NFT: what it means and how it works
Over the past year of work in the WEB 3.0 industry, I often heard from friends and acquaintances that NFT is some kind of a pyramid scheme. I decided to collect the most important questions about NFT to show the coolness of the technology in detail. No complicated terms, literally on fingers.
Let’s go!
What does NFT mean?
In simple terms, NFT is a digital certificate of ownership. This is a confirmation recorded in the blockchain acknowledging you as the owner of what is tied to this token. And it can be anything, not just a picture.
When we talk about NFT in general, we mean the technology that confirms the ownership of something. And this is the key point that needs to be delivered to the public. NFT is not a picture, not a cryptocurrency, not a bond. This is a technology. However, at the same time, NFT technology allows you to link the NFT token to a picture, a cryptocurrency, or even to real estate. But the technology itself is not about trading pictures. It is proof of ownership of an asset that provides some real value.
One of the advantages of NFT is that this certificate of ownership can be transferred to any other person. Thus, a secondary market for trading NFTs was formed. The platforms where NFTs are sold are called marketplaces. The price setting mechanics is the same as in any regular marketplace: the price is affected by supply and demand.
A lot of people use NFTs for speculation — buying low and selling high. But the future of the technology lies in the value that comes from owning NFTs. It could be an event ticket, access to tutorials, a metaverse avatar, or an exclusive physical drop from your favorite brand.
The technology is already supported by such IT-giants, as: Twitter, Reddit, Instagram, Facebook.
Besides that, many brands have already created their NFTs: Nike, Adidas, Coca-Cola, Lamborghini, Disney, Starbucks, Red Bull, Gucci, McDonalds and many others.
Is NFT a pyramid?
No, this is just a technology. But the technology might be used by unscrupulous people who can build a pyramid with it.
Pyramids didn’t come along with NFTs or cryptocurrencies. They were born and built on conventional fiat money. This is a product of the financial system as a whole, and not the crypto industry.
Is NFT a scam?
Again, no, it’s not. This is just technology. But the technology can be used by scammers.
Scammers invent more and more ways of stealing money from the population every day. Via websites, calls, emails, etc. And they did come to the NFT and the crypto industry as well. Most of the fraudulent schemes are about the security of your wallet, where you store your assets.
The real problem is «rug pull». The name comes from the phrase to pull the rug out from under (someone), meaning to withdraw support unexpectedly. This term means that the project team withdrew all the funds and disappeared, having left their followers with a bag of promises that they gave away. This problem will be solved over time, when regulators and guarantors come to the industry to ensure that there are no such precedents.
However, this can happen in the classic finances too. Let’s imagine a company that raised funds for an innovative product. Then the owner suddenly withdraws all the funds to the account of some island state and disappears. The only difference is that it is much more difficult to do, just because of the regulations and authorities.
Are games with NFTs a scam?
See above: NFT is a technology. An application of a certain technology in a game does not mean the game is a scam.
At the same time, many games using NFT technology have appeared on the market, made according to the PONZI model, which is basically a pyramid. Old players make money by bringing in new players. At some point, the growth comes to an end and everyone begins losing their investments. Some manage to make it and earn, the others don’t.
In fairness, it should be said that there are other models in games. For example, RTP (Return-to-Player) used in slot games. As per this model, 95% of the funds invested by the player are returned to him.
There is a model where the winner gets rich at the expense of the loser. My army defeated the enemy, I captured his resources.
But the biggest market in gaming, in fact, is the trading of in-game assets between users. Previously, such trading took place in chats, and you had to find a guarantor to ensure the security of the transaction, etc. Then it moved to centralized platforms like STEAM.
Now the era of WEB 3.0 is coming, where players fully own their in-game assets. They can manage them, sell, buy or burn them. As you can see, there is no pyramid here. The games themselves remain unchanged, only the principle of storing game assets changes.
Why are some NFTs so expensive?
Simple answer: because they are in high demand. When the demand rises, the market price rises too. At the same time, the value of the NFT itself may not change. This may occur because that is a very rare limited edition NFT. Or that’s a one-of-a-kind NFT from a famous artist, sold via auction.
Here are some real life examples:
- Tesla stock costs $215. Ford stock costs $13. Tesla does not make 20 times more than Ford. But the demand for stocks is much higher, so the stock price rises.
- Another example comes from the automotive industry. There are mass production cars that can be found on the roads. The point and the benefit of a car is clear — a comfortable transfer from point A to point B. At the same time, there are rare signature cars that are produced in a limited edition of just dozens of pieces. The cost of such cars is ten times more than mass production vehicles. Although the main point is the same — a comfortable transfer from point A to point B.
- Let’s take fine arts. No one is surprised when a painting by Raphael or Da Vinci goes under the hammer for several million dollars. They are no longer alive, works of art like that will never be created again. At the same time, there are contemporary artists who sell their paintings for millions of dollars too. For example, Banksy. Art connoisseurs see value in his works. Considering that the auction sales of Banksy’s works are hot, it can be assumed that there are quite a lot of such connoisseurs.
As you can see, the principles of price formation are the same in the NFT industry and the real-life. However, you need to understand that not all NFTs are expensive. And to understand that, let’s see what types of NFTs are there.
What types of NFTs are there?
Digital art and other creative items (music, video). NFT technology fits in this category most organically. A Digital Certificate of Ownership verifies the ownership of a digital piece of art, as well as its authenticity.
Collectibles. NFT collections with limited release, where each NFT image is unique. Such NFTs have collection value. Possession of this NFT usually provides certain benefits for the owner: from access to a private community, to real-life benefits such as physical drops.
Game assets and metaverse lands. This type of NFTs have value in the game worlds they belong to. It can be a game character with certain characteristics, outfit for your avatar, or a piece of land in a virtual world.
Utility. At the moment this is the smallest category. But potentially this is what the NFT market will grow upon. Such NFT can be widely applied in real day to day life.
What it can be:
- Passes: access to an educational platform, a service feature, etc.
- Tickets: for shows and sports events, railway, flights, etc.
- Physical items: the possibility of obtaining a physical item by the NFT owner.
- Unlockable content: digital content available only for NFT owners.
- Subscription: for a feature or a service.
- Certification: verification of authenticity of the items.
- Promo-codes and discounts in online-stores.
- Voting and decision-making on project development.
- Fractional ownership of art objects, collectibles and real estate.
Is NFT a good investment?
Hereabove, we have discussed all types of NFTs. Some of them can indeed be used as an investment tool. For example, fine arts, which is widely used in the offline world as a way to save and multiply your assets.
Collectible NFTs can also be considered for purchase as an investment. However, it needs to be understood that this is a super risky instrument as the NFT companies might vanish into thin air in a day.
Can I create an NFT?
Yes, you can use one of the platforms that allow you to create your own NFTs:
Where to buy NFTs?
As I mentioned above, you can buy NFTs on different platforms. There is a bunch of marketplaces; some NFTs can be purchased on several platforms, and some only on a specific one.
To purchase an NFT you need a wallet to withdraw the payment from and to receive your NFT. Centralized platforms offer easy-to-use solutions where you can register with your email and pay by card. Decentralized ones require a cryptocurrency wallet. For example, Metamask.
I paid special attention to marketplaces in a separate article.
Are NFTs safe?
The distributed storage of NFTs on the blockchain makes it impossible to fake it. This is the main advantage of NFT over the usual record in a database on a company’s server.
Main risks:
- You can lose access to your wallet where the NFT is stored. For example, a hacker will steal access to your wallet. Or you will simply forget your login details.
- The platform wallet that holds the NFT will cease to exist. This risk relates to centralized solutions.
- The NFT project itself will cease to exist and fulfill its obligations. The so-called “rug pull”.
What is WEB 3.0?
WEB 3.0 is the new decentralized era of the internet. This means new game rules, where users are full owners of their digital assets. And they can interact with various resources by connecting their wallet.
WEB 3.0 is only in its infancy. But it already seems to be a kind of opposite to the centralized WEB 2.0, where the platform and data belong to a corporation.
WEB 3.0 = NFT?
It is not quite so. NFT is one of the assets widely used in WEB 3.0. There are also cryptocurrencies, tokens. NFT technology is fundamental in WEB 3.0, allowing the user to fully store and manage their digital assets.
At the same time, NFT can be created and used on a centralized basis, that is, without a full-fledged WEB 3.0. This has its advantages. The most basic one is a simple entry for the mass user who doesn’t want to dig into cryptocurrency wallets, transactions and other technical details. In a centralized solution, the project itself can take over, providing the user with just the real value of the NFT.
As a conclusion
- NFT is a technology, not a speculative tool.
- NFT might be used by unscrupulous people, but that doesn’t make the whole technology fraudulent.
- NFT provides a specific value in the real or digital world.
- In-game NFT is merely a technology that allows users to fully own their game assets. The gaming economy itself may be a pyramid scheme, but the technology has nothing to do with it.
- WEB 3.0 is a new round of Internet development, when the user remains the sole owner of his digital assets.
