What is NFT? (simple explanation for beginners)

Thumbnail for the article “What is NFT?” Photo: HollyHarry / shutterstock.com

In this article, we explain to newcomers what NFT is and give an overview of everything there is to know about digital assets.

What does NFT mean?

NFT is an acronym for Non-Fungible Token, in German: Non-replaceable code.

What is a token?

The token is the digital form of the asset. So the token owns a specific value or function. However, at the same time, real estate assets such as real estate or music rights can also be tokenized by overwriting the rights and obligations associated with the token. This means that ownership is digitally assigned and therefore can be traded.

The token can be replaceable (interchangeable) and non-replaceable (non-replaceable). Basically, “uninterchangeable” in this sense means that it is a unique digital asset, which cannot be exchanged for another.

The situation is different with bitcoins, for example: bitcoins can be exchanged at will because they always have the same value. It’s the same with cash: a ten euro note has the same value as another ten euro note.

On the other hand, non-replaceable icons can be compared to artistic objects such as paintings. This has an individual value. When you exchange them with each other, you usually don’t get the same value as you pass them in.

Also interesting: Paying Taxes on Cryptocurrencies (Info)

What does NFT look like?

NFT artwork by artist Beeple “Every Day: The First 5,000 Days” on a smartphone. Photo: mundissima / shutterstock.com

In theory, any asset can be digitized and become an NFT: graphics, digital artwork, videos, or even real property. It is important that NFTs contain information that proves their uniqueness. In this way, the respective owner can always be traced and can confirm his claim.

Now, of course, the question arises, how do we protect digital assets? Finally, one can save a copy of any digital artwork on their computer with a simple mouse click.

How is ownership documented?

The scenario described above is true and is often cited by NFT critics, but it’s a bit more complicated than initially assumed. Like cryptocurrencies, NFT is based on the blockchain, that is, a decentralized database.

Simply put, this consists of blocks of information arranged like links in a chain. Each block in turn contains certain data as well as its hash value and the hash value of the previous block. The data stored in a block can include, for example, transaction details for cryptocurrency or NFT: seller, buyer and transaction amount.

The hash value can be thought of as an electronic footprint. It is always unique and is used to identify the respective block. Since each block also contains the hash value of the previous one, a chain is generated. This is based on a peer-to-peer network, i.e. a network of equal computers that all contain a complete copy of the blockchain. When a new block of information is created, all computers on the network receive that information, compare it and then confirm the inclusion.

If someone tries to enter a block of false information into the blockchain, they will have to enter it into all copies of it. Since this is almost impossible, the blockchain represents a very secure variant for storing data.

So what does this have to do with NFTs?

Since data can always be traced back on the blockchain, individual ownership can be well documented. So NFTs stored on the blockchain can’t be copied – at least not inside the blockchain.

Of course, digital works of art can often be reproduced infinitely with any technical device, but they are in no way inferior to physical works of art (forgeries, art prints, etc.). And like real painting, they derive their value primarily from what we attribute to them.

I think the only difference is that a Picasso or Van Gogh painting is a tangible thing to hang at home, while NFT is really only in the virtual world. However, if you think about the amount of time we now spend in digital realms like Facebook, Instagram, and Co, then the idea of ​​purely digital property shouldn’t seem too far fetched to us.

In addition, there are virtual worlds with Cryptokitties or Decentraland where purchased NFTs can be used.

Also interesting: What is a short squeeze?

Hype around NFTs

NFTs may seem incomprehensible and useless to many. After all, they are in principle nothing more than a piece of information within a technical system. The fact that digital assets are so popular right now is probably due to the hype surrounding cryptocurrencies like Bitcoin or Ether.

In addition, the Corona pandemic will have played its part. On the other hand, there are the artists and musicians whose sales plummeted overnight and who discovered alternative income streams using NFTs (see Grimes and Kings of Leon). On the other hand, there are the buyers who have withdrawn more and more into the digital realms during the many lockdowns and quarantines.

Added to this is the fear that the value of money may be devalued due to the high level of debt in the wake of the pandemic, which is currently worrying many people. Thus cryptocurrencies and NFTs can be understood as a way to keep savings safe from such a scenario. Then there are the speculators who hope that the value of NFTs will rise in the future.

It remains to be seen if the sometimes very high amounts are justified for some non-monetary transfers. Because in order for its value to remain stable or even to increase, enough people must believe in it.

Where do you buy NFTs?

OpenSea is one of the largest NFT marketplaces. Photo: Rokas Tenys / shutterstock.com

NFTs are now offered on many online trading platforms. The most famous of them are OpenSea, Rarible, and Mintable. In most cases, the purchase of NFT requires cryptocurrencies, which in turn need to be stored in a digital wallet. Since most NFTs are currently still based on the Ethereum blockchain, you need the Ether (ETH)-linked currency to purchase them. A detailed guide to buying Ether can be found here.

Creating and Selling an NFT: Here’s How

Now, if you want to create NFT artwork on your own, you can easily do so through a marketplace like OpenSea or Rarible. The Create function can be found in the menu at the top of both pages. All you have to do here is upload a compatible file like PNG, GIF, WEBP, MP4 or MP3, which will then be automatically converted to NFT.

You can sell your business directly via the platforms. Note, however, that you need a digital wallet to upload and sell.

For a detailed guide to creating and selling an NFT, check out our guide.

Read also: How to sell NFTs tax free

swipe NFTs

It is no longer a secret that the technical processes behind the blockchain consume an incredible amount of electricity. The University of Cambridge estimates that Bitcoin alone consumes more electricity annually than the Netherlands as a whole. This is due to all the hardware needed for the peer-to-peer network mentioned above. Depending on the type of power generation, this naturally also leads to higher CO2 emissions. NFTs are no exception to this.

British artist and technologist Memo Akten has spent several months researching the energy consumption involved in creating and selling NFTs. With nearly 18,000 NFT artworks he has analyzed, Average power consumption at 340 kWh She has a lot. This corresponds to nearly ten percent of the average annual electricity consumption per household in Germany. According to the files, NFT . will have Carbon footprint of 211 kgLike a two-hour flight.

There are plans to improve the Ethereum blockchain, on which most NFTs depend, in terms of power consumption, but so far each transaction has been very power-consuming. So the question of whether some colored pixels are worth the effort is fully justified.

Read now: Determine the value of Pokemon cards

Leave a Comment