What are NFTs and how do they work?

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By now, you’ve probably heard about cryptos such as Bitcoin (BTC), Ethereum (ETH), and Litecoin.

But have you heard about NFTs?

NFTs or non-fungible tokens are the next big thing to have hit the crypto market.

Like cryptocurrencies, NFTs exist on the blockchain but fulfill an entirely different purpose.

While cryptos act as a medium of exchange with all transactional data stored on the blockchain, NFTs certify the unique nature of a digital file.

What Does an NFT Do?

One of the most basic rules of economics is that scarcity leads to an increase in price. This is why priceless works of art are often transacted for millions of dollars.

While you can copy the Mona Lisa, it will still end up being worthless, no matter how good a copy.

Why?

Because it’s not the original and you’re not Leonardo da Vinci.

And this is why some works of art are priceless while others are worthless.

But what does all of this have to do with art?

Well, that’s because NFTs act as a certificate of authenticity.

Artwork converted to a digital form can easily be copied and shared amongst others thus making scarcity impossible.

NFTs however allow a user to create a digital certificate of ownership. Hence certifying said file as totally authentic.

These certificates can be traded from one person to another – just like actual art.

While this may sound crazy to some, some NFTs can be actually worth a fair amount of money…  As can be seen by how CryptoPunks NFT bundle was recently sold at auction for $17 million.

How Do NFTs Work

Cryptocurrencies and NFTs have this in common – they are both based on the blockchain. The blockchain is a decentralized digital ledger that stores and records transactions as well as proof of ownership.

Due to its decentralized nature, it is technically impossible to falsify records on the blockchain as it is maintained by thousands of computers from around the world.

Just like the ETH coin, NFTs are tokens that operate on the Ethereum blockchain. But this is where the similarities end.

ETH coins are used to process transactions and act as a medium of exchange. However, NFTs store information that is used to prove that a digital file is original.

NFTs are usually based on Ethereum blockchain but there are other cryptocurrencies that have also begun implementing their own form of NFTs.

What Makes NFTs Valuable

Unlike cryptocurrencies, NFTs cannot be used as a medium of exchange. Instead, these digital certificates have

  1. Speculation

Speculation is the main driving force behind why NFTs have seen a jump in value. Punters hoping to get ahead of the next crypto boom have flocked to NFT auctions in droves.

As a result, this increased attention has led to much speculation to avoid missing out on a potential gold rush.

  1. Perceived Value

Beauty is indeed in the eye of the beholder as can be seen by how NFT prices have steadily increased.

Unlike physical works of art, digital art can technically be shared and owned by as many people as possible… It’s simply a matter of sharing a file.

But what if there was a way for you to own the true original copy?

This is what NFTs are able to do – they function as proof that what you have stored on your drive is the true original… a stamp of approval if you would.

For some, the cost is well worth the knowledge of knowing that you have something truly original. And this is why there are people willing to pay millions for an NFT.

Closing Thoughts

Before you invest in an NFT, think long and hard before taking the plunge. While they are totally unique, the market is extremely volatile – even more so than cryptocurrencies. Which is saying a lot.

Nonetheless, if you want to buy or sell NFTs consider visiting Auctionity, one of the best Bitcoin auction sites according to this list from Tezro: https://blog.tezro.com/best-bitcoin-auction-sites/





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