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18 days ago

Non-fungible tokens: Why is it such a hype and what is an NFT?

Non-fungible tokens have created a huge market that created a hype. That is nothing particularly new in the world of cryptos and its industry. In 2017 the market was swarmed with ICOs and companies that tried to sell tokens to make millions of cash. Most of these projects vanished, but some managed to stay and build something new and in many cases they even became successful. With NFTs at the forefront of the latest hype in crypto, we are looking at the exact same market mechanisms, but under different circumstances and completely different use cases.

What are NFTs?

An NFT is a non-fungible token, meaning that each token is unique and irreplaceable. Think of it as a unique certificate and the owner of this certificate owns primarily the token itself and also something that is associated or attached to it.

The basic idea of NFTs is to make digital items unique. Such an item could be a picture of yourself, a concert ticket, or the most powerful sword in your favorite MMO. As you can easily see all of these exemplary items aren’t unique, in fact each one represents a certain set of data that can be copied, altered and duplicated. In fact, most of the data needs to be duplicated in order to be accessible over the internet. If you send a picture of yourself via e-mail there is a copy on your hard drive, at least one with your e-mail provider (these companies also have a lot of backups) and of course the same for the person who received your e-mail and the picture.

But how can you transfer ownership over that picture? While it is impossible to entirely prevent that anybody is making copies you can simply use an NFT to represent that ownership and keep it as a certificate or pass this tokenized certificate on to somebody else.

What is the legal perspective on ownership of NFTs?

While the basic explanation above is valid the legal perspective in regard of ownership and copyright isn’t that easy to explain. It remains open to the parties involved to negotiate terms and licenses attached to the NFT itself. The very jurisdiction might also play a role, e. g. in Germany a person is granted the right to his or her own image. Meaning that if I buy a picture of you through an NFT – even with copyrights involved – you still have a saying if I should ever use it in an unappropriated way.

So, just because you’re buying an NFT doesn’t automatically provide you with legal rights of full ownership or the full copyright. It is worth to mention that non-fungible tokens are at a very early stage and it is absolutely possible that legal frameworks involving NFTs will be designed in the future in some countries. However, until that day it remains open to the parties involved to define the limits and one is well advised to study the terms and conditions before buying an NFT.

How can I jump into the action?

The most successful and biggest platform in the realm of NFTs is OpenSea. It is based on Ethereum and the revenue of the platform past 1 billion US-Dollars in August 2021 and it is expected to reach even higher levels until the end of this year.

In order to buy digital art or pictures on OpenSea you need these things:

Please note that there is no guarantee that an NFTs will see a significant price increase in the future. In fact, many analysts believe that the market might become dangerous at some point. Meaning that once all holders decide to sell there won’t be enough liquidity to exit the market.

Are there only NFT marketplaces on Ethereum?

No, many other blockchains with smart contract capabilities tried to jump on the train while it was leaving the station. The biggest platform in terms of traffic and trading volume remains OpenSea based on Ethereum, but there are a few other notable players in the market:

  • Solana (SOL) with Solanart
  • Tezos (XTZ) with the Kalamint platform
  • Cardano (ADA) with CNFT
  • Algorand (ALGO) with Opulous

Please note that the mentioned cryptos and the respective platforms are just examples and not a recommendation to use them. Most NFT marketplace are still in beta phase and might face more or less critical bugs.

It is also possible to buy an NFT on the secondary market. The holder can transfer the token to any address in the network freely. But before you do so, please note that this requires a lot of trust, because there will be no third party involved to mitigate in case of dispute. You have to negotiate all terms with the seller over the internet and you cannot protect yourself from any attempt of fraud.

What is minting and why is everybody in the NFT space so excited about it?

Many NFT collections that you might have heard of are not only limited editions, but all pictures come with different traits. But how are these traits determined? The answer to this is minting. At the start of each collection every participant gets the chance to mint one more NFTs of a particular collection.

Minting will require a fee determined by the project that is running the mint process and is issuing the collection. Please note that network fees are not included and have to be paid additionally. While minting the NFT an algorithm determines the traits randomly. In effect you might end up with a very rare NFT of a specific collection with only little expense.

While the first NFT collections that were minted didn’t draw much attention, todays minting events are over in a matter of a few minutes. Many fans and fortune seekers spend sleepless nights just to be the first in line when it comes down to get the chance to be one of the first owners of a new collection.

Here are a couple of collections that went viral and are very expensive:

- CryptoPunks on Ethereum

- Degen Ape Academy on Solana

- Bored Ape Yacht Club on Ethereum

- Crypto Rocks on Ethereum

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