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What is NFT? Explain It Like I Am 5

NTFs are the hottest topic in the digital space right now...and people are getting rich with them

what is nft

NFTs, or non-fungible-tokens, have been making headlines lately. You might have even seen a few yourself as some of them have sold for tens of millions of dollars. What are they, though? How do they work? How can you hop on the potentially life-changing bandwagon?

If you’re anything like we were when the NFT craze first started, you probably can’t answer any of those questions. That’s okay. It took us a bit of digging to figure this super-trendy, mind-boggling mess out for ourselves, too.

Now that we’ve got a firm understanding of it, we’re going to go over everything we’ve learned to answer those questions for you, and who knows, maybe you can use these glorified clip-art tokens to live that life of luxury you’ve been dreaming about?

Let’s take a look at what is probably one of the world’s biggest technological innovations of the last decade.

After reading this, you’ll understand:

What is NFT?

Nyan Cat NFT
Nyan Cat screenshot. The original is a GIF animation sold for a whopping $560,000.

Before you can start investing in and selling NFTs, you have to really wrap your head around what they are.

I could go on and on about non-fungible this, and blockchain that, but if you knew what all that meant, you wouldn’t need to be reading this. The simple answer is that an NFT is basically a certificate of ownership for a digital asset. In layman’s terms, it’s a way to buy someone’s digital files and prove that you have ownership of them.

So, someone can hop on MS Paint, draw up two stick figures playing football, and turn it into an NFT. Then, they can sell that NFT to you, and you would have the original copy of their, admittedly crap, art. Obviously, stuff like that isn’t going to net millions of dollars, but when a professional artist does it, the game changes entirely.

Imagine how much people would pay if DaVinci could paint something in PhotoShop, attach it to a proof of authenticity token, and sell it legitimately over the internet. That’s NFT.

Characteristics of NFTs

These are the most commons properties of NFTs:

  • Unique – Of course, NFTs are unique, and they can be verified on a blockchain. After all, that’s how they bear the name of Non-Fungible. They’re not interchangeable.
  • Indivisible – NFTs are indivisible. You cannot sell a fraction of your NFT, you have to transfer the ownership of the whole thing.
  • Programmable – Like traditional digital assets, NFTs are programmable. Remember, they’re just a piece of code on a blockchain. Once you create an NFT, you can program it to have a specific set of qualities. For example, you can set a royalty rate of 10% of the sale price of your NFT. Every time your NFT is getting sold you get 10% of the sale. Sweet!
  • Fraud-Proof – NFTs have permanent information and data that is stored within the token, which will reduce the probability of fraud.

Difference Between Non-Fungible and Fungible Tokens

Difference Between Non-Fungible and Fungible Tokens
Difference Between Non-Fungible and Fungible Tokens. Herby Jasmin/Gotechtor

Alright, now that you got the layman’s version, we’re going to get into a bit more technical analysis. First, you need to know two definitions: Fungible and non-fungible.

You have a ton of experience with fungible assets. Cash is one. If you have a dollar, and Bill Gates has a dollar, both dollars are worth the exact same amount. They’re entirely interchangeable, and it doesn’t matter that one of them came out of Bill Gates’ wallet instead of yours.

Bitcoin is the same way. Two whole Bitcoins don’t have varying values.

Non-fungible assets, such as NFTs, aren’t interchangeable like that. Your NFT of you “artistically” posing nude in front of a mirror is nowhere near as valuable as an original NFT of J-Lo doing the exact same thing. They have their own values based on what the NFT proves ownership of, and no two NFTs are interchangeable.

Even copied NFTs have different values. Think of fine art, again. Someone may pay millions for an original Picasso, but a copy of the same painting might sell for $15 at a rummage sale.

What Makes NFTs So Special?

This is why NFTs are such a big deal in today’s online-centric world. Up until the creation of NFTs, it didn’t matter if you had the original copy of something because it was impossible to prove it. Take digital art for example.

Before NFTs, if an artist made a really cool GIF with a GIF maker app, and then uploaded that GIF to the web, anyone, and their third cousin could download that exact same GIF with a couple of clicks, and no one could tell that they had nothing to do with making it. This removed any and all value from collecting digital files because everyone could have anything.

Since NFTs can identify a file as the original and copies are just useless copies, digital files can now have real value.

As such, NFTs are valued just like fine art. Value is based on demand vs availability. For example, if the maker of Doge memes had made an NFT of his first meme, it would start off with practically no value. No one would have cared about it.

However, Doge has exploded and turned into a key part of e-culture. That would have skyrocketed the value of an original Doge NFT despite it just being a stupid meme, and tons of deep-pocketed meme lovers would be fighting over it, today.

Keep that in mind if you’re into making creative expressions with the potential to go viral. That dumb meme might turn into a gold mine.

How to Buy NFT Tokens?

Opensea NFT marketplace
Screenshot: Opensea NFT marketplace

Buying and selling NFTs is a fairly simple process. Making them is a bit more complicated, as it takes some artistic talent, a little tech know-how, and sometimes an invitation to a platform. For now, let’s just go over buying and selling instead of teaching you how to play Picasso.

First, to purchase an NFT, you need to join an NFT marketplace. These are built on top of blockchain systems, and you can only buy or sell NFTs that were made and issued via the blockchain associated with your chosen marketplace.

For example, if you use OpenSea to buy NFTs, you only have access to NFTs that were made using Ethereum standards, and you can only sell them on Ethereum-based marketplaces. Each marketplace has the associated blockchain available upfront. So, don’t worry about getting confused.

Once you have an account with a marketplace, it’s just like buying or selling digital products on Amazon or an auction site. You can browse what’s available, find something you want, and buy it or bid on it.

The key difference is not every marketplace accepts credit cards or fiat currency. Some will require you to use the associated cryptocurrency, and you’ll need to set up an account with that cryptocurrency provider to convert your fiat into Bitcoin, Ethereum, or whatever is required.

When you purchase an NFT, it goes to your crypto wallet, and you can do whatever you want with it. You should check our recommendation for best crypto apps to buy, sell, and trade crypto on the go.

How to Sell an NFT

Selling the NFT is just as easy. While each marketplace is laid out differently, you’ll typically navigate to the “sell” option next to the piece you want to sell, and you’ll put it back up on the marketplace in a couple of clicks. When someone buys it, the funds are placed in your virtual wallet.

Your NFT can also appreciate in value if the demand for it jumps. So, make sure to keep tabs on it like any other investment. Bidding options will take care of this for you, but make sure you don’t list it for a ridiculously low price if you make a “buy now” option available.

It sounds complicated when you read some highly-technical finance article, but it’s actually super easy. Don’t let the techy types overwhelm you.

How to Verify an NFT

Verifying traditional, physical art is a bit of a chore. You have to have a professional examine the piece, and even then, some really solid fakes can be passed off as originals. It happens all the time and costs amateur collectors tons of cash.

It’s also easy for a two-bit criminal to swipe a painting for sale on the black market, or do something incredibly stupid like using a priceless Monet as a tablecloth. That’s an exaggeration, but idiots do exist.

The good thing about NFTs is that that isn’t a problem.

Since NFTs are built into blockchain systems such as Ethereum, they benefit from the same tracking technology that cryptocurrency benefits from; transaction records are entirely public.

This means that when an NFT changes ownership, the transaction is tracked and recorded for anyone with the know-how to see. You just need to use a free scanning service.

For example, if you wanted to verify an NFT built on Ethereum standards, you could use Etherscan; a program that scans the Ethereum blockchain and shows you the transaction history of whatever you’re looking for. When Etherscan has found the NFT you’re looking to verify, it’ll show you its owner and its proof of authenticity. In a sense, it generates a report covering the history of the NFT.

What’s even better is that the transaction history of an NFT can’t be tinkered with to change who the owner is. Due to how blockchain technology works, it’s pretty much impossible for someone to steal an asset or mess with the transaction history in any way.

Different crypto standards have different scanning programs, but you’re a simple Google search away from seeing what you need to use for your preferred platform.

Which Blockchains Offer NFTs?

At first, Ethereum was the only real option for creating, selling, and buying NFTs as we know them today. However, that’s changed a lot, and just about everybody is trying to get a slice of the pie, now.

Besides Ethereum, you can get NFTs through the following blockchains:

  • Tron
  • EOS
  • NEO
  • Dapper Lab’s Flow

Why Would You Buy an NFT Over a Physical Item?

Right now, we’ve all grown up seeing digital items as non-tangible playthings, and physical items have substance and value. So, why would you want to blow $1000 on some non-existent token that is basically nothing more than a handful of pixels tossed together?

Well, because our current mindset is quickly becoming a thing of the past. As we discussed earlier, digital items didn’t hold any value in the past because there were so many ways to copy and redistribute digital content without being able to tell the original from a copy some kid on the internet made.

Now that NFTs exist, and it’s possible to identify the original copy of something, digital items have value. Not only do they have value, but they’re more secure than physical assets.

If you have a Lamborgini in your garage, that’s a pretty valuable asset, right? Now, imagine your neighbor’s 15-year old breaks into your house, jacks your Lamborgini, and decides to go for a joyride before wrapping it around a telephone pole. That huge asset is now a pile of bolts and polymer.

With an NFT, theft is a non-issue. Blockchain technology is decentralized, which means no one really has control over it, and it’s constantly verified and monitored by crypto “miners”. In simpler terms, no one is even attempting to steal your NFT without it being immediately noticed, and that’s if they manage to get remotely close to stealing it in the first place.

Besides security benefits, digital assets are simply more accessible to a wider audience than physical assets. Yeah, the average person can buy a print of someone’s art showpiece, but can they buy an original and preserve it long enough for it to gain value? Probably not.

With NFTs, there is no maintenance, and since NFTs are so varied, just about anyone can afford to buy something cool. Especially since budding artists, musicians, and even game studios can make NFTs available at will, and they can appreciate in value in the future.

What Types of NFTs are Being Sold?

We’ve rambled on and on about art throughout this article, and that’s probably all you’ve heard about on the news, too. That’s just because of the massive sales figures surrounding some high-end art NFTs right now.

In reality, there are so many types of NFTs being sold that we’ll probably miss quite a bit if we try to list everything here.

An NFT can be attached to any digital asset, and it can also be attached to physical assets such as land or rare Nike shoes. In fact, Nike just patented an NFT type specifically for their more collectible shoe models, and you’ll be able to buy them in the future as authenticity certificates.

For now, you’re mostly going to see NFTs for art, game content, music, memes, and some boring stuff like business ownership.

What is the Environmental Cost?

One downside to NFTs is that they have a pretty big impact on the environment. Yes, they’re digital, and you’d think that would mean their carbon footprint would below. However, it takes a lot of resources to maintain the high-security servers and blockchain systems in place to create and house NFTs.

When you add the use of millions of crypto miners to the mix, that’s a lot of computers running at once to create and secure NFTs.

Fortunately, technology is finally catching up with blockchain advancement, and the carbon footprint of NFTs, as well as cryptocurrency, is dropping dramatically. Within a few years, it’ll be one of the most environmentally-friendly industries on the planet. You can’t say that for automotive production, or any other industry you rely on every day.

Wrap Up

NFT is an emerging concept. If you told us 8 years ago that we could buy and sell digital files such as memes for millions of dollars, we’d have called you a babbling idiot. Now, it’s just a fact of life.

If you’re not dipping your toes into the world of NFTs, you’re going to fall behind the curve, and you could be costing yourself an early retirement.

Right now, you can invest in NFTs pretty affordably. So, what’s stopping you? Get out there and add some digital assets to your virtual wallet, today.