What is an NFT?
Non-fungible tokens or NFTs, as they are more popularly known, are digital collectible tokens, unique in form (hence non-fungible) which are verified and secured by a blockchain. NFTs provide and represent the authenticity of origin of an underlying work/item, its ownership, scarcity as well as its permanence.
Further, NFTs are cryptocurrency ‘tokens’, implying that the existence of an NFT leverages an existing cryptocurrency’s blockchain. A large proportion of the NFTs are created and exist on ‘Ethereum’, ‘Polygon’ and ‘WAX’ blockchains.
Most NFT transactions take place on internet platforms through smart contracts. A smart contract is a self-executing contract in which the terms and conditions of the buyer-seller agreement are directly inscribed into lines of code. The code and the agreement contained within it are dispersed and decentralised over a blockchain network. Transactions are easily traceable and irreversible, and the code controls the execution.
The non-fungibility or the uniqueness of NFTs prevents counterfeits of the underlying assets. As a general rule, non-fungible items aren’t freely exchangeable or replaceable by similar items. One cannot freely exchange NFTs or replace one NFT with another as each NFT is verified and secured independently on the blockchain and remains on the blockchain forever for any person to verify and authenticate. Though NFTs have been around for a while, the boom in NFTs came about in the year 2017, when a Canadian gaming company, Dapper Labs created a blockchain based game named ‘Crypto Kitties’, wherein people could purchase, collect, breed, and sell virtual cats over the internet. The trading community benefitted financially due to the non-fungible nature of the collectible traded. This paved the way for the expansion and recognition of NFTs on a larger scale in the financial and investment market.
A few examples of NFTs issued / sold recently are as follows:
Industry Jargon
Minting denotes the action that brings an item into existence on the blockchain, and costs “gas” to do so (“Minting”). Minting using the NFT Marketplace only occurs when necessary, i.e. (i) when you transfer an item to another account; and (ii) when someone buys an item from you.
The term "Gas Fee" refers to the cost or payment required to carry out a transaction or execute a contract on the Ethereum blockchain. Gas Fees is an essential incentive in the form of a cryptocurrency that is given to miners for validating transactions on a blockchain. The Gas Fee is usually collected by the NFT Marketplace from the creator and passed on to the miners. Gas Fees is an important levy as it helps miners prioritise the validation of certain transactions over the others when there are multiple transactions queued up for validation.
NFTs and cryptocurrencies
NFTs are functionally similar to cryptocurrencies, except for the limit on Error! Reference source not found.. Theoretically millions of cryptocurrencies can be minted, but NFTs, in order to remain non-fungible, are required to have a limited supply of only 1 (one) token per NFT. However, there exists a fairly common exception to the rule of fungibility which is observed for a number of multi-token NFTs wherein at the time of creation of the NFT, minting additional copies is permitted, subject to a specified limit.[1]
Purpose of an NFT
In the limited time that NFTs have existed, NFTs have served varying purposes including promotion of art (digital or otherwise) by way of creating a marketplace with demand for ownership of artworks in a digital and thus globalized and accessible format.
Generally, an NFT serves the following purposes:
Creating and Minting NFTs
Issuing an NFT for an existing artwork is quite simple. One needs to set up a cryptocurrency wallet (“Wallet”) and open an account on an NFT marketplace. The artwork, if it is digital, can be uploaded to the NFT marketplace and a token i.e., the NFT, can be generated.
While the process seems cumbersome and may require a lot of handholding, a large number of dedicated NFT marketplaces have simplified and made the creation, issuance and marketing of NFTs quite intuitive.
Though non-digital art can also underly an NFT, it is most common to issue NFTs for digital art, which could be anything from an image to a music video. The artwork can be of any size and resolution, though most NFT Marketplaces usually enforce an upper limit on the file size that can be uploaded onto the NFT Marketplace’s online platform. Opensea, Rarible, SuperRare and Nifty Gateway are some of the most common NFT Marketplaces where NFTs can be created, listed and traded. As for Wallets, Ethereum wallets are among the most common, since as they allow the user to hold Ethereum (abbreviated as ETH) cryptocurrency, Error! Reference source not found. tokens[2] as well as NFTs. Metamask, Coinbase, Bitski and Torus are some popular service providers which provide easy to use Ethereum based Wallets to the users.
In order to understand the practical processes and challenges that a layperson may face in minting, marketing and selling NFTs, Anurag, Aryan and Aishwarya ("The AAA Team") created and minted their won NFTs based on the two amateur photographs shown below (a) Bombay Through a Fence; (b) Pandemic Office Desk.
The AAA Team opted for Opensea, a very popular NFT marketplace which allows a user to upload the underlying content for an NFT, up to a maximum file size of 100 (one hundred) Megabytes (“MB”). Opensea also has restrictions on the type of file that can be uploaded, as explained below.
Opensea is one of the most popular NFT marketplaces and setting up an account with Opensea entails the following steps:
Setting up an Opensea account for NFT trading, minting, and listing requires creating and linking of a Wallet. The AAA Team opted to set up a Coinbase Wallet, for which the process was as follows:
“0x78F612C7e861xxxxxxxxxxxxxxxxxxxx986fD6C4”
Thus, it is important to not reveal one’s Recovery Phrase to anyone at any time. It must also be noted that the order of occurrence of each word in the Recovery Phrase is vital and the Recovery Phrase should be saved exactly as displayed on the Wallet.
Illustration 1: Buying an NFT on Opensea.
Illustration 2: Selling an NFT on Opensea.
Opensea is one of the largest NFT marketplaces and is also considered to be one of the most user-friendly. While creating NFTs on Opensea a user is not required to pay any Error! Reference source not found.. However, a Gas Fee might be required at the time of listing of an NFT for sale, especially on the Ethereum blockchain. The following steps are required to be followed for setting up an account with Opensea: