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BASICS OF NFT

WORDS

 * 2459

TIME TO READ

 * 10 mins

PUBLISHED

 * 29 Jun, 2023

Basics of NFT by Sankar Srinivasan

Non-fungible tokens, or NFTs, have become a hot topic in the world of blockchain
and cryptocurrency. These digital assets have gained widespread attention due to
their potential to revolutionize the way we think about ownership and value in
the digital realm. With NFTs, creators can monetize their work in new and
exciting ways, and buyers can own unique, one-of-a-kind digital assets that
cannot be replicated.

At their core, NFTs are a type of digital asset that are stored on a blockchain,
a decentralized ledger that records transactions in a secure and immutable
manner. While cryptocurrencies like Bitcoin are fungible and interchangeable
with one another, NFTs are unique and cannot be replicated. This makes them
ideal for representing digital assets that have value, such as artwork, music,
videos, and other types of content.

In recent years, NFTs have gained popularity in the art world, where they have
been used to sell digital art for millions of dollars. However, their potential
applications extend far beyond the world of art. NFTs could be used to represent
ownership of real-world assets, enable new forms of social media, and even
transform the gaming industry.

While NFTs hold great promise, they also come with some challenges and
limitations. These include the environmental impact of blockchain technology,
the volatility of the market for NFTs, and concerns about fraud and scams.

In this article, explore the basics of NFTs, how they work, why they have become
so popular, and their potential applications and limitations. We’ll delve into
the technical aspects of NFTs, examine real-world use cases, and discuss the
challenges and opportunities that this technology presents. By the end of this
book, you’ll have a deeper understanding of NFTs and their potential to
transform various industries in the years to come.

Basics of NFT by Sankar Srinivasan


WHAT ARE NFTS?

NFTs, or non-fungible tokens, are digital assets that are stored on a
blockchain, which is a decentralized ledger that records transactions in a
secure and immutable manner. NFTs are unique and cannot be replicated, making
them ideal for representing digital assets that have value, such as artwork,
music, videos, and other types of content.

To understand NFTs, it’s important to first understand what makes them different
from other types of digital assets. Fungibility is the key difference — while
cryptocurrencies like Bitcoin are fungible, meaning each coin is interchangeable
with another, NFTs are unique and cannot be replicated. Think of NFTs like a
one-of-a-kind piece of art — while a print of a painting may look the same as
the original, it doesn’t have the same value because it’s not the original.

NFTs are created using smart contracts, which are self-executing contracts with
the terms of the agreement between buyer and seller being directly written into
code. These contracts contain information about the digital asset being
represented, such as its metadata, ownership, and transfer history. Once an NFT
is created, it can be bought, sold, and traded on various marketplaces and
platforms.

One of the most interesting aspects of NFTs is that they can enable creators to
monetize their work in new and exciting ways. With NFTs, artists, musicians, and
other creators can sell their digital assets directly to collectors, without the
need for intermediaries like galleries or record labels. This can enable them to
earn more money from their work, as well as have greater control over how it is
distributed and shared.

NFTs have gained popularity in recent years, particularly in the art world,
where they have been used to sell digital art for millions of dollars. However,
their potential applications extend far beyond the world of art. NFTs could be
used to represent ownership of real-world assets, enable new forms of social
media, and even transform the gaming industry.

Overall, NFTs are a fascinating development in the world of blockchain and
cryptocurrency, and they have the potential to transform the way we think about
digital ownership and value.


HOW DO NFTS WORK?

NFTs are a type of digital asset that are created and stored on a blockchain,
which is a decentralized ledger that records transactions in a secure and
immutable manner. The process of creating and managing NFTs involves several key
steps, including creating a smart contract, minting the NFT, and transferring
ownership.

Creating a Smart Contract

NFTs are created using smart contracts, which are self-executing contracts with
the terms of the agreement between buyer and seller being directly written into
code. These contracts contain information about the digital asset being
represented, such as its metadata, ownership, and transfer history.

Minting the NFT

Once a smart contract has been created, the next step is to mint the NFT.
Minting is the process of creating a new token on the blockchain and linking it
to the smart contract. The metadata of the digital asset being represented is
typically stored on IPFS (InterPlanetary File System), which is a decentralized
file storage system.

Transferring Ownership

NFTs can be bought, sold, and traded on various marketplaces and platforms. When
an NFT is sold, the ownership is transferred from the seller to the buyer via
the blockchain. This transfer of ownership is recorded on the blockchain and
cannot be altered, ensuring the authenticity and ownership of the NFT.

The value of an NFT is determined by a variety of factors, including the
uniqueness and scarcity of the digital asset being represented, the reputation
of the creator, and the demand from buyers. NFTs can be sold for a wide range of
prices, from a few dollars to millions of dollars.

One of the benefits of NFTs is that they enable creators to monetize their work
in new and exciting ways. With NFTs, artists, musicians, and other creators can
sell their digital assets directly to collectors, without the need for
intermediaries like galleries or record labels. This can enable them to earn
more money from their work, as well as have greater control over how it is
distributed and shared.

Overall, NFTs are a fascinating development in the world of blockchain and
cryptocurrency, and they have the potential to transform the way we think about
digital ownership and value. While there are still some challenges and
limitations to be addressed, the possibilities for NFTs are endless, and it will
be exciting to see how they evolve in the years to come.


WHY ARE NFTS SO POPULAR?

Non-fungible tokens (NFTs) have rapidly gained popularity in recent years, with
some NFTs selling for millions of dollars. But what is driving this surge in
popularity? In this chapter, we explore some of the reasons why NFTs have become
so popular.

Unique and Rare

NFTs are unique and rare digital assets, which makes them highly desirable to
collectors and investors. Unlike fungible tokens such as cryptocurrencies, which
are interchangeable with one another, each NFT is one-of-a-kind and cannot be
replicated. This scarcity and uniqueness make NFTs valuable to those who want to
own a piece of digital history.

Digital Ownership

NFTs allow for ownership and provenance of digital assets. This is a significant
shift in the way we think about digital ownership. Until recently, digital
assets like images or videos could be copied, pasted, and shared with others
without any way to prove ownership. NFTs solve this problem by providing a way
to verify and track the ownership of digital assets on the blockchain.

Accessibility

NFTs have made it possible for artists and creators to monetize their work in a
new way. With NFTs, artists can sell their digital art directly to collectors,
without the need for intermediaries like galleries or auction houses. This has
made it possible for artists to reach a global audience and earn money from
their work in a way that was not possible before.

Cultural Significance

NFTs have also gained popularity because of their cultural significance. NFTs
have been used to represent iconic moments in history, such as the first tweet
or the first ever NFT auction. These cultural artifacts have become highly
sought after, with collectors and investors willing to pay large sums of money
to own a piece of history.

Speculation

Finally, NFTs have become popular because of speculation. As with any new asset
class, there is a degree of speculation involved, with some investors buying
NFTs in the hope that their value will increase over time. This has led to some
NFTs selling for millions of dollars, which has generated a great deal of media
attention and further fueled the hype surrounding NFTs.

Overall, NFTs have become popular because of their uniqueness, their ability to
provide digital ownership, their accessibility to artists and creators, their
cultural significance, and the speculative opportunities they present. As NFTs
continue to evolve, it will be interesting to see how they are used and what
impact they will have on the broader art world and the economy as a whole.


CHALLENGES AND LIMITATIONS OF NFTS

Non-fungible tokens (NFTs) have gained significant popularity in recent years,
but they also face challenges and limitations. In this chapter, we explore some
of the challenges and limitations of NFTs.

Environmental Impact

One of the most significant challenges facing NFTs is their environmental
impact. NFTs are created using blockchain technology, which requires a
significant amount of energy to operate. This has led to concerns about the
carbon footprint of NFTs and the impact they are having on the environment.

Lack of Standardization

Another challenge facing NFTs is the lack of standardization across platforms.
There are currently multiple platforms for buying and selling NFTs, each with
its own set of standards and requirements. This lack of standardization can make
it difficult for buyers and sellers to navigate the NFT market.

Technical Complexity

NFTs are built on top of blockchain technology, which can be complex and
difficult to understand for the average person. This technical complexity can
create barriers to entry for artists and creators who want to participate in the
NFT market.

Limited Use Cases

While NFTs have gained popularity in the art world, their use cases are
currently limited. NFTs are primarily used for buying and selling digital art,
but their potential applications extend beyond the art world. However, there has
been limited exploration of other potential use cases for NFTs.

Price Volatility

The price of NFTs can be highly volatile, which can create uncertainty for
buyers and sellers. NFTs are a relatively new asset class, and their value can
fluctuate significantly based on market demand.

Legal and Regulatory Issues

Finally, there are legal and regulatory issues surrounding NFTs that need to be
addressed. The ownership and transfer of NFTs can raise complex legal questions,
and there is currently a lack of clarity around the legal and regulatory
frameworks that apply to NFTs.

Overall, while NFTs have the potential to revolutionize the art world and
transform the way we think about ownership and value in the digital realm, they
also face significant challenges and limitations. Addressing these challenges
will be critical to ensuring the long-term viability and success of NFTs as a
technology and asset class.

Basics of NFT by Sankar Srinivasan


POTENTIAL APPLICATIONS OF NFTS

While NFTs are currently most commonly associated with the art world, their
potential applications extend far beyond that. In this chapter, we explore some
of the potential applications of NFTs.

Gaming

One potential application of NFTs is in the gaming industry. NFTs could be used
to represent in-game items, such as weapons or armor, allowing players to truly
own and trade these items. This could create new opportunities for players to
earn money through gaming, and could also enable new forms of gameplay, such as
scavenger hunts for rare NFT items.

Music

NFTs could also be used in the music industry. Musicians could release NFTs to
represent ownership of a specific song or album, allowing fans to truly own a
piece of their favorite artist’s work. This could create new revenue streams for
musicians and could also enable new forms of fan engagement, such as exclusive
access to concerts or meet-and-greets.

Real Estate

NFTs could also be used in the real estate industry. NFTs could represent
ownership of a specific property, allowing for faster and more secure real
estate transactions. This could also enable new forms of fractional ownership,
allowing multiple investors to own a portion of a property.

Identity Verification

NFTs could also be used for identity verification. By creating an NFT that
represents a person’s identity, individuals could have a secure and immutable
record of their personal information. This could be particularly useful in
situations such as voting, where identity verification is critical.

Collectibles

NFTs are already being used as collectibles, but this market could continue to
expand. NFTs could represent ownership of a wide range of collectibles, from
sports memorabilia to rare stamps. This could create new revenue streams for
collectors and could also enable new forms of interaction with collectibles,
such as virtual exhibitions.

Digital Asset Management

Finally, NFTs could be used for digital asset management. Companies could use
NFTs to represent ownership of specific digital assets, such as software
licenses or patents. This could create more efficient and secure ways to manage
digital assets and could also enable new forms of asset monetization.

Overall, the potential applications of NFTs are vast and varied. While the
technology is still in its early stages, it has the potential to transform a
wide range of industries and create new opportunities for ownership and value
exchange in the digital realm.

In conclusion, NFTs represent a fascinating development in the world of digital
ownership and value exchange. As we have seen in this book, NFTs are unique
digital assets that are created using blockchain technology, which makes them
secure, transparent, and immutable. While NFTs are still a relatively new
technology, they have already proven to be hugely popular in the art world,
where they have enabled artists to monetize their work in new and innovative
ways.

But the potential applications of NFTs extend far beyond the art world. NFTs
could be used to represent ownership of a wide range of assets, from in-game
items to real estate properties. They could also be used for identity
verification, digital asset management, and more. As the technology continues to
evolve, it is likely that we will see NFTs being used in even more creative and
innovative ways.

However, as with any new technology, there are also challenges and limitations
to be considered. Some of the key challenges include issues around scalability,
interoperability, and environmental sustainability. It is important for
developers and users alike to address these challenges in order to ensure the
long-term viability of the technology.

Overall, NFTs represent a fascinating and potentially transformative development
in the world of digital ownership and value exchange. As the technology
continues to evolve, it will be exciting to see how it is used and how it
changes the way we think about digital assets and ownership.

Sankar Srinivasan


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