NFTs made simple: An Idiot’s Guide!

This is the first part in the series — An Idiot’s Guide to Everything Web3. Give it some love so I can keep writing and break down complex topics into simpler explanations. Let’s get started.

The concept of NFTs, or Non-Fungible Tokens, can be interesting for curious minds but can also be extremely technical for those who want to dive into it.

Consider NFTs as digital trading cards or digital paintings. When you buy one, you’re actually buying specific rights to that asset. As the name suggests, “Non-fungible” implies that it cannot be changed, split up, or interchanged with something else. To understand this better: 1 $BTC is identical to another 1 $BTC, but 1 NFT is entirely different from another NFT. So, an NFT is a token that you own that doesn’t change over time.

That’s what it means in the most basic sense, but if we go deeper into the tech, an NFT is essentially a piece of data owned by an address. Whoever owns that address (with the password) is the owner of the data. This piece of data can be bought and sold to different addresses. It is verifiable on the blockchain, which is the underlying technology. One key aspect of NFTs is that the owner and the entire history of ownership are always trackable.

For example, the crypto kitty that was sold for $600,000 is essentially a small URL owned by an address. The only thing the person owns is that tiny piece of data. That data points to a server somewhere that hosts an image. Technically speaking, whoever owns that server could also change the image. In essence, when you buy an NFT, you’re buying that data hosted on a server, which usually contains images or GIFs. Either the server or the images or GIFs can change. You’re buying a small piece of data on the blockchain, not the server or the image itself — just the data that points to it. Think of it like buying stocks: you don’t own the company. This brings us to the question: why would anyone want to buy an NFT?

Beyond several reasons to buy NFTs, the strongest is that people see NFTs as digital collectibles and perceive them as an investable category. Here are four main things that make NFTs valuable:

1. Perceived Value:
   The perceived value of NFTs is what makes them highly valuable. For instance, Bitcoin, being the first cryptocurrency, is seen as highly investable and valuable, driving demand. Similarly, NFTs that were first in the market or platforms releasing their first editions will always have an upper hand in terms of perceived value. Think of Pokémon cards: the first editions were in high demand and considered a must-have.
2. Utility or Real-World Benefits:
   NFTs with real-world benefits can be incredibly attractive. Imagine the world’s most popular singer releasing her first NFT collection, which also gives exclusive perks. Owning one could grant you free access to her biggest concerts, invitations to after-parties, or even merch from her personal collection. That’s an irresistible proposition for a music fan.
   For instance, the American alt-metal band Avenged Sevenfold launched a collection of 10,000 NFTs called Deathbat Clubs in 2021. While not tied to their music directly, these NFTs offer exclusive benefits based on rarity, such as free concert tickets for life or even spending a day with the band.
3. Rarity or Uniqueness:
   Think of the Mona Lisa. The original in the museum holds immense value, while copies do not carry the same sentiment or value. If Elon Musk minted a rare picture of his car collection and limited it to just five, people would compete fiercely to own one. Even if copies of the picture were available online, the original NFT would hold much higher value for those who understand its rarity.
4. Ownership History:
   Ownership history can significantly increase an NFT’s value. Think of charity sales where celebrities auction their iconic jackets, with proceeds going to charity. Fans might pay extra for the jacket simply because the celebrity wore it. Similarly, someone might pay a premium for a simple NFT if it was previously owned by a famous person, like Barack Obama.

When buying an NFT, consider these four questions:

• Does it have perceived value?
• Does it have real-world utility?
• What is its rarity?
• What is the ownership history?

Can someone copy your NFT?

Technically, yes — just like any other artwork. But the original NFT address can always be traced back to its originator, as all NFTs have a transaction history log. Someone could create a new NFT that points to the same hosting address as the original or one with the same image or GIF. However, the value of an NFT lies in the unique piece of data you own, not the image or GIF itself.

How do you buy an NFT?

Buying an NFT is simple and usually done through marketplaces like OpenSea or Rarible. One drawback is that most NFTs are purchased with Ethereum. You’ll need ETH or the specified token to grab that crypto kitty or NBA Top Shot. This means you’ll need a wallet and some knowledge of how blockchain networks work.

To simplify the process, you can use NFT exchanges like Rarible, Nifty Gateway, OpenSea, or SuperRare. The first step is to create an account on the platform. You’ll then need to buy crypto from another exchange and transfer it to a wallet accepted by the platform. You can bid for the NFT you want, and if you win, it’s yours. Once you pay, the NFT will be stored in your wallet.

Where is the NFT stored?

NFTs are stored in wallets. The safest option is a hardware wallet like Ledger, which keeps your NFT offline and protected. If you prefer online wallets, options like MetaMask, Trust Wallet, and Enjin are popular choices.

In the next article, I’ll talk about the 11 most valuable NFTs ever! See you.