explore the many different types of non-fungible digital assets in the market.

By this, we mean a collection of real-world examples of the best NFT tokens to have sold in recent years.

Physical Real Estate

Real estate is perhaps the most interesting aspect of the NFT marketplace, not least because it covers both physical and virtual property.

Starting with the former, physical real estate is a perfect example of an asset that can be represented by an NFT token. After all, no two properties are the same – meaning that each house or condo is unique in its own right.

  • A recent example of a traditional property that was sold in conjunction with an NFT took place in Florida.
  • The 4-bedroom house was sold for just over $653,000 – and paid for with Ethereum.
  • Moreover, the house is now represented as an NFT token on top of the Ethereum blockchain
  • This means that in theory, should the owner of the NFT wishes to sell all or some of their newly purchased property, this can be achieved via a simple wallet-to-wallet transaction.

With that being said, perhaps an even bigger use-case for NFTs in the real estate sector is part-ownership. For instance, let’s say that a property development company is looking to build a new luxury hotel in New York.

Ordinarily, the developer would turn to traditional financial institutions in order to raise capital to help fund the project. However, to open up investment opportunities to retail clients, the developer could represent ownership via NFTs.

And, each NFT could be linked to a certain percentage of ownership – which could then be traded on the open market.

Virtual Real Estate in the Metaverse

NFTs and the Metaverse are two terms that are often used in the same discussion. For those unaware, the Metaverse is a digital representation of the real world – and interest in this space is expected to grow exponentially in the coming years.

A great example of this is Decentraland, which is a 3D gaming world that allows players to buy virtual land and then build real estate. Each plot of land is subsequently represented by a unique NFT token, which can then be sold on the open market.

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As a prime example of just how popular real estate NFTs are becoming in the Metaverse – consider this:

  • In November 2021, a plot of land in Axie Infinity – which is a Metaverse gaming, sold for over $2.3 million.
  • Just one month later, a plot of 100 virtual islands on the Sandbox platform – which is another popular Metaverse game, sold for over $4.3 million.

Considering that virtual real estate NFTs are now generating millions of dollars per sale, this is certainly a marketplace to keep an eye on.

CryptoPunks and Other Digital Collectables

In searching for the best NFT tokens, you are likely to have come across CryptoPunks. In a nutshell, CryptoPunks represent a collection of 10,000 digital characters that were created in 2007.

Each CryptoPunk is unique and backed by an NFT token. Although the design of each character looks like it was created in the 1970s, CryptoPunks are arguably the most sought-after NFTs in this marketplace.

  • For example, a single CryptoPunk NFT was sold in February 2022 for 8,000 Ethereum tokens, which, at the time, equated to the crypto-equivalent of over $23 million making it one of the most expensive NFTs out there.
  • According to the founders of the CryptoPunk series – Larva Labs, this particular NFT was sold in 2017 by its original owner for just $1,646.

With that being said, CryptoPunks has since spurned thousands of other NFT collectibles to enter the market, so this space is getting somewhat oversaturated.

Sporting Moments 

Another rapidly growing space in the NFT marketplace is ‘sporting moments’. By this, we mean that major sporting brands – such as the NBA and ATP, are now selling ownership of video clips from key in-game events.

  • An example of one of the best NFT tokens in terms of value is the $100,000 that NBA star Zion Williamson raised for a clip of the player blocking a shot.
  • In another example, the recent Australia Open event sold individual items from its tournament in the form of NFTs – such as the center court and even the umpire’s chair.

The theory here is that over the course of time, the value for these sporting moment NFTs will continue to rise. Many sports stars, athletes and other celebrity icons have backed NFT collections of other types too.

Gaming NFTs 

Some of the best NFT tokens in the market today can be found in popular gaming titles. In many cases, these games are referred to as ‘play-to-earn’ or simply P2E.

For example:

  • As the name suggests, the newly launched P2E title Pirate X Pirate is a game based on pirates.
  • The main concept is that users can build their own crew and win digital tokens as they progress through the many worlds that the game has to offer.
  • And, in order to give themselves the best chance possible of maximizing earnings, players can buy unique NFTs that represent virtual ships.

Other examples of NFT play-to-earn spaces include Axie Infinity, Decentraland, and the Sandbox. Ultimately, gaming developers are now incentivizing players to engage with their platforms via tradable NFTs that can be minted when certain tasks are achieved.

Why People Invest in NFTs

There are many reasons why people decide to invest in the best NFT tokens that the market has to offer. From regular retail investors to millionaire celebrity NFT owners.

If you’re wondering whether or not this space is right for you – consider the benefits discussed below.

Store of Value 

One of the main reasons why more and more people are looking to buy NFT tokens is that they can represent a store of value.

As we covered earlier, it is now a simple process to mint an NFT token so that it represents something of value – such as a sporting moment or piece of land.

Either way, the NFT that you mint or buy will, in theory, be worth what people are prepared to pay for it when you eventually decide to cash out.

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For example, we mentioned that the CryptoPunks NFT series is now attracting individual sales in millions of dollars. Those buying a CryptoPunk typically do so because they believe that it will be worth more in the future.

Great for Content Creators 

Content creators – such as artists, writers, and musicians, often have to go through third parties to sell their products. This typically means giving away a large percentage of any future sales and royalties.

For example, a successful singer on YouTube might make a sizeable amount of money each month from advertising revenues. But, YouTube itself will take a significant cut that often outweighs what the content creator receives.

This is where the best NFT tokens come into play – not least because creators no longer need to partner with third parties to sell their content. On the contrary, ownership of each song, video, or painting can now be represented by a unique NFT.

Investment Product 

It goes without saying that many people decide to buy NFT tokens as an investment product. This means paying a price today that is much lower than what the buyer thinks the NFT could be worth in the future.

  • As a prime example of a successful NFT investment, let’s once again take the case of the $4.3 million purchase of 100 virtual islands in the Sandbox Metaverse.
  • Although this might sound like an obscene amount of money to invest in digital real estate, the buyer has already created virtual villas on each island – 90% of which sold out within one day at $15,000 each.
  • Moreover, some of these virtual villas have since been relisted for sale at over $100,000.

In theory, this means that the traditional real estate development industry has now moved into its own niche sector via the Metaverse.

That is to say, people are looking to buy NFT tokens that represent virtual plots of land, and are then building digital real estate with the intention of making a profit.

Conventional Restrictions Have Been Removed  

Attempting to invest in a physical store of value in the real world can be challenging – not least because jurisdictional restrictions are often in place.

For example, buyers in certain parts of the world might find it difficult to buy real estate in the US. Even if they do have access to the plot of land in question, the purchase is likely to be filled with red-tape – resulting in high fees and a cumbersome verification process.

However, by engaging with non-fungible digital assets, there are generally no restrictions on who can buy NFT tokens.

Small Barrier to Entry   

Another major reason why so many people are looking to buy NFT tokens is that the industry has opened the investment space to those on a budget.

Sure, this guide has given some real-world examples where people have paid millions of dollars for a single NFT. However, some of the best NFT tokens can actually be accessed with a small amount of money.

  • For example, we mentioned earlier that the Australian Open created a range of NFTs that were subsequently available to buy.
  • One such example was a set of decade-by-decade NFTs that were linked to tournament games within each 10-year period.
  • The 1970s edition, for instance, initially sold an umpire chair NFT for just $24.99 AUD (about $19 USD).

Crucially, this means that even if you only wish to risk a small amount of money into this space, some of the best NFT tokens can be accessed with a modest amount of capital.

Huge Marketplace    

Although estimates on the future total value of the NFT marketplace vary quite considerably depending on the source, what we can do is look at just how much money has changed hands in recent years.

For example, in 2021 alone, Bloomberg notes that almost $41 billion worth of NFT sales took place. If you believe that the growth of the NFT space will continue over the course of time, this industry could soon surpass the $1 trillion market.

Yuga Labs, the company that created the Bored Ape Yacht Club NFT collection, has been valued at $5 billion according to Yahoo Finance, after rumours of an investment by Silicon Valley venture capital firm Andreessen Horowitz.

On March 12th 2022 Yuga Labs acquired CryptoPunks and Meebits NFTs, taking over the leadership of those NFT projects. Currently BAYC, Punks and Meebits are ranked the #1, #2 and #6 most valuable NFTs by floor price and floor cap.

NFTs can be Used as Collateral     

There are now a number of innovators that allow you to access financing in return for putting your NFT token up as collateral.

This works in a similar nature to conventional secured loans, where the borrower will put up a certain amount of money in order to secure the financing agreement.

However, in the case of crypto loans, as the borrower is putting up an NFT that has real-world value, not only will the lending agreement be approved near-instantly, but no credit checks are required.

After all, if the borrower fails to repay the funds, the crypto lending site can simply sell the NFT to recover their losses.

NFTs vs Cryptocurrency

The terms NFT and cryptocurrency are often used interchangeably. After all, both phenomena are represented in digital form and are built and stored on top of the blockchain protocol.

However, in the vast majority of cases, crypto assets are virtual currency – meaning that they can be used as a medium of exchange. This once again goes back to the discussion on fungible tokens like Dogecoin.

That is, if you buy $100 worth of Dogecoin from two different brokers – there is no difference between the two sets of tokens that receive. This is because two individual Dogecoin tokens will always be worth the same – as per the current market value.

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However, NFTs have, in essence, a completely different concept and use-case from cryptocurrencies. After all, each NFT token is unique. For instance, if one NFT represents a full plot of land in Decentraland, no other token can claim to do the same thing.

With that being said, there is another major similarity between NFTs and cryptocurrencies – that the market is often driven by speculation and hype.

In other words, while many people have had great success with both NFTs and cryptocurrencies in terms of value, there is no guarantee that this will continue to be the case.

In the case of CryptoPunks, for instance, there is every chance that someone that paid millions of dollars for a single token will find that the value of this NFT series could be worth significantly less in the future.

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NFT Marketplaces

NFT marketplaces are not too dissimilar to crypto exchanges – insofar that they sit between buyers and sellers. That is to say, if you want to buy NFT tokens today – then you will first need to choose a suitable marketplace. To learn how to buy NFTs on Binance read our guide today.

In terms of choosing the best NFT marketplace to sign up with – there are certain things to consider, such as:

Reputation

You will, of course, need to consider the reputation of the respective NFT marketplace. For example, how long has the platform been in operation, how many users does it have, and what trading volumes does it typically generate on a day-to-day basis?

Choosing an NFT marketplace without a solid track record in this space can be a risky venture. After all, you need to be confident that your funds are safe and that the NFT token you wish to buy is actually available on the respective platform.

Supported NFTs

You also need to ensure that the marketplace offers the specific NFT that you are interested in.

Fees

NFT marketplaces generate the vast bulk of their income by charging transaction fees. This is often charged to both buyers and sellers, so this is something to consider before choosing a provider.

Typically, as a buyer, you will pay a percentage of the total transaction amount. For instance, if the NFT marketplace charges 2% and your chosen token costs $1,000 – then you will pay a fee of $20.

Payments and Wallets

When you buy NFT tokens online, you typically have to fund your purchase via cryptocurrency. For instance, if your chosen NFT was built on top of the Ethereum blockchain, then it’s likely that fees need to be paid with ETH tokens.

Moreover, NFT marketplaces usually collect payment through a wallet connection.

For instance, you might need to connect your Trust Wallet or MetaMask to the NFT marketplace, which, after you authorize the transaction, the platform will deduct the respective number of tokens.

Where to Buy NFTs

Taking the above points into account, if you’re wondering where to buy NFTs today – then you might consider Crypto.com. In the sections below, we explain why Crypto.com is potentially the best NFT marketplace for 2022.

Crypto.com – Overall Best Place to Buy NFTs in 2022

If you’re learning how to buy NFT tokens for the very first time, you will appreciate that the Crypto.com platform has been designed with beginners in mind. Founded in 2016, Crypto.com is now one of the world’s largest crypto ecosystems, with the platform offering a wide suite of products and services.

In addition to trading services, loans, savings accounts, and a crypto card issued by Visa, the provider also offers a popular NFT marketplace. This covers thousands of unique NFTs – many of which are tokens created by well-known brands. This includes the likes of Aston Martin, UFC, and the Philadelphia 76ers. In terms of market value, Crypto.com hosts NFTs that range from just a few dollars to over $1 million.

For example, NFT series such as Ryker, AlphaBot, and OG Jack come alongside auction bids that start from just $1. At the other end of the spectrum, you have the likes of PsychoKitty and Loaded Lion, which carry starting bids of $1 million. Irrespective of how much you are looking to spend, what we really like about Crypto.com is that the platform allows you to buy NFT tokens with fiat money.

This means that should you not have any crypto tokens to hand, you can pay for your NFT purchase with a debit/credit card. In terms of fees, you won’t be charged anything to buy NFT tokens at Crypto.com. Sellers, however, are charged a processing fee of 5%. Another standout feature is that if you use Crypto.com to sell an NFT, you can attach royalties. This means that you will recieve a percentage of any future sales that your NFT token generates.

What We Like:

  • Thousands of NFT tokens for sale
  • Buy NFT tokens from just a few dollars
  • Pay for your NFT purchase with a debit/credit card
  • No fees charged to NFT buyers
  • Crypto.com has a solid reputation in the crypto space

Once you’ve got your wallet ready, all you need to do is to buy NFT. Currently, the largest NFT marketplaces are:

  • Rarible – Rarible is a democratic marketplace that allows artists and creators to issue and sell NFTs. It enables holders to weigh in on features like fees and community rules.

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  • OpenSea – To get started, all you need to do is create an account on the official website of OpenSea and browse NFT collections and discover new artists. This platform is famously known as a vast collection of rare digital items and collectibles.

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  • Foundation – On this platform, artists need to receive from or send an invitation from fellow creators to post their art. This community’s exclusivity boasts higher-caliber artwork, assuming the demand for NFTs remains at current levels or even increases over time.

How Does the Future of NFT Look Like?

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NFT has enhanced media exposure and special perks for aspiring artists on social media. Recently, Jack Dorsey, the CEO and co-founder of Twitter, with his very first and famous tweet, “just setting up my twttr,” and Vignesh Sundaresan, famously known as “Metakovan,” bought 69.3 million dollars worth of NFT art on Beeple.

Owing to its increasing popularity, people are now willing to pay hundreds of thousands of dollars for NFTs.

Like David Gerard, author of Attack of the 50-foot Blockchain, many experts in the crypto industry say that around 40% of new crypto users will use NFTs as their entry point. As a result of its growing popularity, NFT could represent a more significant part of the digital economy in the future.

Conclusion

Thanks to this “What is an NFT?” tutorial, you have now seen everything you need to know about what an NFT is, how it works, its uses, and how you can buy them.

Whether you’re an experienced Blockchain developer or just an enthusiast who wants to explore more about NFTs, cryptocurrencies, and blockchain, you can enroll in Simplilearn’s Blockchain Bootcamp in collaboration with the University of Minnesota. This program helps you learn and explore more about cryptocurrencies, blockchain, and all the associated technology, accommodating all levels of experience.

Do you have any questions for us? Please feel free to drop them in the comments section of this article, and our experts will get back to you as soon as possible.

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