What is an NFT (non-fungible token)?
What does NFT stand for?
An NFT, or non-fungible token, represents an asset that is created and traded on a blockchainA secure, distributed database that stores transactions between users, from the date of its creation, in a chronologically ordered sequence of blocks that are linked together. in the same way as Bitcoin or Ether. The main difference between an NFT and a cryptoasset (crypto) like Bitcoin is that an NFT represents a unique asset that cannot be replaced with another asset. This is what makes the token non-fungible.
In contrast, fungible goods and assets can be replaced with other goods or assets that are identical without affecting their use. For example, a one dollar coin is fungible because it is not unique (there are many one dollar coins in circulation) and all one dollar coins can be used the same way. A Bitcoin is also fungible because it is always equal and “identical” to another Bitcoin.
How NFTs work
Anyone who wants to create, buy or sell an NFT has to have a crypto wallet.
Creating a non-fungible token
Anyone who wants to launch a non-fungible token can mint and list it on a specialized platform. They will need to connect their crypto wallet to the platform. The wallet will be used to pay transaction fees in crypto to have the certificate of authenticity (the smart contract) registered on the blockchain. It will also be used to receive payment in crypto if the NFT is listed for sale and someone buys it.
Buying and selling non-fungible tokens
As with cryptos, NFTs may be bought and sold on a specialized platform. When these transactions occur, the information on the blockchain is updated, confirming ownership of the token. The only way to track and confirm token ownership is via the transaction history recorded on the blockchain.
What are non-fungible goods or assets?
Below are two examples:
- A piece of land in Montréal is non-fungible, because each plot is unique and has its own distinct characteristics (location, size, etc.).
- A painting by Riopelle is also a non-fungible asset, because it is unique. There are copies and reproductions, but, basically, the only thing that can actually increase in value is the painting created by the artist.
What are NFTs used for?
Non-fungible tokens are clearly proving their utility in the realm of digital goods. They are used to certify, then buy and sell digital items. For example, NFTs can certify as unique videos, images or productions in MP3, GIF or other formats.
NFTs are a type of digital certificate of authenticity. They’re a form of contract (a smart contract), with rules embedded in computer code. These rules can limit the number of copies available for sale (in the case of a limited edition, for example), authorize a reprint or even establish a system for compensating (paying) the original creator of the work each time there’s a transaction.
Non-fungible tokens can therefore be created, sold or bought in the digital universe. The information is recorded using blockchain technology. The entire history of an NFT’s ownership is stored in a large digital ledger in which each transaction, and the token’s price, can be viewed by anyone on the Internet.
When you buy an NFT, you are purchasing a digital good. Since NFTs have been in circulation, they have been associated with digital artworks, Instagram pictures, songs, in-game purchases and even cat GIFs. Non-fungible tokens have also been associated with more surprising purchases, such as plots of land in a virtual world and virtual racehorses.
Are there any risks with NFTs?
NFTs carry risks similar to those associated with cryptos. NFTs are seeing a surge in popularity and speculation, with the value of some tokens skyrocketing and plummeting in quick succession.
The risk of volatility is twofold, because the crypto used to buy NFTs can also fluctuate significantly in value. There is currently tremendous interest in “investing” in NFTs, and while some people may win big, others may lose big.
Remember
The big question is: will all of these digital goods—virtual racehorses, digital artworks, plots of land in a virtual world—hold their value?
It all depends on supply and demand!
End of the insightSome points to consider before venturing into NFTs
High volatility
- NFTs are very sensitive to fluctuations in the value of cryptos, which are also extremely volatile.
- Buying newly minted NFTs from a highly anticipated collection is a very competitive process, with thousands of potential buyers hoping to make a purchase at the same time as you. With demand far exceeding supply, the token’s value increases quickly, without any guarantee that its value will remain at the same level or increase over time.
Fees
- NFT trading platforms and collections charge fees for each transaction. The fees can be relatively high, especially for tokens with a low value.
- A lot of transactions will not be completed, but the transaction fees, which are often very high, may still have to be paid.
Occasionally complex buying process
- Some buyers will do anything to ensure the success of their buy, sell or trade transactions, even going so far as to use bots (powerful software programs) to place buy or sell orders, which makes things even more uncertain, because it’s difficult, if not impossible, to beat a bot to the punch!
- In many cases, a tiny group of highly experienced people will pocket most of the profits from NFT collections.
Beware of fraud!
NFTs are not immune to fraud, so be careful.
For example, some malicious individuals push NFT prices higher using a technique called “wash trading,” a form of market manipulation designed to make you believe that there is strong demand for the token and that it will increase enormously in value. The aim is to make you buy the NFT and to pocket your money. The token will be worthless or next to worthless!
If you want to venture into NFTs, make you sure you understand how they work. Stay within your budget. Be wary of misleading or too-good-to-be-true ads or campaigns on social media. Also, be careful not to buy on impulse: the costs can really add up and you may end up paying a lot for something that will quickly decrease in value or that you will lose interest in after a few days.
It’s easy to blow an entire paycheque or rack up credit card debt buying NFTs!