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Non-Fungible Tokens

Lesson in Course: Crypto (beginner, 9min)

NFTs have made news headlines. What are they and should we buy one?

Eureka!

What it's about: NFTs are digital assets, often in the form of art or collectibles, that we can buy using cryptocurrency.

Why it's important: They present new uses for crypto and opportunities for owning different types of digital assets.

Key takeaway: While NFTs are collectibles, they are speculative and have additional technological risks.

NFTs are digital collectibles built mainly on the Ethereum blockchain. With the rise of interest in NFTs, creators are starting to use other blockchains to create NFTs as well. The common risks of investing in NFT are similar to investing in sports jerseys, name-brand shoes, and other collectibles. Instead of a physical product, people display NFTs through computer and smartphone screens.

What is NFT ?

Non-fungible tokens, or NFTs, represent digital assets, often in the form of art or collectibles, created mainly on the Ethereum blockchain that certifies the asset to be unique and not interchangeable.

 

Fungible vs non-fungible

Fungibility is an uncommon word, but it describes the uniqueness of an item. NFTs are non-fungible or the opposite of fungible.

What is Fungible?

Fungible assets are stores of value that are interchangeable with another of the same type, like a $5 bill. Copies of fungible assets can be made, and they will retain the same value as the original.

Gold is a fungible asset since a one-pound bar of pure gold is worth the same as a one-pound worth of coins and ingots. Other fungible assets include oil, company shares, bonds, other commodities, and currencies. 

Each bill has value and is replaceable and fungible

In those examples, a barrel, share, certificate, or bill have the same value as another identical barrel, share, certificate, or bill. We can make copies of fungible assets, and they will retain the same value as the original.

What is Non-fungible?

Non-fungible assets are unique, non-interchangeable, and cannot be divided into smaller units, like diamonds. No two diamonds are the exact same. Copies of non-fungible assets can be made; however, the original is still one-of-a-kind.

Diamonds, land, houses, and original art are examples of non-fungible assets. 

Many artists are using NFTs to sell rights to their art

No two diamonds, plots of land, houses, or art pieces are the exact same. Even though we make copies of non-fungible assets, the original is still one-of-a-kind.

Check out this video covering the difference between Fungible and Non-fungible
https://www.youtube.com/watch?v=gbsewBbW3Jk
 

Digitalization of reality

Part of the appeal of NFTs is the belief in the partial or complete digitalization of reality. Virtual reality and augmented reality could provide clues to what the future has in store. NFTs could eventually replace the Yeezys, Louboutins, and Mona Lisas if a digital world overcomes the actual world. Instead, luxury might look something like this:

This Gucci ghost NFT sold for over $3,600

Other supporters of NFTs include artists and art enthusiasts. By listing their pieces as NFTs, artists around the world can sustain their livelihoods while maintaining $0 shipping costs, and gaining access to a worldwide market, instead of just their local market.

Common risks of investing in NFTs

There are some key risks to consider before buying an NFT.

Digital deterioriation

NFTs can be affected over time by websites going down and image file format changes. If the owner forgets or losses the password to the digital wallet, the NFT is lost forever.

What is Bit rot?

The slow deterioration in the performance and integrity of data saved on storage media.

Speculation

Unlike utility tokens, speculation ultimately drives the value of NFTs. The value of an NFT is only as much as anyone else is willing to pay for it. Some of the highest selling NFTs have been memes or other art forms because of their novelty; however, what is popular or vintage today might not be tomorrow. Pop culture is constantly changing and hard to predict.

Regulatory

NFTs do not fit neatly in our current systems of regulations and laws.

NFTs challenge current laws as a new way to think about ownership, value, and securities

Some unaddressed concerns include:

  1. What intellectual property rights, if any, are transferred through an NFT sale?
  2. Should NFTs be treated as a commodity or security?
  3. Are NFTs counted in US sanctions against other countries?
  4. Are NFTs subject to state laws?

Liquidity

Liquidity risk refers to "How quickly can I sell an NFT?" Due to speculation, if an NFT goes out of style, we might not find a buyer before we need the cash.

Fraud

Copies have sprung up pretending to be the originals. It is up to us to protect ourselves from scams and make sure that what we buy is the original.

Copy and paste can quickly duplicate digital assets

Buying NFTs

NFTs are sold on online marketplaces for ETH and require a crypto wallet. There are many marketplaces available for us to search and find an NFT that might interest us.

 

Actionable ideas

Speculating with NFTs comes with a large degree of risk. As a responsible investor, it's a good idea to only buy NFTs with your extra cash or play money and not your retirement savings.

Supplementary materials

Here is a video that provides a deeper dive into NFTs and DeFi
https://www.youtube.com/watch?v=Xdkkux6OxfM
Some NFTs sell for millions!
Read the whole storyhttps://en.wikipedia.org/wiki/List_of_most_expensive_non-fungible_tokens

Here are some popular NFT marketplaces:

Opensea
https://opensea.io/
Mintable.app
https://mintable.app/
SuperRare
https://superrare.com/

Glossary

What is NFT ?

Non-fungible tokens, or NFTs, represent digital assets, often in the form of art or collectibles, created mainly on the Ethereum blockchain that certifies the asset to be unique and not interchangeable.

What is Fungible?

Fungible assets are stores of value that are interchangeable with another of the same type, like a $5 bill. Copies of fungible assets can be made, and they will retain the same value as the original.

What is Non-fungible?

Non-fungible assets are unique, non-interchangeable, and cannot be divided into smaller units, like diamonds. No two diamonds are the exact same. Copies of non-fungible assets can be made; however, the original is still one-of-a-kind.

What is Bit rot?

The slow deterioration in the performance and integrity of data saved on storage media.