Decoder: A Quick Explanation of NFTs

If you are a Twitter user, you would have at least once came across those cool and bored-looking cigar-smoking monkey avatars called "NFTs" on people's profiles. Have you ever wondered what they are and why all the noise about them in the last two years or so? Well, wonder no more because, on today's "Decoder" article, we explain, in layman's terms, what exactly those monkey avatars, or NFTs, are.

Although they have been around since 2014, NFTs have gained huge popularity over the last two years. NFT stands for "Non-fungible token". Let's break down these terms, starting with "non-fungible". This term simply means something that cannot be exchanged for another thing of equal value. For example, a P10 note or 1 bitcoin are fungible items because you can easily exchange a P10 note or 1 bitcoin for another P10 note or 1 bitcoin and they will have equivalent value. An artwork like a Picasso or a viral tweet like Jack Dorsey's first-ever tweet, on the other hand, is non-fungible because only one original can ever exist.

Meanwhile, "token" means a thing serving as a visible or tangible representation of something else. Putting these two explanations of "non-fungible" and "token" together, we come to the conclusion that an NFT should mean a unique and unexchangeable representation of something, and that's exactly what they are; unique cryptographic assets that represent real-world objects on the blockchain (usually the Ethereum blockchain). This video here explains quite eloquently what a blockchain is. 

Real-world objects like art, music, images, etc, are non-fungible meaning that they can be turned into NFTs. But what is the process of turning an object, say an image, into an NFT? Well, this process is called tokenization or more popularly, "minting". Because NFTs are recorded on a blockchain, the creator of the NFT is recorded in a public ledger. The record in the ledger gives the owner the ability to set a fee for whenever the NFT is sold in the future and allows them to earn passive income every time the NFT is sold in a secondary market. Five percent to 10% of the secondary sales price is considered a standard royalty payout.  to the original NFT creator.

Selling an NFT involves recording that a transaction has taken place between two parties on a blockchain and requires the network to do some computing. That transaction will cost some money, which is known as a "gas fee" and set as 2.5% per transaction on OpenSea, the most popular NFT marketplace. To complete your first sale, make sure you've purchased some Ethereum on a crypto trading app and deposit it into your wallet. Depending on the marketplace, you can then transfer the crypto from your wallet to your NFT marketplace account. 

We have so far talked about what NFTs are and how one can turn a real-world object into an NFT. Now let's talk about buying an NFT. When you purchase an NFT, you are buying the digital rights of the object minted as an NFT and not the object itself. Simply put, this means that if you buy an NFT of artwork, you don't get the physical artwork itself but rather a digital certificate in the form of a record of your ownership on the Ethereum blockchain. This means that even if buy an NFT of an artwork, another person can just download the .jpeg version of the same artwork on the internet and do as they please with it and there is nothing you can do to stop them.

The logical question now becomes, well, if I'm buying artwork and I don't get the actual artwork itself or any exclusive copyright benefits, what's the point then? What exactly I'm I spending my money on? Well, although they have no inherent value, NFTs allow you to support your favorite artists by buying their NFTs and allowing them to directly benefit from their creative work instead of having to rely on music labels or art galleries for distribution. You can also earn some profit by reselling an NFT you bought for a higher price than you bought it.

So yes, that's what those monkey avatars on Twitter are. They are NFTs. Those specific monkey ones are part of a collection called "Bored Ape Yacht Club". There are many other NFT collections like "Cryptopunks", "Cryptokitties", etc. Celebrities have also been getting into the space by launching NFTs of their creative works. Examples include Snoop Dogg and Eminem.

So in this article, you have learned what NFTs are, how to create NFTs, how to sell NFTs, how to buy NFTs and what the whole point of transacting them is. As you can see, even you can create and sell your own NFT of that one viral tweet you have had or anything else really, as long as it is non-fungible and you believe there is a market for it to make the gas fees to be incurred worth it.

NFTs can be used for more than just trading artworks, tweets, cigar-smoking monkeys, and other seemingly trivial items. More "important" use cases exist. For example, NFTs can be used to democratize investing by fractionalizing physical assets like real estate. It is much easier to divide a digital real estate asset among multiple owners than a physical one.

Consider a piece of real estate divided into multiple divisions, each of which contains different characteristics and property types. One of the divisions might be next to a beach while another is in an entertainment complex. Depending on its characteristics, each piece of land is unique, priced differently, and hence can be represented with an NFT. Real estate trading, a complex and bureaucratic affair, can be simplified by incorporating relevant metadata into each unique NFT.

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