What are NFTs? 7 things to know before you buy


Data from market tracker DappRadar further revealed that some of the world’s top brands, such as Coca Cola and Gucci, have also sold NFTs. NFT sales volume totaled $24.9 billion in 2021, compared to just $94.9 million the year before. Now it has become extremely difficult to miss the avalanche of talk about NFTs. So what exactly are they?

What is an NFT?

An NFT is a non-fungible token. And what this means is that an NFT is a unique token on the blockchain that cannot be replaced with something else. NFTs can really be anything digital, including drawings, music, photographs, videos, and any type of digital file. However, it is interesting to note that digital art is not the only way to use NFTs, as they can be used to represent ownership of any unique asset, such as a deed to an item that can be digital or even a physical item. Basically, these tokens are transferable but not replicable tokens on the blockchain.

How does it work?

NFTs function as digital collectibles that are unique, one-of-a-kind, that cannot be exchanged for another token like you can when it comes to other cryptocurrencies. “A creator of these tokens releases them on a blockchain and offers them for sale. Buyers can again offer it for sale to secondary buyers, either directly or through marketplace platforms,” ​​explains Sathvik Vishwanath, Co-Founder and CEO of Unocoin Technologies Ltd.

What are the risks associated with buying NFTs?

Currently, there are several risks associated with crypto collectibles, as NFTs pose significant market risks, including financial and regulatory risk. As we have witnessed the many cases of fraud, experts believe that any digital underlying can be easily replicated and can lead to counterfeiting, which is one of the biggest risks associated with NFTs.

Amit Jaju, Senior General Manager of Ankura India, who is an expert in digital forensics, explained that “crypto collectibles are not controlled by any entity and therefore you are responsible for your own security (unlike fiat currency). , where banks hold your money for you). ). If you lose the private key (similar to a username) associated with an NFT, no one else will be able to access it and you will not be able to spend or transfer the NFT. This means that if lose your private key, you risk losing all the value stored in that NFT.”

Another risk is associated with data fragmentation, Jaju explained, “if you buy an ERC-20 token, for example, that bundles many different types of NFTs together, then a single token is just a number on the blockchain. If you want to exchange this Ethereum ERC-20 token for another form of crypto-artifact, that requires reading and processing the data associated with each NFT in that bundle.” So, the more NFTs that are included in a token, the higher the risk. of fragmentation.

What buyers can do to protect themselves against these risks

According to Jaju, buyers can avoid risks by making sure they have a reliable source from where they buy the NFT directly or through a platform. In addition, buyers should also review the relevant terms and conditions associated with the transaction, including exclusivity and platform liability in the event of non-compliance.

“It is important for the buyer to validate that the creator of the token they are buying is genuine. The other major risk posed by the buyer is the custody of the NFT: he must beware of hackers and fraudsters and must take care of the token as if it were real cash,” Vishwanath noted.

In addition to this, to avoid cyber breaches, buyers should back up their private keys and explore hybrid wallets and all other basic security measures associated with protecting a crypto wallet.

Does volatility in crypto markets affect NFTs?

The value of NFTs is determined by a variety of considerations, including their scarcity, the demand for the underlying artwork or even the artist, and the prices of the underlying cryptocurrencies. “Many online marketplaces that trade NFTs are based on blockchains. The Ethereum blockchain currently powers the most popular ones. If you want to trade NFTs through one of the most popular exchanges, you will almost certainly need ethereum’s native currency, ether, for the transaction,” said Jaju.

Cryptocurrency and NFT markets are not directly related when it comes to coin and token prices, Vishwanath explained, “However, many people try to buy NFTs using other cryptocurrencies or tokens and so if the cryptocurrency market is bored, buyers prefer not to buy NFTs at that time, as the purchasing power of cryptocurrencies would be less.”

Interestingly, not all NFTs track the prices of their underlying crypto. “Although crypto markets are down overall, the OpenSea NFT market has seen $2.3 billion in trade so far this year and is on track to break its monthly volume record if the trend continues,” Jaju said. In the future, it is likely that the demand for an NFT may affect the value of a crypto currency due to demand.

Many online marketplaces that trade NFTs are based on blockchains. The Ethereum blockchain currently powers the most popular ones. “If you want to trade NFTs through one of the most popular marketplaces, you’ll almost certainly need Ethereum’s native currency, ether, for the transaction,” added Jaju.

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