What Is an NFT?

NFT (non-fungible token) is a digital asset that represents objects like art, music, video games, videos, etc. Artworks can be “tokenized” to create a digital certificate of ownership that can be bought and sold. 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.

NFTs exist on a blockchain, which is a distributed public ledger that records transactions. They are mostly held on the Ethereum blockchain, but other blockchains support it as well. NFTs are bought and sold online, mostly with cryptocurrency.

In economics, a fungible asset is something with units that can be readily interchanged – like money. NFTs are one of a kind, or at least one of a very limited run, and have unique identifying codes and metadata that distinguish them from each other. Each has a digital signature that makes it impossible for NFTs to be exchanged for or to be equal to one another.

An NFT allows the buyer to own the original item, as it contains built-in authentication, which serves as proof of ownership. NFTs can have only one owner at a time. Collectors value those “digital bragging rights” almost more than the item itself.

Any digital image can be purchased as an NFT. It can also be used to remove intermediaries and connect artists with audiences or for identity management. NFTs are also sold on marketplaces and the process can vary from platform to platform.

Some of the most popular NFT marketplaces include OpenSea, Mintable, Nifty Gateway, and Rarible. Some marketplaces charge a “gas” fee, which is the power required to complete the transaction on the blockchain. Other fees can include the costs for converting currency into Ethereum and closing expenses.

One of the biggest appeals of NFTs is that anyone can create one. All that’s needed is a digital wallet, a small purchase of Ethereum, and a connection to an NFT marketplace where you’ll be able to upload and turn content into an NFTs or crypto.

NFTs evolved from the ERC-721 standard. Developed by some of the same people responsible for the ERC-20 smart contract, ERC-721 defines the minimum interface – ownership details, security, and metadata – required for the exchange and distribution of gaming tokens. The ERC-1155 standard takes the concept further by reducing the transaction and storage costs required for NFTs and batching multiple types of non-fungible tokens into a single contract.

NFT and copyright

Ownership of an NFT does not inherently grant copyright or intellectual property rights to the digital asset the token represents. Even though someone may sell an NFT representing their work, the buyer will not necessarily receive copyright privileges when ownership of the NFT is changed and so the original owner is allowed to create more NFTs of the same work. Therefore an NFT is merely a proof of ownership that is separate from copyright, therefore ownership data is stored in the blockchain and it is almost impossible to hack its system.

“In one sense, the purchaser acquires whatever the art world thinks they have acquired. They definitely do not own the copyright to the underlying work unless it is explicitly transferred.“ says legal scholar Rebecca Tushnet. This means that in practice, NFT purchasers do not generally acquire the copyright of the underlying artwork.

When did NFTs gain public awareness?

Non-fungible tokens gained major public awareness with the success of CryptoKitties, which is an online game where players adopt, trade, and breed virtual cats. Shortly after release, the project went viral, raising a $12.5 million investment, with some kitties selling for over $100,000 each.

After the success of this NFT project, CryptoKitties were added to the ERC-721 standard, which was created in January 2018 (and finalized in June), and affirmed the use of the term “NFT” to refer to “non-fungible tokens”.

At the beginning of 2020, the developer of CryptoKitties, Dapper Labs, released another (beta) version of NBA TopShot. The aim of this project was to sell tokenized collectibles of NBA highlights. The project was built on top of Flow, which is a newer blockchain compared to Ethereum. Later that year, the project was released to the public and reported over $230 million in gross sales as of February 28, 2021.

Ethereum Blockchain and NFT

Blockchains that support NFTs (other than Ethereum):

Bitcoin Cash – Bitcoin Cash supports NFTs and powers the Juungle NFT marketplace.
Cardano – Cardano introduced native tokens that enable the creation of NFTs without smart contracts with its March 2021 update. Cardano NFT marketplaces include CNFT and Theos.
Flow – The Flow blockchain, which uses a proof of stake consensus model, supports NFTs. CryptoKitties plans to switch from Ethereum to Flow in the future.
GoChain – GoChain, a blockchain that bills itself as ‘eco-friendly’, powers the Zeromint NFT marketplace and the VeVe app.
Solana – The Solana blockchain also supports non-fungible tokens.
Tezos – Tezos is a blockchain network that operates on a proof of stake and supports the sale of NFT art.

Pitfalls of NFTs

The problem is that the use of NFTs does not rule out the possibility of fraud. Despite the absolute transparency of working with tokens, their creation does not at all guarantee that the author actually owns the property. And this situation happens quite often.

In addition, it should be taken into account that a variety of rights for the buyer of a token can be registered in NFT. In other words, instead of the right of ownership of an object, it can only speak of the possibility of using it, and sometimes even without the right to profit from such use. Although, of course, there is nothing wrong with that if the NFT is bought for this purpose, and, in fact, you just want to leave a memory of yourself in the digital space.

Most NFT tokens traditionally refer to a specific object located on a specific server. But what happens if you buy NFT and the server moves to another domain or goes offline altogether. In this case, the NFT token will no longer refer to the object you purchased. And it’s good if such a situation arises due to an accidental failure. In fact, it can be quite a malicious act.

Another point concerns possible plagiarism, against which the NFT does not insure in any way. Yes, once created, an NFT token can neither be counterfeited nor stolen. But do not forget that this is not a physical and not even a virtual object of sale. Therefore, it costs nothing for an attacker to copy an object tied to an NFT and create their own token with this copy. Moreover, plagiarised work is a very loose concept on the Internet.

Small insurance in the case of buying NFT for a non-original object can be the use of specialized online platforms that take care of the copyright protection of the content creator. But even they cannot give a full guarantee here.

How to create an NFT

So we come to the most interesting part – how to create an NFT token. Any specialized platform like OpenSea can be used to create an NFT. In addition to registering there, you will need a wallet in the Ethereum system and, in fact, digital content to which you will link the token.

The algorithm for creating an NFT depends on the platform you choose. But in the general, for this, you need to log in to the system through the Ethereum wallet, create a collection and upload the necessary images, animation, music, or even 3D animation to it. For example, the platform OpenSea supports files of JPG, PNG, GIF, SVG, MP4, WEBM, MP3, WAV, OGG, GLB, GLTF formats, weighing no more than 100 MB.

After that, you need to add a description and a link to the object, as well as set the basic parameters of the token and click the “Create” button. The token is sent for verification, after which it can be sold.

As for the token itself, its non-fungibility is ensured by the unique combination of the object to which it is linked and your identifier in the system or a unique key that signs any token passing through your account. Actually, it is thanks to such an individual signature that any user can trace the entire path that NFT has gone through since its inception and all the owners of this certificate.

In addition to your ID and token object data, there are a number of options inside the NFT that describe what the certificate owner can do. The main ones are reselling and copyright transfers. The first one is responsible for the possible resale of the token, and the second one is for the transfer of the item copyright to its owner. Moreover, if the copyright transfer status is false, then, in fact, you are buying only your place in history and the possibility of reselling the token (if the resellable parameter allows it). There is no way to even copy the file attached to it.

Conclusions

Many users and some journalists mistakenly equate an NFT with any regular digital object. But in fact, the NFT is a digital certificate denoting your rights to an image, animation, music, or any other object. At the same time, such a certificate does not always mean the transfer of exclusive rights of the content to you.

For example, with the help of an NFT token, you can give yourself the right to listen to some tracks, attend a certain event, or simply enter your name in the history of some meme. In this case, you will not receive any ownership of the object itself. There are also reverse situations when NFT certifies exclusive ownership rights. Moreover, recently there are more and more situations when, with the help of NFT, one may sell not only digital assets but also quite tangible things and even intellectual property for all kinds of know-how.