ou've probably heard a lot of buzz about NFTs as iconic internet moments, popular memes, and captivating artworks are turned into high-value digital assets. How can you not? From reputable news outlets to famous celebrities, everyone talks about these assets or actively deals with them.
But sudden exposure to these assets also opens the door to a plethora of problems. What exactly are NFTs? How does it work? how do you buy it? Most importantly, what gives NFTs value?
Fortunately, the answer is not difficult to find. You can learn everything about these fast-growing digital assets in just a few key points.
To help you through the process, here's an inside look at NFTs, their capabilities, and their accrued value.
What is NFT?
Term NFT stands for non-fungible token , which refers to a digital asset based on blockchain technology. These tokens are uniquely identified by metadata and corresponding signatures.
As the name suggests, an NFT is non-fungible, which means it cannot be replaced or copied by another item of the same kind. This allows each NFT to exist in its original form. This uniqueness fuels the enthusiasm surrounding such blockchain tokens.
For this reason, when an NFT is attributed to a traditional or digital asset, it creates a unique token on the blockchain along with its metadata and associated details. This allows the token to represent the corresponding asset in digital form. Additionally, digital forms can be exchanged between buyers and sellers of the property in question as proof of ownership.
This means that anyone who creates or buys a unique NFT for a specific item has full ownership of the underlying asset. This ownership statement applies whether the asset exists in digital form or tangible property. Thus, the easy transfer of ownership claims has become one of the biggest reasons behind the popularity of NFTs.
What types of assets can be turned into NFTs?
When you think of fungible assets, you can refer to cryptocurrencies like Bitcoin, which can be replaced by another unit of the same kind. But when you look at irreplaceable assets, a piece of real estate is a great example of a completely unique position.
This is why NFTs can be attributed to several non-fungible or different assets, including but not limited to the following assets.
Artwork such as oil paintings and digital sketches.
Online content, such as social media posts and opinion articles.
Musical content such as songs, mixes, symphonies, and backing scores.
Video content, such as short and long videos.
Real estate, such as residential and commercial properties.
In fact, anything unique in its form can be turned into an NFT and retain its state on the blockchain. Since NFTs are representations of actual assets and their ownership, this gives people a lot of flexibility in the type of assets they want to convert to NFTs.
NFTs are not limited to single-owner arrangements
NFTs are often viewed as single-owner arrangements, where anyone who owns the NFT is considered the full owner of the underlying asset. While this concept is true to some extent, it doesn't always apply. In many cases, shared email list properties can be successfully transformed into multiple NFTs.
In these arrangements, people can create multiple NFTs for a group of projects or products of shared ownership. This means that apartment buildings can create different NFTs for each of their residential units and sell them to different buyers. But flexibility is not limited to unique ownership subdivisions within the property. For example, a piece of jewelry or a rare collectible can have multiple NFTs attributed to it, each sharing a small percentage of its value and ownership.
This particular mechanism makes NFTs more than just a single permutation of tokens and gives them enormous adaptability. This also opens the door to the use of NFTs in many forms, such as private equity arrangements, shareholder agreements, and commercial property distributions.
What gives NFT value?
After understanding the basics of NFTs and their capabilities, the next question that comes to mind is about their value, price or cost. Exactly who sets this price is a common question for those who have never been exposed to NFTs or blockchain technology before.
To be fair, this is a natural investigation since NFTs are not limited to typical assets such as traditional paintings with real-world value. They also extend to digital content, such as social media posts that often don't have price tags.
This means that the value of an NFT depends on the type of asset it represents on the blockchain. If the underlying asset is a tangible property such as residential real estate, its actual price is reflected through an NFT on the blockchain. But assuming the asset is digital content without a pricing tag, its value is purely speculative. Essentially, its value depends on the market, supply and demand.
You can think of it as dealing with a specific type of art, where the value of each piece depends on market sentiment and what potential buyers are willing to pay for it. This means sellers can set the price of their particular artwork to whatever level they want. Whether the buyer will pay this fee to take ownership of the asset is a completely different matter.
However, when the seller's asking price and the buyer's intentional cost or their willingness to pay are two factors in line, it determines the speculative value of the NFT. This covers all types of assets that don't have a real-world price tag attached. This includes content such as social media posts, digital trading cards and digital artwork.
Speculative NFTs can be sold at high prices
Perhaps one of the most famous examples of digital content NFTs being sold at high prices is a tweet from Twitter CEO Jack Dorsey in 2006.
As Dorsey's first tweet, the post is considered one of the most iconic on the web. When this digital item becomes a digital asset on the Ethereum blockchain, it allows the NFT corresponding to the tweet to sell for more than $29,000 on 22/1/2021. For reference, bids for this tweet start at $15 back on March 15, 2020 .
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This transaction mechanism around Dorsey's tweet-to-NFT outlines that the value of NFTs can indeed start from the lowest possible amount. But if interested buyers are willing to pay a higher amount, you can expect good things to happen. As long as the market shows high demand for the underlying asset or NFT, bids can go as far as you can imagine.
This means that the sky is limitless for NFTs whose prices are independent of real-world assets. Since their value depends on how much buyers are willing to pay, these NFTs can exceed the wildest expectations of the original seller.
Another example of NFTs being worth more than anyone could imagine is the cryptocurrency kit relationship, which are collectible digital cartoon cats that reside on the Ethereum blockchain. These tradable digital cats were once labelled "Digital Beanie Babies" around their excitement . They are still considered a popular form of NFT Other types of digital art such as NBA Top Shot trading cards value.
Besides uniqueness, other properties such as the content creator's signature or other different details in the metadata can also largely determine the value of its NFT.
But most importantly, what really drives the value of NFTs is the importance of their underlying assets. The greater the strength surrounding the corresponding asset or its unique properties, the greater the chance that sellers will trade their NFTs at higher prices. This especially applies to NFTs that have no initial value in the real world. Some examples of this include, but are not limited to, social media posts, unreleased music, and digital artwork.
The value mainly depends on the type of asset being sold
Often, the value of an NFT depends on its real-world price or speculation. This gives you the highly volatile value of the physical assets and digital content of different types of NFTs.
While real-world value is the reference point for tangible assets, and speculative value plays an important role in digital assets, this is not always the case. In many cases, both of these factors affect the value of the corresponding asset.