NFTs – or Non-Fungible Tokens – have been around for a while now, but enthusiasm for these digital assets shows little sign of abating.
NFTs continue to make headlines, although not always for the right reasons. There have been numerous high-profile NFT thefts, together with NFT projects that have seen their value collapse overnight.
But whether you love them or hate them, NFTs have revolutionised the way we think about digital assets.
Whether it be digital pixel art and collectibles, to virtual property, there’s no doubt that NFTs have opened up many exciting new possibilities for creators, collectors and investors.
But what exactly are NFTs? What are they for? Why do they have value? And how you go about buying one?
This article will explain why NFTs are reshaping the digital landscape.
What is an NFT?
An NFT is a unique digital token that gives the holder ownership or proof of authenticity of a particular item or piece of content.
The asset is tied to a blockchain to provide immutable proof of authenticity, is indivisible and cannot be exchanged on a one-on-one based (hence non-fungible).
This is an important point as it shows a fundamental difference between an NFT and a cryptocurrency such as Bitcoin which is fungible and interchangeable.
Each NFT contains unique identifying information recorded in a smart contract – a blockchain based program that executes its instructions automatically.
NFTs can represent any piece of content or asset, whether digital or physical, such as a painting or a car.
NFTs can be bought and sold on marketplaces and transferred over the blockchain to a new owner. Ethereum is currently the blockchain that’s used the most among NFT traders, although Polygon is becoming increasingly popular.
Each NFT has its own distinctive value and identity.
An NFT can be verified, sold or transferred online without the need for any central authority to be involved in the transaction.
If the Ethereum blockchain is used a ‘gas fee’ will need to be paid to facilitate an NFT purchase or transfer. Other blockchains have their own fee structure and are often cheaper than Ethereum.
What gives an NFT value?
There are various factors that directly impact the value of an NFT.
They include:
- Rarity – One-of-a-kind pieces created by well-known artists or celebrities can add a huge amount of value to an NFT.
- Ownership – As mentioned above, an NFT created or promoted by a celebrity or influencer can be worth a lot of money.
- Social proof – A large social community behind a NFT artist’s collection can dramatically increase its value.
- Utility – NFTs that are created to generate funds for a cause can also attract huge bids.
- Added value – NFTs that offer special access to either limited edition real-world items or events can be extremely desirable.
How are NFTs created?
NFTs are created using a process known as ‘minting’.
This involves uploading art to a marketplace and signing a blockchain transaction within a smart contract that describes the token’s details and its owner.
Once the NFT is minted and added to a blockchain it cannot be changed, nor can its metadata be altered.
How do I mint an NFT?
If you want to create your own NFT, you first need a digital file of the work that you intend to use. Then you need to choose a platform that to mint it on.
Some popular NFT platforms are: OpenSea, Rarible, Nifty Gateway and Mintable.
You then need to upload your file to the platform and pay the gas fee to mint it.
It’s then up to you to set a price for your NFT and the level of royalties applicable to any future sales. You can also auction your NFT and allow bidders to dictate the price.
NOTE: OpenSea allows users to mint NFTs for free using a ‘lazy minting’ function. This allows creators to mint an NFT and add it to the marketplace for sale without spending any money.
You may also like: How to mint an NFT for free on OpenSea
How much does it cost to mint an NFT?
The cost of minting and NFT will vary from platform to platform and are also impacted by which blockchain you use.
As mentioned above, some platforms will allow you to make your NFTs without any upfront fees and will only charge you if someone buys it or you transfer it off the platform to a wallet.
However, if you want to transfer your NFTs off the platform and into your own wallet, fees will apply (ETH ‘gas’ fees plus OpenSea’s cut).
Bear in mind that the cost of minting and NFT will also fluctuate depending on the amount of network activity and the actual blockchain you choose.
How do I buy an NFT?
Selecting and buying an NFT can be an exciting time, but it’s important to get it right to avoid any problems further down the line.
Here are the steps you need to take:
Choose a wallet
The first thing you need is a wallet that supports NFTs and the blockchain that you’re using to make your purchase.
As I’ve already mentioned, Ethereum is used for the majority of NFT transactions, so a wallet like MetaMask, Trust Wallet or Coinbase Wallet is ideal.
They are all well-known and supported and offer a high degree of security, while being user-friendly. There are plenty of others to choose from as well though.
Get some ETH (Ether)
You’ll need to fund your wallet with some ETH in order to buy your NFT and pay the fees.
You can buy ETH through a cryptocurrency exchange using fiat money, directly through many crypto wallets or by transferring from another wallet.
Choose an NFT marketplace
Now that you’ve loaded up on ETH, you need to connect your wallet to the platform and go shopping for an NFT you like, which means checking out the various marketplaces available.
Once you’ve decided on what you’re going to buy you can either place a bid or buy it instantly depending on the seller’s preference.
You’ll be asked to confirm the transaction details in your wallet before paying the Gas fees to secure your purchase.
The transactions will then be processed, although this may not be instantaneous depending on how busy the network is.
Once the transaction is confirmed, your new NFT will be transferred to your wallet where you can view, manage and showcase it.
Quick guide to buying an NFT
Here’s a simple step-by-step guide to the stages involved in buying an NFT:
- Choose a wallet to pay for your purchase and store the NFTs you buy.
- Fund your wallet with some ETH using cash, or transfer from another source.
- Choose an NFT marketplace and connect your wallet to the platform.
- Find an NFT, place a bid or buy instantly depending on the seller’s preference.
- Confirm the transaction and gas and wait for it to be processed by the blockchain.
- You’re newly purchased NFT will be transferred to your wallet where you can view and manage it.
NFT safety and security
Buying NFTs is not without risks so it’s important to make sure you know what you’re doing and what you’re buying before parting with any cash.
Thoroughly research the NFT you’re interested in and verify its identity and the reputation of the seller before going ahead.
Remember, NFTs are a very new asset class meaning prices can be extremely volatile.
There’s no guarantee that an NFT you purchase today will be worth anything tomorrow so you should never invest more than you can afford to lose.
How do I store an NFT?
The most secure way to store your NFTs is by using a cold-storage solution hardware wallet, in the same way you would for your crypto portfolio.
There are many options on the market, but two of the biggest names are Ledger and Trezor.
There are drawbacks to using a hardware wallet, the most significant being that it can lead to delays in transactions, especially as most people don’t carry their hardware wallet around with them.
A compromise, although less secure, is a self-custody wallet app that sits on your smartphone or other device and enables you to buy, sell and trade your NFTs (and crypto) at a moment’s notice.
Again, there are many options to choose from, but a couple of well-supported apps are MetaMask, Trust Wallet, Coinbase Wallet and Exodus.
How do I move my NFTs onto my self-custody wallet?
Once you’ve chosen your preferred storage option, transferring your NFT is quite straight forward.
You’ll first need to create your wallet, which will involve making a careful note of your seed phrase (and not sharing it with anyone else!), and making sure it supports the blockchain on which your NFT was created.
Connect your wallet to the marketplace where you’re planning to transfer or buy an NFT from and initiate the transaction.
You’ll need to verify this on your wallet, but if all goes well your NFT will appear in your wallet’s NFT gallery where it’ll be stored for safekeeping.
Additional features
Some wallets offer additional features which allow you to manage and interact with your NFTs.
This includes showcasing them, viewing their transaction history, or even participating in decentralised applications (DApps) that support NFTs.
A word on seed phrase security
It’s crucial to create a backup of your wallet’s seed phrase or private key.
This backup is essential for recovering your wallet and accessing your NFTs if you ever lose or replace your device.
Store your seed phrase or private key in a secure location offline and avoid sharing this information with anyone to maintain the security of your wallet.
Take steps to enhance the security of your wallet by enabling additional security measures, such as biometric authentication or and set multi-signature measures if available.
It’s also important to regularly update your wallet software to benefit from security patches and improvements.
Remember that the security of your NFTs relies on the safety of your wallet and its backup.
Be cautious with phishing attempts, only download wallet software from official sources, and double-check website URLs to prevent falling victim to scams.
Related post: What is asset tokenisation?
