NFTs Explained: Understanding Non-Fungible Tokens

What Are NFTs?

Before explaining Non-Fungible Tokens (NFTs), it's essential to understand Fungible Tokens (FTs). Fungible Tokens refer to tokens that are interchangeable with one another and can be divided as desired. For instance, if both you and I have one Ethereum coin, there's no inherent difference between them—no Ethereum coin is unique. In contrast, NFTs are unique, indivisible, and utilize the same blockchain technology as cryptocurrencies like Bitcoin. They exist as entries on a blockchain ledger that cannot be counterfeited, enabling ownership verification of native digital assets (assets that exist or originate in the digital world) outside centralized services or databases. For example, we can mint game items, tickets, and digital artwork as NFTs through blockchain, thus giving these assets uniqueness and making them impossible to duplicate.

The Evolution of NFTs

NFTs remain a relatively new technology, with a development history of less than 5 years. The most prominent NFT project on blockchain is CryptoPunks on Ethereum, featuring 8-bit artwork in 24×24 pixel format. The concept of NFTs only became popular on November 28, 2017, when the blockchain game CryptoKitties launched and the prices of virtual cats surged. Since then, the primary application scenarios for NFTs have gradually expanded from crypto games to collections, artwork, domains, virtual identities, and other fields. Among these, DeFi, gaming, and artwork have led to several waves of NFT-related project booms.

Applications of NFTs

NFT applications are diverse, including ownership rights, gaming, and more. An NFT can represent specific intellectual property such as paintings, songs, patents, films, or photos. In this domain, the uniqueness of NFTs serves as a patent office, registering unique identification numbers for copyrights and identification patterns.

NFT Staking

What is NFT staking and how does it work? NFT staking refers to locking NFTs on a platform or protocol to receive rewards and other privileges. This way, NFT holders can earn passive income while still retaining ownership of their NFTs.

In practice, NFT staking is still in its early stages but operates similarly to other decentralized finance (DeFi) liquidity mining activities. The basic principle is that after users stake their NFTs into the platform, the rewards they receive will be determined according to the Annual Percentage Yield (APY), commitment period, and number of NFTs committed.

Due to the unique nature of NFTs, investors and collectors often choose long-term holding and speculation, and NFT staking provides them with a new opportunity to earn additional income from their assets, attracting more participants and increasing demand for NFT staking.

Advantages and Disadvantages of NFTs

Advantages

NFTs offer numerous benefits to content creators, sellers, and buyers, depending on the platform they use. With NFTs on Ethereum, smart contracts are automatic: the code in a smart contract cannot be changed after being added to the blockchain, and transactions cannot be altered once criteria are met and verified. This provides security for both creators and buyers.

For creators, blockchain technology and NFTs bring opportunities for artists and content creators to monetize their goods. For example, artists no longer need to rely on galleries or auction houses to sell their artwork. They can sell them directly to consumers as NFTs, which also allows them to retain more profits.

For collectors, NFTs allow collectors to prove ownership in the digital world. Before the invention of NFTs, it was impossible to prove ownership or authenticity of digital artwork or collectibles. With NFTs, investors now have genuine ownership of the non-fungible tokens they purchase.

Disadvantages

Every market has risks. NFT markets such as digital art and collectibles are growing rapidly. However, this doesn't guarantee that these investments will always be safe. Investing in NFTs also carries its own risks. After all, this is still a young technology. Particularly, new investors may not have enough experience to evaluate the performance of NFTs. When investing in virtual NFT assets, market volatility, poor liquidity, and fraud risks are the main precautions to note.

The valuation of NFTs depends greatly on authenticity, creativity, and the understanding of owners and buyers. Currently, market psychology and demand are the main factors driving NFT prices higher rather than fundamental, technical, or economic indicators.

Three Main Ways to Participate in NFTs

First, invest in tokens related to NFT concepts:

Invest in tokens related to NFT concepts. These tokens are not the NFTs themselves, but are the native governance tokens or functional tokens of various NFT projects or blockchain tokens providing infrastructure for NFTs such as Ronin or Tezos.

Second, directly purchase NFT assets:

Directly register/buy NFTs in primary or secondary markets, such as digital artwork, collections, game items, virtual land, etc. The top 10 NFTs mainly focus on collectibles, games, and virtual land.

Third, mint and issue NFTs:

Besides the two methods above, issuing your own NFTs is also one of the ways to earn profits. It's worth emphasizing that if you want to issue and mint an NFT yourself, you can choose to upload files on NFT minting platforms like OpenSea and Rarible to mint and issue.

The Future of NFTs

The capability of NFTs to store identification and ownership data on blockchain will enhance data integrity and privacy, as well as applications in many fields, including intellectual property and publishing. Consequently, these assets can be transferred and managed simply, ultimately aiming to reduce costs for all types of transactions. While mainstream cryptocurrency assets like Bitcoin and Ethereum are also recorded on blockchain, NFTs differ in that anyone's NFT token is irreplaceable and indivisible. In the future, NFTs will become an important component of the digital economy based on blockchain technology.