NFTs and How They Work

Throughout history, individuals have collected scarce and valuable assets such as art, jewelry, and land. Today that trend has extended into collectibles like NFTs, autographed memorabilia, trading cards, and more.

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NFTs are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying technology as the rest of the cryptocurrencies. Although they’ve been around since 2014, NFTs continue gaining notoriety now because they are becoming an increasingly popular way to buy and sell digital artwork. The market for NFTs was worth a staggering $41 billion in 2021 alone, an amount that is approaching the total value of the entire global fine art market.

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Nearly $41 billion worth of cryptocurrency was sent to two types of Ethereum smart contracts associated with NFT marketplaces and collections from the beginning of 2021 through mid-December, according to an estimate from blockchain analytics firm Chainalysis Inc.

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What is an NFT? What does NFT stand for?

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NFTs (Non-Fungible-Tokens) are unique cryptographic tokens that exist on a blockchain and cannot be replicated. More importantly, an NFT is a verifiable and unique piece of digital art because it comes with its own certificate of authenticity. 

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Non-fungible tokens are an evolution of the relatively simple concept of cryptocurrencies. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can serve as a medium for commercial transactions. 

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The concept of fungibility refers to the ability for an asset to be exchanged equivalently with another asset of like kind. They’re also equal in value - one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain. NFTs shift the crypto paradigm by making each token unique and irreplaceable, thereby making it impossible for one non-fungible token to be equal to another. Non-fungible assets, in contrast to fungible ones, are valued differently based on their unique attributes and scarcity.

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In October of 2021, Beeple’s “Everyday”, which is a fascinating photo collage created by artist Mike Winklemann, sold for $69.3 million at Christie’s. The auction of Winkelmann’s art - the first of its kind - proved to the world that investors were willing to pay top dollar to own an authentic piece of digital history. 

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What was the first NFT? 

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The colorful, octagon-shaped animation "Quantum" was a work of digital art made in 2014 by multidisciplinary artist Kevin McCoy. McCoy recognized he needed a mechanism to sign or authenticate the artwork because it was digital. Yet how? He teamed up with businessman Anil Dash to find the solution. As a result, the two men created a digital authentication method using a new technology called blockchains and cryptocurrency. Prior to 2014, blockchains and their unchangeable ledgers were used solely to help authenticate cryptocurrency transactions. McCoy and Dash pioneered the use of blockchains to also authenticate art. Thus, McCoy became the first artist to use the digital authentication for “Quantum” and, in doing so, created the first-ever NFT.

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How do they work? 

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NFTs exist on a blockchain, which is a distributed public ledger that records transactions. Blockchains not only ensure that all transactions get recorded into the ledger correctly, but they also prevent changes to ledger entries. 

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Digital assets from a blockchain must be stored in a digital wallet. If you’ve ever used PayPal, Venmo, or Apple/Google/Samsung Pay, then you’re already familiar with what digital wallets are and how they work with standard U.S. dollars. A central holding place is also used when consumers wish to purchase cryptocurrencies or NFTs. 

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Each NFT has a unique digital signature that is established during its minting, or creation, process. This signature, which is also the token that defines the asset’s type (digital art, song, gif, etc.), is stored on the blockchain and establishes the NFTs ownership. However, the attached file of the asset itself is stored on an NFT marketplace where it is listed (i.e. OpenSea, Rarible, etc.). Prior to buying or selling an NFT, a crypto wallet must be connected to the NFT marketplace in question.

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Disclaimer: All information provided in the content is for informational purposes only and should not be perceived as investment, financial, or trading advice. Any investment decisions you make should be based on your personal preferences, financial expertise, and market research.

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About

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Parea Labs is a Web3 Gaming company that is driven by visionary ideas to provide various blockchain solutions and the excitement to build a user-focused, adaptive, and innovative gaming experience for all.

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