Guestpost by Sophia Young
NFTs are becoming a hot topic today as everybody’s exploring blockchain. Despite that, many people still have a lot of misconceptions when they talk about it. So, we’re here to help you clear those thoughts and get started on your NFT journey. We will equip you with the things you should know about NFT. But first, let’s start with having a quick overview of what NFT is all about.
Understanding the concept of NFT
The term “NFT” stands for non-fungible tokens. From the word itself, “non-fungible,” NFTs are not interchangeable and have unique IDs. They are one-of-a-kind digital assets that cannot be swapped for another token of the same value. NFTs are used to signify ownership of digital artwork or valuables, such as photos, videos, audio, and other digital files. And the blockchain authenticates the said ownership for proof.
Now that we know what it means, here are seven things you should know about NFT:
1. NFTs are not cryptocurrencies.
Many people who just discovered NFTs often think they’re similar to cryptocurrencies, but they’re not. Unlike NFTs, cryptocurrencies like Bitcoin, Ether, and others are fungible tokens. In other words, they are interchangeable. One BTC, for example, can be exchanged for another cryptocurrency of similar value, such as 14.60 ETH or 41,259.16 XRP.
Of course, the values of various coins fluctuate over time. One BTC may be worth 30 ETH next month or less the following month. You need to understand that you can trade these coins based solely on the currency’s value at the time of the trade.
NFTs do not work the same way. Because there are no price constraints, their value is as high as you want it to be. This means that one NFT token may be worth $100 while another may be worth only a penny. Nevertheless, there’s a wallet to manage your Bitcoin and Stacks NFTs.
2. Copyright laws do not cover NFTs.
Even if the NFTs represent pictures, music, and other things, they are not protected under the law about intellectual property. So, that means people can own as many as they want and utilize them in whatever way they see fit. In other words, an NFT creator can sell, give it away, or do anything they want.
However, since some people capitalize on the NFT success of other people to develop scams or fraudulent schemes, few countries have created a legal framework to address this issue.
3. The NFT market is illiquid.
When a market is illiquid, there are few buyers and sellers, which results in fewer transactions. This is reflected in the market’s reduced trading volume and more price volatility for NFTs. For instance, Cryptopunk #7523 has increased its price by 71,000% in just a few months, from 1646 to 11.8 M USD. The value of NFTs constantly changes over time.
4. With the use of smart contracts, anything digital can become an NFT.
With the use of smart contracts, anything digital can become an NFT.
Although the majority of the focus is on selling digital art and collectibles, the technology’s adaptability allows almost anything to be tokenized. So, whether it’s photos, movies, and other digital files, you can mint them or transform them into crypto assets on a blockchain.
To create ownership proof, you should use a smart contract. It is a program stored on a blockchain that facilitates transactions and automates the processes. This is how it works: when you mint, you are essentially customizing the underlying smart contract code that determines the attributes of your crypto assets. It will ensure that your NFTs are unique and not interchangeable.
5. You can stake NFTs as collateral.
Many platforms currently support NFT staking for borrowing and lending purposes. This is a common notion in decentralized finance (DeFi), in which anyone can make peer-to-peer loans via a trustless third-party protocol.
Popular NFTs like CryptoPunks and Bored Apes have a market ‘floor price’ where bids and asks meet, and the collection’s least rare pieces congregate. Typically, the protocol values NFTs at this price, and users can earn liquidity by taking loans against them. If the cost of the NFT falls below the outstanding debt, the protocol may seize it as collateral.
6. Ethereum is the major blockchain that supports NFT, but not all NFTs are on it.
Ethereum is a blockchain technology recognized for its robust data security and protection. It enables safe and stable transactions free from fraud or third-party interference, making it a suitable platform for hosting NFTs. Ethereum supports a wide range of NFT collections and allows them to be sold through various online auctions, with a strong emphasis on authenticating holdings using proof of stake procedures.
However, not all NFTs can only be found on Ethereum. In fact, you can actually see them on nearly every blockchain. You can find them on Tezos, a blockchain network with a booming marketplace called “Hicetnunc,” a Latin term for here and now.
There’s also Solana, which contains the marketplaces Magic Eden and Solanart. It is a strong NFT competitor that challenges Ethereum’s dominance by offering cheaper gas fees and swifter transactions.
7. NFTs are risky investments.
NFTs, like all investments, have risks. They are unregulated, and the craze surrounding them may cause volatility. For instance, consumers may purchase an expensive NFT only to realize later that it isn’t worth much. Because NFTs are not easily exchangeable for cash, liquidity is an issue.
The Bottom Line
The range of possibilities provided by NFTs opens up an exciting new market for both creators and customers. However, there are still risks that you have to watch out for. So, be sure to be ready for possible outcomes when you decide to start your NFT journey. Nevertheless, NFT’s future seems bright as blockchain adoption increases.
About the Author
Sophia Young recently quit a non-writing job to finally be able to tell stories and paint the world through her words. She loves talking about fashion and weddings and travel, but she can also easily kick ass with a thousand-word article about the latest marketing and business trends, blockchain, cryptocurrency, finance-related topics, and can probably even whip up a nice heart-warming article about family life. She can totally go from fashion guru to your friendly neighborhood cat lady with mean budgeting skills and home tips real quick.
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