NFT Explained: How to Make, Buy and Sell Non-Fungible Tokens
Knowing how to make, buy and sell non-fungible tokens is all the rage, but make sure you take the time to educate yourself before jumping in.
Some non-fungible tokens (NFTs) have sold for millions of dollars, and experts expect the market will exceed the billion dollar mark by a couple of hundred million within 2021. What is this thing that is creating new markets and has captured the attention of creators, collectors, and crypto-enthusiasts?
An NFT is a specific type of digital asset. The token refers to a virtual entity. Cryptocurrency like Bitcoin and Ethereum are examples of tokens. However, cryptocurrency is by definition fungible. It is meant to be mutually interchangeable with other forms of money. In contrast, something that is non-fungible is truly one-of-a-kind.
It brings to mind the descriptive phrase in Antoine de Saint-Exupéry’s The Little Prince, “unique in all the world” that the prince applies to his rose as distinct from all others. In contrast Gertrude Stein declared there is no difference among roses: "Rose is a rose is a rose is a rose."
Money in all its forms, including digital tokens is the interchangeable rose. But an NFT is a token immortalized as something distinctive.
What Is an NFT?
Ty Young and Mason Nystrom suggest thinking of an NFT “as a file format” and compare it to a “jpeg, png, or gif.” It contains digital information in a way that allows it to move over the internet. “NFTs are a file format that transfers data and value on blockchain networks.” (Read also: An Introduction to Blockchain Technology.)
However, whereas I can transfer a gift to you without owning it or granting you ownership, the transfer of the NFT also transfers the digital ownership of whatever it contains.In addition to the quality of uniqueness and digital ownership Young and Nystrom identify three key attributes of NFTs that all begin with the letter p:
Permissionless – NFTs can be used in multiple ways if they exist on a permissionless blockchain like Ethereum (not all NFTs are on Ethereum). For example, Sorare – a sports trading card game – has third-party games (not built by the Sorare team) that use Sorare trading cards.
Permanence – NFTs have permanent information and data that is stored within the token. This information can include a message, image, music, signature, or any other piece of data.
Programmable – An NFT is just a piece of code on a blockchain. This means it can be programmed to have various qualities. One of the most useful qualities of NFTs to date is that royalties can be programmed (or built-in) to the tokens.
The programmable capability is what enables the “smart contract” feature of blockchains. If that is applied to work of art rendered into an NFT then, it’s possible to build in a royalty payment for sales made off the token. Because it’s programmed into the token, it’s impossible to cut the artist out of their rightful share for a setup in which the artist maintains the copyright.
Why Buy NFTs
The one who buys the NFT has something that contains its own proof of authenticity. Even if the work is copied and sold to others, the owner has the bragging rights of possessing the original with indisputable digital proof. They can feel like they have the equivalent of the Mona Lisa even though her image has been reproduced thousands of times.
This system solves a problem that has plagued the art world, including both collectors and museums: counterfeit works of art. Part of the great value of art is derived from its irreplaceable status. The possibility of copies dilutes that value.
The blockchain solution has been adopted by that world to guarantee authenticity and track provenance. Art produced today will often get that kind of identifiers. (Read also: Art Museums and Blockchain: What's the Connection?)
The unalterable feature of blockchains gives absolute assurance of the data on identity, and the smart contracts will automatically update any movement. This is not limited to works of art.
More than art
Most of the headline-grabbing sales of NFTs all concern works of art like the Hashmasks collection that sold for $16 million in under a week, or the work of the artist Beeple that sold for $69 million. Beeple’s real name is Mike Winkelmann. He’s been a digital art creator for over a dozen years and has over 2.2 million followers on Instagram.
One multi-million dollar NFT sale that made headlines wasn’t the product of an artist. It was nothing more than a tweet. But it was Jack Dorsey’s first tweet on the platform he founded. It sold for $2.915,835.47 (a figure that must have been deliberate because the buyer bid up his own last bid). Dorsey converted the dollars to Bitcoin and donated it to a cause. That tweet is still visible in the public domain, and I can offer you a screenshot of it right here, for much less than $2.9 million.
As anyone can see this tweet, why would someone pay millions for it? The appeal for the purchaser must lie in owning this “original” piece of digital history. It likely has the same appeal for some as an autographed baseball used in a historic World Series game.
But now some have considered marketing a bit of digital history with the possibility that once the NFT is sold, it will no longer be posted on a public platform. That is the case of the Charlie Bit Me video that became a viral sensation back in 2007. The auction was up for the NFT version of the video on a site called CharlieBitMe.com. The auction ran for precisely 1day 32 minutes 10 seconds when the bids climbed from $99,999 to the winning bid of $760,999. The owner would have the right to remove the video that has been free to view these 14 years.
In addition to social media posts, Young and Nystrom list multiple categories which can become NFTs. Generally that would be used as guarantee of authenticity or a way to set documented value on digital properties They include: digital trading cards, event tickets, domain names, virtual goods used in gaming, and authentication of physical goods.
“Tokenized real-world assets, from real estate and cars to racehorses and designer sneakers” is CoinDesk’s amplification of that last category. How it works is really an extension of how it is being applied to certify authenticity and provenance for art works. CoinDesk also adds music, which can be the music itself without accompanying images, as was the case for the headline-grabbing sales of the $6 million in NFT sales captured by the musician Grimes.Creating and connecting for the love of sports
One additional category for NFTs that CoinDesk touches on is the capture of history in terms of “iconic sporting moments” that lend themselves to tokenized video footage. NBA Top Shot has generated over half a billion dollars in sales since it made its offerings available to the public.
Caty Tedman is the head of partnerships at Dapper Labs, which calls itself “The NFT Company℠" and powers the technology used by NBA Top Shot. She explained the motivation for collectors of these pieces of sports history.
Going beyond the static trading card, “‘NBA Top Shot is a next generation collector experience,’” she said. It enables participants to not just collect the most memorable moments of their favorite players but to “ build community around it.”
On that basis, the experience of producing and selling those moments in sports history become about much more than trading cards with people in person. Tedman explained how blockchain technology enables that:
It brings the hard in your hands experience online, so it makes it more global and it makes it an opportunity to have a much wider audience that you’re playing with, collecting with and buying, selling and trading with. What the blockchain elements bring to it is the ability to truly own those assets in a digital space. In the same way you feel like you can tangibly hold your physical cards, you truly own your Top Shots in a digital space.
The NFT Blockchain
Dapper Labs uses its own blockchain system called Flow. That is among the new blockchain systems that CoinDesk reports are gaining ground in NFTs. Other names in that space include: Binance Smart Chain, Tron, EOS, Polkadot, Tezos, Cosmos, and WAX. Nevertheless, Ethereum blockchain still dominates NFTs for now. (Read also: Bitcoin, Ripple, Ethereum: Comparing the Top 3 Cryptocurrencies)
While having choices can be a good thing, it can also complicate the process, as an NFT created on one blockchain may not be sold on an exchange that doesn’t support it. CoinDesk explains it this way:
“For instance, if you create NFTs on top of the Binance Smart Chain, you will only be able to sell them on platforms that support Binance Smart Chain assets. This means you wouldn’t be able to sell them on something like VIV3 – a Flow blockchain-based marketplace – or OpenSea which is an Ethereum-based NFT marketplace.”
How to Buy NFTs
For many marketplaces, it is necessary to adopt some kind of digital wallet to purchase an NFT through the form of crypto it accepts. The notable exception is NBA Top Shot, which accepts payment via credit card. As the company blog explains, “The vision is for Dapper to support purchases using whatever kind of currency you want - from fiat to crypto.” For now those crypto forms include ETH, BTC, or BCH. The company plans to add additional options over time, striving to play well with others even while other blockchains don’t naturally integrate with each other.
Outside of this particular market, CoinDesk lists four considerations buys need to go through before they can make an NFT purchase:
What marketplace do you intend to buy the NFTs from?
What wallet do you need to download in order to connect with the platform and purchase NFTs?
Which cryptocurrency do you need to fund the wallet with in order to complete the sale?
Are the NFTs you want to buy being sold at a specific time, i.e. via a pack or art drop?
The number of marketplaces will likely continue to increase. As of the now, the most popular ones are: OpenSea, Rarible, SuperRare, Nifty Gateway, Foundation, Axie Marketplace, BakerySwap, NFT ShowRoom, and VIV3.
Say you opt for OpenSea, that determines that you would need ETH to pay for your NFT. It’s just like having to, say, trade your American dollars for Canadian ones if you want to buy things in a Canadian store that doesn’t accept credit cards. (Read also: Is It TIme for Your Business to Accept Bitcoin?)
Your payment has to come in the form accepted by the platform. So you’d look for the wallets that support ETH. A number of them do, including MetaMask, Trust Wallet, and Coinbase Wallet to be ready to make your purchase when the NFT you want becomes available.
A “drop” is not unique to NFTs. It’s a tactic used for a range of designer consumer products to increase the sense of urgency to buy because the item is only on the market for a limited time. A drop that draws a huge amount of interest can end up open to buyers for mere minutes or even seconds. However, the difference is that with most things, you can just use your credit card to pay on the spot. In contrast, buying the NFT at the time it drops would require preparation ahead of time like funding an account to be able to pay in the crypto accepted there.When you’ve made your selection on the site, you can put your purchase through in pretty much the same way you do for any online purchase. You’d click the “buy now” button, then “checkout,” then “submit.” Even though nothing is physically shipped, you will see a virtual shipping and handling fee that Ethereum charges for transaction processing identified as a “gas fee.” The fee is priced in ETH, so the amount will vary, but it can easily double the cost of an inexpensive NFT.
How to Make and Sell NFTs
You begin by creating the file you want to offer for sale as an NFT. It can be a static picture like a JPG or PNG or one with movement like a GIF. You could also use audio files or even a combination of music and visual files. A 3D printing model could also be rendered into an NFT.
Then, as in the case of purchase, you have to select your marketplace and set up your digital wallet accordingly. Alternatively, you can decide which form of blockchain and/or crypto you’d prefer and then select the marketplace that accommodates that.
When it comes to marketplaces from the creators’ point of view, CoinDesk identifies the three main ones that use the Ethereum blockchain as OpenSea, Rarible, and Mintable. Note that it's also possible to create on Makersplace, though it is only open for listed artists who are registered on it.For the three named, the process is pretty much the same. You can click on the “create” button in the top right corner of the screen to get the option to connect your Ethereum-based wallet.
The specifics of the next step varies a bit from platform to platform, but is generally the same. As an example, on the OpenSea platform you hover over the “create” button, select “my collections,” and then click the “create” button. That will bring up a window where you can upload your file, give it a name, and describe what it is.
That creates a digital file for your collection. You will be assigned an image to identify your collection. Then you would click on the pencil icon on the top right to add your banner image to the page. That’s the setup.
To actually create your NFT, you click “Add New Item” and use your wallet to sign another message. Then you’ll get the window in which you can upload the file that will become an NFT.
Gas Money: Why Creators Need Some ETH in Their Wallets
OpenSea doesn’t charge creators to make the NFT, but they are subject to Ethereum gas charges that also apply to buyers. As OpenSea explains, the free transactions include the following:
- Minting a new NFT aka "Lazy Minting".
- Creating a collection
- Listing an NFT as fixed price
- Listing an NFT as auction
- Reducing the price of an NFT you've listed
However, gas fees are incurred from the following:
- Accepting an offer
- Transferring (or Gifting) an NFT to someone
- Buying an NFT
- Canceling a listed NFT
- Canceling a Bid
- Converting wrapped ETH (WETH) back to ETH, and vice versa.
It does offer this tip to creators, though. Given that the gas charges vary according to how busy the network gets from simultaneous transactions, those who want to reduce the fees can wait for off-peak times to complete their transactions. Weekends are usually less busy than weekdays, and so the thrifty creators should bear that in mind when listing their NFTs.
How to Sell NFTs
Pick the NFT you want to sell, click it, and then click the “sell button.” that will bring you to a pricing page that allows you to select the options for the sale like whether you are setting a fixed price or putting it up for auction. Payment for the sale will depend on which form is accepted for that platform. As CoinDesk explains, “Ether and other ERC-20 tokens are the most common cryptocurrencies you can sell your NFTs for, however, some platforms only support the native token of the blockchain they were built upon.”
These can vary. As noted above NBA Top Shot works off the FLOW blockchain, but it does accept several options of crypto, as well as standard credit card payments. In contrast, VIV3 only accepts FLOW tokens.
CoinDesk continues to explain how the process works on OpenSea, which enables smart contracts. You would click the “edit” button, use your wallet to sign the message, and then scroll down to select which ERC-20 token you’d accept and which royalty option you want. Drawing on the smart contract feature, royalties can be generated for each NFT sale, so revenue to the artist is not limited only to the initial sale.
Remember, though, that there are some gas fees connected to the sales process, including accepting the offer and transferring the asset. This is why you need to plan for pricing that would at least cover those fees, or you could actually lose money on the sale. Once the sale goes through, the funds will transfer to your digital wallet. You can leave them there to fund future activities related to NFTs or because you believe the currency will increase in value. But you can also cash out to whatever currency you do use, just like you may convert your Canadian dollars back to American dollars when leaving the country.
Some embrace NFTs as the future of collecting and a great way to invest, while others it a bubble built that will inevitably pop. As an investment, it certainly is extremely risky because it is far too early to tell if NFTs will retain their value over the long term. Aspiring NFT creators should also realize that for every multi-million dollar sale, there are thousands more priced so low that the creators would barely cover their costs. Still, we likely will be seeing more and more trying their hand at it, hoping to sell the digital assets that will motivate high bids and headline-grabbing numbers.