Understanding NFTs – How Do NFTs Work?

Understanding NFTs - How Do NFTs Work?

Non-fungible tokens or NFTs are among the biggest technology trends in business today. This beautiful marriage of modern technology, art, and cryptoeconomics is not only an entertaining way to build a digital collectibles library, but it is also a great way to make money.

NFTs are the next big thing when it comes to digital technology. These digital properties can help build an internet economy, exchange valuable collectibles, and even help create specialized investment portfolios. Here’s everything you need about non-fungible tokens, how they work, and why they’re relevant for you.

How Do NFTs Work?

Non-fungible tokens are a type of blockchain token, representing a digital asset or property. These can be anything from art, music, videos, photos, and even other assets. Because they are non-fungible, which means they’re unique and can’t be replaced, they have the level of rarity that a collectible needs.

So far, you can have NFTs in almost any niche, with its best use for digital collectibles right now. These include NFTs in college sports, national sports, internet culture, memes, art, and more. In addition, they’re a great way to buy and sell digital artwork, with millions of dollars in cryptocurrency used over the past few years.

NFTs are nothing new, with the first NFTs traded in 2017. However, they are gaining notoriety due to mainstream companies starting to adopt certain types of non-fungible tokens. An excellent example of these includes NFT games like Axie Infinity that uses NFT to move around and generate their own tokens.

NFTs, much like any property, are tradeable. These collectibles can be created, sold, and traded between different potential buyers and sellers. Much like trading art, NFTs can fetch a reasonable sum due to the value of the media that is within the token.

How Many Types of NFTs Are There?

As we already noted, there are several types of uses for NFT that you can use. There are at least nine types of NFT and a variety of uses and collectability. These include:

  • Art NFTs
  • Music NFTs
  • Collectibles/Trading Cards
  • Videos
  • Video game items (skins, characters, weapons)
  • Memes
  • Domain names
  • Sports highlights
  • Online fashion
  • miscellany

As you can see, the technology is still in its infancy, so there should be more applications of them in the near future. The conception of non-fungible tokens allows artists to sell their best works online. The most profitable NFTs at the moment is art, as commissions can create unique art only available through a single token.

Musicians are also trying to get as much as possible through music NFT. As music is digitally distributed and fungible, they earn only a small amount of money through their songs. Artists and DJs specifically sell NFT music for specific music, earning as much as 100% of the entire value of the token back for themselves.

The most prominent and most collected type of NFT at the moment are sports highlights and collectible cards. Organizations like the NBA take advantage of NFTs, selling game highlights, snippets, and digital collectibles through the NBA Top Shot brand.

NFT vs. Cryptocurrency: Is There A Difference?

NFT is entirely different from cryptocurrency when it comes to scale. Of course, both are built with the same technology, which is blockchain, but that’s where everything ends. NFTs are different from cryptocurrency primarily due to one operative term: fungibility.

Cash and cryptocurrency are fungible, which means you can trade and exchange them for something else. For example, if you have 10 Bitcoin tokens, you can sell a small portion and divide it into 5 and 5 or 8 and 2. They also have a consistent value: a dollar is always a dollar, while one Bitcoin is always one Bitcoin.

NFTs are non-fungible, which means each digital signature only refers to a single token. You can never exchange them for one another or change their pre-assigned value. This makes them work more as a property or a piece of art. A clip from NBA Top Shot is not the same as any other, including other videos from NBA Top Shot.

Benefits of NFT

Much like art, NFT is beneficial to its creators because there’s only one of them. Depending on the digital asset that you’re buying, the contents of your token are yours forever. Even if you sell the NFT, the ownership of the NFT is yours forever unless you transfer the rights to someone else.

NFT also confirms that your digital ownership of the token’s contents is authentic. While people can take pictures of the NFT and even make copies of the image or the video, but the ownership of the original goes back to the owner of the token.

At the same time, you can sell NFTs to those interested in the content. Depending on the rarity and value of the token’s contents, this can be a good way for creators to earn money. For fans, this is a great way to support their favourite creators and immortalize their creations.

If you’re playing an NFT game, you can also use it to earn money. Depending on the game, you can buy, sell, and collect in-game items. Some play-to-earn games generate special cryptocurrency that allows you to create rarer and high-quality NFT items, which can also sell for a high value.

Some games are also looking at letting players keep rare items and drops as NFT items. These work similar to collectibles, which means you can store them in your digital wallet. By doing so, you can eventually keep these pieces of media for your collection or sell them to those who want them.

Key Takeaways From Non-Fungible Tokens

The size of the NFT market is growing at the moment, and it’s not stopping any time soon. The market had as much as $10 billion in transfers in March 2021, and more transactions will happen over time. The price of NFTs vary, depending on the valuation you have of the art and how much other people will pay for it.

NFTs are taxed similarly to other collectibles through the capital gains tax. Owning digital artwork for less than a year can get up to 37% in taxes, while long-term can get a maximum of 27% taxes. Buying an NFT with your crypto can also get you taxed on the profits as well.

Final Thoughts

NFT is the future of blockchain. So far, it is a great way for creators to secure and authenticate their art and receive money and sell them for a higher value. In the future, we’ll likely see NFT everywhere on the internet. So if you’re considering if non-fungible tokens are suitable for you, everything in this guide should help you get more informed.