I’ve been seeing a lot of people wondering and asking a lot of question about NFTs explaining NFTs, so on this post I’ll explaining NFTS and I’ll try to make it as detailed and explanatory as possible.
What is an NFT?
NFT stands for “Non-fungible Token” which are simply tokens that cannot be swapped for another.
For instance a 500 naira note in your wallet is the same note in mine and it can be divided for example; ₦200 + ₦200 + ₦100 = ₦500
That’s simply what fungibility means.
But an NFT is unique and can’t be duplicated anywhere else in the world, that is if I own an NFT, no one else can have it and that’s what non-fungibility is.
And unique items have more value compared to non-unique ones, and here’s where the concept of demand and supply comes in.
If there’s a lot of demand for a unique NFT collection, there’ll be increase in it’s cost because people value it, and there’s no amount that is “too much” when it comes to the valuation of a unique item.
That’s why people would pay 150k naira($300)+ for an Azul in a club and not for a Hennessy bottle because they term it more valuable than the Hennessy.
This is exactly why we have people paying hundreds of thousands to millions of dollars for JPEGs (images) that you may see as “just images” and you may wonder why, their uniqueness is what actually makes them that expensive.
NFTs are just digital assets, but unlike basic Cryptocurrencies like BTC, ETH, SOL etc, they can’t be swapped because they are unique.
For instance, on Binance you can swap BTC/USDT, or SOL/BUSD.
The reason why you can do such is because these are fungible tokens, you can swap them which means they are readily available everywhere i.e 1 $SOL here in Nigeria is the same 1 $SOL in UK, same with USA and anywhere else in the world.
But NFTs are unique and you can’t have duplicates of it because there can be only one of such NFT, and that NFT is registered on the Blockchain network.
And that registration is exactly what makes it unique, even though anyone else can “right click > save” or screenshot the picture, they don’t own the real NFT, what they have is just a mere JPEG because the signature lies with you and not them which means you have the legal ownership.
Anyone else can have a screenshot or picture of your NFT, but they cannot sell it!
This signature is exactly what you sell and transfer for money, and not really the picture in this instance and this is what makes the term “non-fungible token”.
Though note that not only pictures can be sold as an NFT, you can sell your music, meme, video, GIF as an NFT but since most people are familiar with the pictures and art part, I’ll be using that to explain.
Now let’s say you buy a NFT built on the Ethereum or Solana (much more affordable) Blockchain, the NFT would be registered in your name or wallet address.
It can be from a collection/project but once you mint it (means buy from the project for the very first time), the ownership gets transferred to you.
And when there’s a lot of demand for the project, the floor price (least amount you can buy that NFT for) of the NFTs increase.
And this right here is where basic economics come in play which is the concept of “Supply and Demand”.
What happens when we have demand for an asset? Or in this case a NFT project?
It’s simple, the price increases!
It can be nonsense which is what a lot of people call it but I want you to know that if there’s high demand for that same “nonsense”, it will sell at insane numbers.
This is why we have people splurging millions of dollars for NFTs, they’re not just buying the NFT or in this instance a picture, what they’re buying mostly is the value attached to owning the NFT which includes the signature or proof of ownership and social status.
Eg Lamborghini produces cars right?
But do you know most people don’t buy Lamborghinis for the features but for the social status? because who cares about features?
What most people pay for in Lamborghinis and other exotic vehicles is mainly for the social status, there’s nowhere a Lamborghini will take them to that a casual vehicle can’t, but they buy for the status and the bragging rights.
And this is the exactly case with NFTs
If you buy a crypto punk and announce it on Twitter, you’ll get thousands of followers and requests from several hundreds at an insane rate, and why’s that?
The Crypto Punk project has a high reputation due to how long it’s existed and the reputation of the creators and this affects the value it has, hence anyone who owns a crypto punk is perceived to be high value because only a few can afford to own a crypto punk.
This is also a reason why there’s no such thing as “too expensive” when it comes to the valuation of something because valuation is in the eyes of the beholder. If the buyer sees the reward and potential of buying something as much more bountiful than the risks, he would definitely go for it no matter how expensive it may be.
This is a reason why people buy NFTs.
Besides, some people buy NFTs for the “art” itself, this is is also a main reason
Example is; If your favorite artist or a reputable and popular artist creates an art, you can decide to buy it because:
1) You like the project team/artist, this is why reputation sells first.
2) You like the art itself… And this right here js where we have something called “rarity” which is simply a measure of the scarcity or rareness of an NFT.
The more rare an art is, the more positive influence it will have on its pricing.
For instance if the artist creates 100 different paintings made with black and white colours, and only 2 of them have an extra colour in them which is gold.
Now do you think the ones with gold color will sell for the same price as the remaining 98 which are just black and white?
Why? Those two are rare!
So if the artist sells the basic 98 arts with black and white for $1k, same seller can list those two with golden colours for $3k each because they are unique and different from the rest, due to what? Rarity!
The famous artist Leonardo Da Vinci created hundreds or probably thousands of arts during his time, but why is it the painting of Monalisa that stands out?
It’s because it’s unique! Last time I checked, the valuation of the Monalisa art is over $860 million.
Is it just a picture? Definitely not. It’s an art and a rare one.
The artist Leonardo Da Vinci is a legendary artist (reputation), and the art was drawn in the early 15th century (duration of existence).
These are the factors that make the art highly valued and very expensive.
So if you’re looking to buy NFTs, rarity is one of the things you should look out for as it’s one of biggest influencers of price.
Rare NFTs can be sold for millions, buyers who spends millions on a rare NFT do so because they see the worth or have interest, they’re not stupid.
NFTs are here to stay, and the earlier you get in the metaverse, the better it is for you, there’s a lot to gain, learn and witness in this space, and you learn more from doing rather than sit at the lines.
Though this doesn’t mean NFTs don’t come with risks too, they do.
So you have to be careful, bad people exist too, scammers exist, that’s why you need to utilize risk management always.
Stick around, follow those who are proven to be successful in NFTs and do what they do, it’s that simple.