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Avast Academy Security Other Threats What Are NFTs and How Do NFTs Work?

What Are NFTs and How Do NFTs Work?

NFTs, or non-fungible tokens, have the potential to revolutionize the way we spend money and do business. But how NFTs work isn’t straightforward, and it’s difficult to know what they mean or what you need to get started. Before you dive in, shore up your digital assets and help protect them with comprehensive online security software like Avast One.

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Written by Anthony Freda
Published on February 10, 2023

What is an NFT?

An NFT is a non-fungible token, meaning it’s a unique asset that cannot be copied and isn’t easily interchangeable. An NFT acts as a digital certificate of ownership — of a tangible or intangible asset — that is recorded on a blockchain. NFTs are most commonly tied to digital content like computer art or video clips.

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    NFT's unique properties are what makes them special and difficult to exchange with similar goods or assets. Fiat currency, like coins and US dollars, is fungible, meaning it can be exchanged or replaced by another asset and hold the same value. NFTs can’t.

    You can think of NFTs like digital art collecting. Traditionally, art collecting has meaning because there is only one version of each painting. Individual works of art are special and valuable because there’s only one example of them in the world. Scarcity adds value and you have to treat it carefully.

    The scarcity principle can apply to the digital art world, too. As Kevin McCoy, a digital artist who minted the first NFT in 2014, explained in NFT Now, “I had an idea to use blockchain technology to create indelible provenance and ownership of digital images.”

    NFTs are bought and sold thanks to deeds of ownership. The deed of ownership is locked behind blockchain technology in a ledger that updates in real-time and is nearly impossible to fake, manipulate, or hack.

    An NFT deed of ownership locked behind blockchain technology.An NFT deed of ownership secured on a blockchain.

    Just like Bitcoin has monetary value based on something abstract (with no physical objects attached), a digital image NFT has value despite being intangible. Some people remain unconvinced, but billions of dollars now change hands every year thanks to NFTs, meaning they have a substantial effect on the real world — whether you believe in them or not.

    How do NFTs work?

    NFTs (non-fungible tokens) are created through “minting,” where an NFT is assigned a unique identifier. NFT identifiers are stored on a ledger, known as a blockchain. This ledger is special because it updates in real-time and is nearly impossible to fake or hack.

    An NFT is owned by someone because the ledger says so, which is the ultimate proof. On top of this, the digital file has a special key stored in its metadata that identifies it, so ownership is indisputable. A million people can make a copy of the online content an NFT secures, but only one person can claim ownership of the NFT.

    An NFT with its certificate of ownershipThere can be only one certificate of ownership per NFT.

    Why do people think that NFTs have value?

    A blockchain works because of an algorithm — every new entry is defined by an ultra-complex math problem that supercomputers would struggle to solve. This makes it virtually impossible for hackers to manipulate the blockchain. What’s more, there’s no central authority that controls the blockchain, so people trust its diffuse, decentralized nature.

    NFT examples

    Compared to many technologies, NFTs are still in their infancy. It’s expected that NFTs will soon be used for practical purposes like authenticating products (medicine, food) or intellectual property (copyrights, patents, trademarks).

    For now, some of the best-known examples of NFTs are:

    • Digital artwork

    • GIFs

    • Collectibles

    • Videos

    • Essays

    • Games

    • Virtual avatars (and their clothes)

    • Music

    • Tweets

    • Digital property or real estate

    The NFT marketplace NBA Top Shot allows you to own a play by famous basketball players. Jesse Schwarz bought a video of a LeBron James dunk for $208,000 in January 2021. While anyone else can still download and view the video, they don’t own it and can’t make money off it. Because the video was sold for so much, it’s amassed similar value as more traditional sought-after art.

    Speaking of art, digital artwork is one of the primary uses of NFTs. One of the most famous examples is Beeple's “Everydays: The First 5000 Days,” which sold for $69 million in 2021.

    Just about anything can be turned into an NFT. Jack Dorsey, the former CEO of Twitter, sold his first-ever tweet as an NFT for more than $2.9 million.

    What are NFTs used for?

    NFTs have meaningful real-world applications that can transform a business or an individual’s professional life. NFTs have significantly improved the ability of digital content creators and artists to monetize their work.

    Here’s a look at different industries where NFTs are used, and how artists and others have benefited.

    Art and design

    NFTs grant designers and artists more power than ever before. Without NFTs, digital artists typically watermark art and demand credit when it’s copied. It’s all pretty unregulated, and designers often get the raw end of the deal when work is used without their permission. Now, artists can make an NFT and get a direct financial return commensurate with their work — and they can also benefit from future royalties.

    Online gaming

    With NFTs, in-game assets can be traded as real-world assets. Some long-running games like EVE Online allow users to transfer items or currency. In fact, somebody once had the idea to sell their entire EVE Online account on eBay. They wanted a financial return for the many hours they had dedicated to the game, and they knew someone would be willing to pay. NFTs provide a regulated system for this practice.

    Domain name ownership

    NFTs let you own a domain name indefinitely. When you choose a domain name (like avast.com), you are subject to a centralized authority called the ICANN (Internet Corporation for Assigned Names and Numbers). Now, you can make a one-time purchase of a domain name, and it’s decentralized and nobody can take it from you.

    The fashion industry

    NFTs can make your virtual avatar’s outfit completely yours. One of the criticisms leveled at NFTs is that an image can still be copied and shared. Within a digital space like the metaverse, however, the NFT will only be usable by the person who owns it. The NFT may be connected with a real-world piece of clothing too, where the owner gets extra benefits like free invites to fashion events.

    Events and ticketing

    There’s been a long-running problem in the music performance industry around Ticketmaster. With virtually no competition, touring artists have to rely on them to sell tickets, and they often lose out on profits as a result. The decentralized nature of NFTs might be the answer, because they increase auditability, making private ticket sales possible and cutting out the middleman.

    Investment security

    The decentralized nature of NFTs and the near-impossibility of faking them, make them a potentially reliable way to invest. As long as nobody else has the private key associated with your NFT, nothing can ever happen to it. The only real risk is if you lose the key.

    We’re on the cusp of Web 3.0, and it just might be as free from corporate influence as the early days of the internet were. NFTs can be very useful for validating transactions, and certain industries and professional fields may get revitalized, wider even than the examples noted above.

    Why are NFTs valuable?

    NFTs are valuable because they’re backed by an infrastructure in which deeds of ownership can’t be disputed. This is a unique way of identifying individual characteristics. But individual NFTs are only valuable when someone, somewhere, is willing to pay for them.

    The value of NFTs has been proved by multiple transactions, such as the aforementioned purchase of a LeBron dunk for $208,000. That’s dwarfed by Snoop Dogg’s purchase of Right-click and Save As Guy by digital artist XCopy, a sort of modern-day Jean-Michel Basquiat, for more than $7 million.

    While we’re used to monetary value being anchored to a physical object, money only has value because everyone agrees that it does. Even cash loses its value if a government defaults or collapses. The system of consensus confers value, as it does for non-fungible tokens.

    With NFTs, the data is traded for money — which is the only requirement for it to have value. The actual physical properties are almost irrelevant.

    How to create an NFT

    There are four steps to create an NFT:

    1. Set up a crypto wallet.
      You can choose from a variety of crypto wallets, which differ based on cost, security, and the device that accesses it.

    2. Add cryptocurrency.
      You need to add cryptocurrency so you can pay the fees associated with creating an NFT.

    3. Connect your wallet to an NFT marketplace.
      An NFT marketplace operates on a blockchain, which is usually based on which currency you want to use. Marketplaces differ based on the fees they require, the NFTs they support, and the method they use to create blocks in the chain.

    4. List your item on the marketplace.
      Finally, you need to list your item on the NFT marketplace so that others can find it.

    Creating an NFT isn’t that different from starting a new Instagram account and posting a few pictures, really. You can also skip the entire copyrighting process, because copyright is established as soon as the NFT is created. Creating an NFT generally costs between $1 and $500.

    How to buy an NFT

    To buy an NFT, you need an account on an NFT marketplace and a crypto wallet linked to it. Depending on the marketplace, you need to fill your wallet with cryptocurrency from the associated blockchain or add funds from your debit or credit card. Then, you can make a bid on an auction item or buy an NFT outright if it's available at a fixed price.

    Here’s how to buy an NFT on OpenSea, the largest marketplace on the Ethereum blockchain:

    1. Open a crypto wallet supported by OpenSea (such as MetaMask or Coinbase Wallet).

    2. Connect your crypto wallet to OpenSea.

    3. Browse the available NFTs.

    4. When you find one you want to purchase, click Buy now.

    5. Choose your payment method: crypto or card.

    6. Review the fees and fine print, and the confirm your order by clicking Pay.

    The OpenSea homepage with a rotating slideshow of NFTs for sale.NFTs for sale on OpenSea.

    Choosing the right wallet requires research, as does finding the best NFT marketplace. This is something you should figure out by understanding what you want out of an NFT. It also depends on whether there’s a specific NFT you want to buy, and which platform it’s available on.

    If you need to buy crypto, learn about the best places to buy crypto first.

    Where to buy an NFT

    NFT marketplaces are the best place to buy NFTs, and there are three types:

    • Open NFT marketplaces. Anybody can use these marketplaces, and there’s no exclusivity in terms of who gets to sell an NFT.

    • Closed NFT marketplaces. Also known as curated or premium marketplaces, these require an invitation or application to list an NFT.

    • Proprietary NFT marketplaces. These are marketplaces that sell their own NFTs, like NBA Top Shot and Bored Ape Yacht Club.

    Some popular NFT marketplaces include:

    An open marketplace like OpenSea gets a lot of traffic, so it has to be diverse and secure enough to be successful (and OpenSea is very successful). Think of it like browsing social media — only everything you’re looking at has monetary value.

    A closed marketplace can set strict rules. For example, artists must be invited to publish their work on SuperRare. It gives royalties to the original artist at every sale, and it coordinates with traditional art collection communities to keep the spirit of curation alive. SuperRare is very serious about art, so they vet their artists carefully.

    A proprietary marketplace like Bored Ape Yacht Club has complete control over the kind of art that’s traded. These marketplaces create a brand image with things like events and limited runs. There are 10,000 Bored Ape NFTs, which live on the Ethereum blockchain.

    Are NFTs safe?

    NFTs are completely safe — in theory. The blockchain technologies they’re stored on are secure. As with conventional art, once you purchase an NFT you need to maintain it to keep it safe. The biggest security issue to watch out for is fraud.

    NFTs are stored on a complex infrastructure that’s almost impossible to cheat. As long as you have the private key, you have complete control. But how can you be 100% sure that your private key is unreachable by anyone but you?

    Hackers develop more sophisticated hacking methods all the time. And with just a little bit of information about you, they might be able to log into your system and expose your crypto wallet. If they steal your identity, they have everything they need to claim your NFTs too.

    NFT scams

    Here are some scams related to NFTs:

    Make sure to report these scams if you think one is happening to you. You might prevent other people from becoming targets too.

    How to Avoid NFT Scams

    Here are some steps you can take to avoid NFT scams:

    • Manage your transactions yourself.

    • Use only the most trusted digital wallets and marketplaces.

    • Research NFTs before you buy them.

    • Understand the market and the risks involved.

    • Keep your cryptocurrency and NFTs in cold wallets, which aren’t connected to the internet and so are better protected against hacking.

    • Practice good digital hygiene like using strong passwords and two-factor authentication.

    • Use comprehensive online security software to protect yourself from threats.

    Secure your digital assets with Avast

    If you’ve decided to take the plunge into NFTs, basic internet security just won’t cut it. You need comprehensive internet security software that provides a suite of features to keep your personal data safe and your digital assets protected.

    Avast One is an award-winning security platform with industry leading threat-detection technology that will protect you from the array of today’s online scams and threats. Plus, it features phishing protection, data-leak monitoring capabilities, and a built-in VPN to encrypt your communications. Install Avast One today to protect your digital life.

    FAQs

    What does NFT mean?

    NFT stands for non-fungible token, and “non-fungible” is what distinguishes NFTs from cryptocurrencies. Bitcoin and Ethereum are fungible tokens — one Bitcoin can be exchanged with another and nothing is gained or lost. By contrast, each NFT has a unique value and cannot be copied or exchanged.

    Are NFTs worth buying?

    NFTs are worth buying if you want to own digital assets — such as a digital artwork from a favorite artist — and understand the investment risks. For investment purposes, an NFT is worth buying if you think its value will increase over time. The market for NFTs is only just emerging, so there is little historical evidence to track and the future is unknown.

    Celebrities go into NFTs with a team of business-savvy professionals who know how to handle investments. Many view them as an investment, as they would stocks or real estate. Normal individuals have a chance at success, but it could be a longshot.

    NFTs are risky because they’re so new. Here are some reasons why NFTs may not be worth buying:

    • Lack of perceived legitimacy.

    • They contribute to climate change, which not only makes them harmful in themselves, but future legislation may also make them illegal.

    • Criminals are targeting NFTs (and their owners) because they’re so lucrative.

    Having said that, the numbers speak for themselves. Some people have made profits in the millions, because they correctly judged the marketplace. It’s also a case of being at the right place at the right time. NFTs can be worth buying if you know what you’re doing and are prepared to take the risk.

    Why do people buy NFTs?

    Many people buy NFTs because they can be lucrative digital assets or investment vehicles that hold significant potential value in the future. Certain industries (like music and art) are already being transformed by NFTs, because their decentralized nature returns control back to artists and small businesses.

    One day, the influence of NFTs may be felt everywhere, and there’s undoubtedly excitement and prestige associated with owning a piece of history. Of course, it’s worth remembering that the same has been said for a lot of technological and artistic developments that have come and gone.

    Are NFTs cryptocurrency?

    NFTs are not a type of cryptocurrency, although they are based on the same technology. They are both digital tokens, and most NFTs are purchased using cryptocurrency. The biggest difference is that NFTs aren’t interchangeable, while cryptocurrency tokens are.

    An NFT is unique and can’t be replicated or easily exchanged. One NFT doesn’t have the same value as another, whereas one Bitcoin does. And while many people buy cryptocurrency for investment purposes, much like NFTs, as a digital currency, crypto is a medium of exchange used to make payments, too.

    How are NFTs stored?

    Two main parts of an NFT are stored: the smart contract and the digital asset (i.e., artwork). On-chain storage is when both components are stored on the blockchain. Off-chain storage is when only the smart contract is stored on the blockchain.

    Off-chain storage is more common, because the digital content portion of the NFT takes up a lot of space. In these cases, the smart contract on the blockchain contains information about where the media or digital asset is stored.

    How do you make money with NFTs?

    You can make money from NFTs by:

    • Renting

    • Earning royalties

    • Trading NFTs

    • Staking NFTs

    • NFT gaming

    • Investing in NFT start-ups

    • Selling NFTs in marketplaces

    • Adopting NFT-powered yield farming

    What does non-fungible mean?

    By definition, non-fungible means something that can’t be copied, replaced, or easily exchanged. NFTs are unique tokens created to represent ownership of one particular asset. Non-fungible also means something isn’t interchangeable. This applies to NFTs and physical items like works of art that have their own unique properties.

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    Other Threats
    Security
    Anthony Freda
    10-02-2023