What is an NFT?

NFT by Beeple worth 69 million dollars (The Verge)

Non-fungible token.

That’s what the letters “NFT” mean. These letters are, at least seemingly, omnipresent in every business forum and every business column ever — online or offline. It’s caused uproars in recent years by giving the internet community heart-attacks because of news like Grimes getting millions of dollars worth of payout for NFTs or when Nyan-cat was announced to be sold as one.

It’s one of those things that would make just about anyone goes “what in the world is happening,” and it would take hours and maybe even days of research before getting a basic understanding of what these things are at all.

From rock clipart and old internet memes to music and tacos, and even toilet paper, NFTs have exploded into prevalence in this new age like artifacts from a now-desolate civilization from the beyond.

What are NFTs? What are they beyond the not-so-helpful “non-fungible-token” brand that seems to have made memes actual assets worth paying millions to acquire?

Well, it’s a whole different world in and of itself. So it’s time to do some exploration.

Nyan Cat (NPR.org)

“Non-Fungible-Tokens” AKA Unique

There isn’t a concise way of explaining what NFTs are in their entirety. If we, however, have anywhere to start, it’s the word “unique.”

Non-fungible means something is unique and cannot be replaced with a different asset. As a reference, bitcoin is fungible as you can trade it for another bitcoin. An ultra-rare trading card with signatures to match, however, is irreplaceable and is non-fungible. Suppose a Pikachu card signed by its voice actor is traded for a William Shatner Teeth Xray trading card. In that case, you’d no longer have a Pikachu card anymore and is, therefore, an entirely different NFT.

In typical instances, the majority of NFTs ride on the Ethereum blockchain. Ethereum is a cryptocurrency, like the highly recognizable bitcoin and dogecoin. Ethereum’s blockchain also supports NFTs, which store a few extra information that enables them to function uniquely from an ETH coin. But it isn’t just Ethereum; other blockchains can implement their own NFTs — some have started doing so.

Anything that can be turned into a digital asset or be conceived in the digital space, the good, the bad, and the weird, can be NFTs. What’s actually causing the uproar is the excitement around using tech to sell digital pieces or assets.

How Is an NFT Different from Cryptocurrency?

The similarity between the two ends in the fact that they are run in the same programming. NFTs are generally built in the same programming as cryptocurrencies like Bitcoin and Ethererum. Still, other than that, they’re apples and oranges.

As physical money and cryptocurrencies can be traded and exchanged for one another, they are “fungible.” A dollar is worth another dollar; a Bitcoin is worth another Bitcoin. It is precisely crypto’s fungibility that empowers it to become a trusted channel for transactions on the blockchain. 

The case for NFTs is different. Each asset has a digital imprint or signature that makes it impossible for NFTs to become exchangeable for other wares that may or may not be equal in value. This is where the term “non-fungible” comes from.

Forbes described the uniqueness of NFTs by simply writing: “One NBA Top Shot clip, for example, is not equal to EVERYDAYS simply because they’re both NFTs.” (One NBA Top Shot clip isn’t even necessarily equal to another NBA Top Shot clip, for that matter.).”

How Does an NFT Work?

Since NFTs exist on blockchains, a distributed public ledger that keeps track of transactions, they work similarly to cryptocurrencies. Blockchain, of course, is the underlying process that makes both concepts possible.

NFTs are made, or what laymen may consider “minted,” from objects in the digital space that represent both tangible and intangible assets that may range from artwork, GIFs, videos and highlights, collector’s items, virtual avatars, video game skins, designer sneakers, music, and everything else under the digital sun (if the original creator wishes it).

NFTs can be so random that even tweets can count. Twitter co-founder Jack Dorsey announced that he’s putting up his first-ever tweet for sale as an NFT for more than $2.9 million.

First ever Tweet by Jack Dorsey worth nearly 3 million USD (Today Online)

At its very essence, The NFT craze takes striking similarities to the physical collector’s items industry — only digital. Instead of frequenting auctions and acquiring an actual Monet to hang on the wall, the buyer gets a GIF of the Nyan-Cat instead; or something similar to this effect.

Like real-life property, buyers get exclusive ownership rights. NFTs can only have one owner at a time. They do this using NFTs’ unique data that allows verification of ownership easy, and transfer tokens between owners can be checked with ease as well. Owners and creators are given the ability to store specific information within NFTs, and artists can even put their signature on their work through an NFT’s metadata.

Should You Buy NFTs?

Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures, believes that it will depend on many factors.

“NFTs are risky because their future is uncertain, and we don’t yet have a lot of history to judge their performance,” she claims.

“Since NFTs are so new, it may be worth investing small amounts to try it out for now,” Yu added.

To make things short, buying NFTs will depend on personal decisions. It may be worth noting that the value of NFTs is based entirely on how much someone is willing to spend for them. This means prices are solely driven by demand instead of technical and economic indicators.

In case it may also be forgotten: NFTs are subject to capital gains taxes,  the same way when you sell stocks at a profit. As NFTs are considered collectibles, though, it is likely that they don’t receive the preferential long-term capital gains rates stocks have and may be taxed at higher collectibles tax rates. There is still an ongoing discussion within the IRS as they have yet to rule out what NFTs are considered for in matters of taxation.

These are NFTs in a nutshell. An asset with crazy variety and an extremely dynamic market. It bears similarities with real and physical industries and is a testament to the evolution of not only man but technology, business, and novelty.

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