WHAT IS NFT
NFT (non-fungible token) is a non-fungible token implemented through a record in the blockchain of ownership of a unique asset. What is the difference between fungible and non-fungible tokens?
A fungible token is one that has essentially the same properties as another token of its class. For example, US dollar, Bitcoin, concert ticket. Banknotes can simply be exchanged one for another. If they have the same value, there is no difference to the holder between, say, one dollar bill and another.
An NFT is a digital asset that contains information identifying it, recorded in a smart contract. It is this information that makes each NFT unique, so one token cannot be directly replaced by another, as no two NFTs are the same.
Non-fungible tokens are unique and have unique characteristics in their class. For example, works of painting or music, a domain name.
An NFT can be 1:1 (one of one) – a single, unique object, such as a painting. Or as part of a collection such as Bored Ape Yacht Club or CryptoPunks. Each of these collections consists of 10,000 NFT tokens.
Airdrops are free collectibles or bonus NFTs offered by creators to generate interest in their project or reward existing users. An airdrop can be a reward for an existing project community, or an exchange for some kind of activity (for example, writing a post on social networks talking about the project). Either way, the effect is always the same – you get the NFT for free if you meet certain criteria. It’s important to note that drop and airdrop are different things.
TERMINOLOGY:
Ape In – buy NFT (also called Aping, Aped).
Collection is a collection of NFTs united by a common theme.
Asset – asset.
Collector is an investor who purchases NFTs for collection and/or for market speculation.
Copyminting is a scam where an investor passes off someone else’s NFT as their own.
Copy Cat is a creator who imitates someone else’s ideas, appearance, or behavior in the NFT space.
Drop is the initial launch of a new NFT, but it’s not free.
Dry Powder refers to cash in NFT community lingo.
Flex – Boasting when someone posts, for example, CryptoPunks or BAYC as their profile picture on Twitter.
Floor/Floor price – the lowest asking price for the NFT.
Fractional ownership is the right to partial ownership of an NFT. Sellers can sell NFTs in pieces, and buyers can purchase as many pieces of a single NFT as they can afford.
The Genesis Drop is the first NFT drop that a creator makes on an NFT auction platform like OpenSea.
Loot Box is a transaction in which the owner does not know which NFT he bought until he opens the Box.
Metadata is the actual content and its description, which is implied in the smart contract stored in the blockchain. This includes a set of data that determines ownership and distinguishes one NFT from another.
Minting is the “minting” of NFTs, the process by which an NFT becomes part of a blockchain. Once an asset is placed on the blockchain, it is “minted” as a token and cannot be changed.
NFTfi are P2P lending platforms that use NFTs as collateral for transactions.
PFP (ProFile Picture) – An NFT used as a profile picture, often for bragging purposes (e.g. BAYC).
POAP NFT (Proof of Attendance Protocol) – NFT for visitors to physical or virtual events.
A Project (NFT project) is a collection of artwork or digital assets released as part of the same overall roadmap or story. Good examples of recent collections are Fluf World and Loot. Typically, the artist or creators will share a “Road Map” of their idea, which is intended to help understand the scope, purpose, and direction of the main project. Once you understand the project, you can decide if you are interested in participating. Always do your own research before investing in a project.
Rekt – Refers to an investor who has suffered severe financial losses due to poor investment decisions.
Royalty is money earned by the NFT creator through the resale of the token. An NFT can be hard-coded to always pay royalties to its creator whenever a token is sold.
Rarity is one of the critical factors for determining the value of an NFT. Based on the unique properties or traits of the NFT. Common: Common, Rare, Mythical, Legendary.
Reveal is a term that refers to when an NFT token will be revealed. The buyer actually finds out what rarity of the token he bought only after the acquisition. It is up to the creators of the collection whether the release will occur immediately when the collection is sold out, or, for example, with a delay of 24 or 48 hours.
Sharding – breaking an NFT into parts.
TYPES OF NFTS
NFT is a new direction in blockchain technology. Market participants are making numerous attempts to find uses for tokens of this type. Some of them are more successful, some less successful. There is hype, the durability of which is still in question. However, certain trends in the use of NFTs are starting to emerge.
Some of the popular ways to implement a non-fungible token are:
5. PRACTICAL USE AND FINANCE (UTILITIES AND FINANCE)
4. METAVERSES
3. GAMES
2. COLLECTIBLES
1. WORKS OF ART
WORKS OF ART
NFT art is the preferred route through which most digital artists buy and sell digital art. It is not unique, but it is limited, creating scarcity and a sense of authenticity that leads to value creation. Everydays: The First 5000 Days by Beeple is one of the most expensive pieces of NFT art ever sold.
• The art market is flooded with new, low-value assets created by artists eager to enter the market.
• Assets increase in value on the secondary market.
On the other hand, connoisseurs of beauty and simple investors buy crypto art in NFTs without unnecessary complications, bypassing legal procedures or auctions.
Thanks to new technology, artists, musicians, singers, writers and other creative individuals have the opportunity to make money from their creativity much easier and faster. As a result, they will create many times more creations and leave a significant mark on history. NFTs also allow artists to earn royalties, that is, receive a percentage of each subsequent sale of their work, since it is possible to program a special code to send a percentage of the resale to the artist.
In 2021, the market for “traditional” art totaled over $14.6 billion versus $2.8 billion for Crypto Art. Thus, today Crypto Art accounts for less than 16% of the entire art market. This percentage needs to be put into perspective considering that the technology that made Crypto Art possible was developed less than 5 years ago. Of the $14.6 billion in sales, 45% of that total was post-war and contemporary art, highlighting collectors’ strong interest in recent works. The Crypto Art and NFT craze is part of this trend.
The majority of 2021 sales came from the primary market, nearly 60% of sales, but the primary market accounted for only a quarter of the dollar volume. Assets traded on the secondary market have a higher monetary value, which can be explained in two ways:
COLLECTIBLES
This is a collection of different objects united by a storyline or having some kind of unifying factor, for example, by semantic load. Often a collection is created based on one object and this object has one or more characteristics varying.
• storage difficulties;
• the problem of materials obsolescence has been eliminated;
An example of a collection is the sensational Bored Ape Yacht Club (BAYC), consisting of 10,000 NFTs with images of monkeys. Each character has completely unique traits. However, some NFTs are rarer than others, making them more valuable. Purchasing Ape gives owners exclusive access to future collections, as well as other BAYC member benefits.
A different combination of characteristics for one object allows us to determine the rarity of a given NFT.
Collectibles are valuable items that are often sought after by traditional collectors. NFTs first emerged with the development of crypto cats, which are a great example of digital collectibles. NFTs have taken collecting to a completely different level. They added useful properties to scarce objects and removed disadvantages.
Each monkey consists of seven possible characteristics: background, clothing, earring, eyes, fur, headdress, mouth. Each attribute has many variations and styles. For example, monkeys can have golden, multi-colored, or gray fur. Some skins are limited to a certain number, so some characteristics are much rarer than others.
Thanks to tokenization:
• the need for additional materials (the necessary additional information and descriptions are already embedded in the blockchain);
• future exchange made easier.
The two flagship collectibles of the year were undoubtedly CryptoPunks and Bored Ape Yacht Club, which accounted for over $3.5 billion in transaction volume, accounting for more than a third of the segment’s activity. CryptoPunks is slightly in the lead, but in 2022 the ranking between the two giants of the segment may well change places. It should be noted that Meebits, which ranks 3rd in terms of dollar trading volume, was created by LarvaLabs, the studio that is also behind CryptoPunks.
As the chart shows, the collectibles segment was largely dominated by the secondary market, accounting for nearly 85% of trade volume. As in the art market, the difference between the number of sales and the value of traded value sold on the secondary market suggests that assets tend to appreciate in value on the secondary market.
GAMES
Game items, game objects, areas of game worlds – all of this can be sold as NFTs. And the rarer the game item is, the higher the status of its owner.
Tokenizing game items into digital assets has also made it easier to transfer tokens between players or different games through a dedicated NFT blockchain registry.
Game developers are introducing NFTs to allow players to win digital in-game items such as digital swords, shields and other collectibles.
Axie Infinity is undoubtedly the top gaming project of 2021, accounting for almost 2/3 of the gaming blockchain industry.
According to the chart, the secondary market accounts for slightly more than half of the segment’s activity in terms of sales volume, and more than 85% of the total volume in monetary terms in the secondary market. As with most other NFT segments, the assets have rapidly increased in value on the secondary market.
METAVERSES
The Metaverse segment generated the most interest in late 2021 thanks to Facebook’s (which became META) bombshell announcement that it had begun working on creating its own metaverse.
Sandbox is the metaverse project that benefited the most from Facebook’s announcement that it would be renamed Meta. Sandbox accounts for more than 50% of the Metaverse segment’s market activity in 2021, followed by the sector’s historic player, Decentraland. All other metaverses together account for less than a quarter of the total volume of the Ethereum blockchain. This segment will undergo a profound transformation next year, given the hype around digital universes, with the market expected to become more competitive and diversified.
The principle of the metaverse is very important in the NFT industry. One of the very first NFT projects on Ethereum in 2017 was the Decentraland project. A metaverse is a form of parallel universe that can be accessed digitally through a screen (computer, mobile phone, etc.) or through a blended augmented or virtual reality experience. Like in the movie Ready Player One, the metaverse will offer gaming and social experiences, but could also open up the possibility of a parallel economy: selling items in the metaverse (clothing, accessories, 3D objects, etc.) or traditional e-commerce through experience in the metaverse metaverse.
The main market for the metaverse segment is primarily Sandbox, which continues to host regular pre-sales.
Meanwhile, Decentraland stopped selling LAND in December 2018, since then sales of LAND have only been on the secondary market. It should be noted that the volume of new Metaverse sites released to market remains relatively high, with 45% of sales volume coming from the primary market. Value remained concentrated in the secondary market with over 80% of trading volume in monetary terms.
UTILITIES AND FINANCE
The NFT Utilities market is perhaps the most difficult segment to understand and the most undervalued today. The most well-known use case for NFTs of this type is domain names for blockchain. A major trend that has emerged in 2021 is NFT splitting and ownership splitting. This use case in finance opens up new prospects for using NFTs as a store of value.
Utilities are any asset intended for a very specific use not directly related to the game, or where the main purpose is simply to own it. There are many use cases today, especially in the areas of finance, digital identity, access and authentication, ticketing, security, physical asset tokenization, product certification, supply chain, healthcare, etc. It is noteworthy that the very nature of individual assets in the Utilities segment does not allow the creation of a market: identity cards, identifiers, diplomas, medical cards. The nature of the assets in circulation makes the Utilities segment inherently difficult to compare to other segments of the NFT industry.
The Utilities market is very different from other segments. Due to the nature of the objects of circulation and their functions, the secondary market is extremely weak (only 10%). These assets, which are finding buyers on the secondary market, have very high values: just under 50% of the total value traded in the segment (more than $264 million).
HOW TO MAKE MONEY ON NFTS?
First, let’s determine what factors influence the value of an NFT.
If there are use cases for the token, this could raise its price in the future. Otherwise, the token may turn out to be useless ballast in the wallet.
PRACTICAL USE
Maybe it was created by a famous person? Or is the token tied to some rare object from the real world?
RARITY, UNIQUENESS OF THE ASSET
This is a liquidity generator, because the more people know and are interested in a certain asset, the greater the chance that it will not remain a dead weight in the owner’s wallet forever.
COMMUNITY
Now those ways of earning money that are relatively easy to implement using tools available to everyone:
• Create your own NFT for sale .
• Create your own NFT to earn royalties . There is information online that royalties can be 5-10%. That is, from each resale, the NFT creator will receive such a percentage of the amount. Alternatively, you can give away NFTs for free with the expectation of future royalty payments.
• Producing NFT creators is a way for those who are well versed in the industry, have the experience and financial ability to bring NFTs to market. The method is not for everyone.
• Receiving NFT tokens in anticipation of their rise in price with subsequent sale. Receiving means both purchasing and participating in the airdrop. If market knowledge, experience and financial capabilities allow, then regular NFT trading can bring significant profits.
• Play-to-Earn – by participating in the game, you can receive various NFT items and then sell them on the secondary market. The NFT token can not be sold, but rented. For example, a piece of land in a virtual universe. Some blockchain trading card games allow you to rent or lease individual rare cards to help increase your chances of winning. Users set the fee and duration of the transaction themselves.
• Staking with NFTs allows you to earn money in a relatively new way. This is made possible by the close connection between NFTs and DeFi. Staking involves depositing or “freezing” digital assets in a DeFi protocol smart contract to generate passive income. The assets in which rewards are paid may vary – for example, ether or the platform’s own governance tokens. In addition, it is often possible to reinvest coins earned from NFTs into different yield farming protocols.
• Liquidity supplies . The decentralized exchange Uniswap, along with the launch of the third version of the protocol, added the expression of positions of liquidity providers in the NFT format (ERC-721), also known as LP-NFT. Based on the pool and parameters selected in the liquidity interface, a unique NFT is minted representing a position in a specific pool. The NFT owner can change or buy back the position, or can sell it on any marketplace on the Ether blockchain.
• Farming . This method of earning is derived from the previous one – receiving LP-NFT for supplying liquidity on Uniswap. This token can be used as collateral in other protocols, thus forming a multi-layered revenue model.
HOW TO BECOME THE OWNER OF AN NFT TOKEN?
Most NFTs are based on the Ethereum blockchain, which means you will need some ETH and a compatible wallet.
After choosing an NFT, you need to find out on which platform it will be sold. Some of the most famous platforms: Opensea, SuperRare, NiftyGateway.
When planning to participate in a popular NFT drop from a famous artist, brand or designer, you need to be as prepared as possible. One thing to keep in mind is that the more hyped and exciting an NFT collection is, the more competitors there will be when it launches. You need to research the NFT creator. Doing your research is a critical aspect of any form of investing, and even more so in the world of NFTs. By purchasing an NFT, an investor is essentially buying a brand (or public perception of a brand) as this is what will determine the value.
The hardest thing about an NFT drop is being one of the first to know about it. Of course, you can search for drops using various services, such as Nftcalendar.io . This is a calendar that posts about upcoming NFT events and new NFT release dates. But this information is also seen by thousands of other NFT hunters. Therefore, you need to strive to obtain such information first-hand, on the pages of social networks of projects, influencers, in specialized groups, channels on Twitter, Telegram, Discord. It is important to check your sources as social media is littered with misinformation and the potential for scams is high.
This means buying an NFT token. The term “NFT drop” refers to the moment when a particular NFT becomes available for purchase by an investor. Since part of the appeal of NFTs is their uniqueness, investors can keep an eye on upcoming NFT drops to be the first to try to buy them. As a result, NFT drops provide investors with a great opportunity to own a one-of-a-kind piece of digital art at a low price, meaning there are plenty of opportunities for profit.
DROP
The benefits of participating in airdrop are obvious – with virtually no material costs, you have the opportunity to obtain a potentially profitable asset. You shouldn’t count on large sums. This can be considered more like starting capital for further increase. Although, if in this way you manage to participate in a project with potential like CryptoPunks, this could be a very profitable acquisition.
To participate in the airdrop, you need to be on the NFT distribution list (whitelist). Next, fulfill the terms of the promotion, if it is a bounty-airdrop, also provide your wallet address. After this, all that remains is to wait for the distribution results. Very often, tokens are received by a limited number of whitelist participants, especially if the project initially has good potential (strong team, successful portfolio of projects, etc.).
• Bounty-airdrop – rewarding users with tokens for completing simple tasks on social networks, for example, subscribing to Telegram, reposting on Twitter, etc.
• Traditional airdrop , when free NFTs are distributed according to a specific algorithm. For example, a marketplace can distribute NFTs of its partner among users of the marketplace. The project can distribute tokens to participants who register in the whitelist. No response is required from airdrop participants.
There are two types of airdrops:
The second way to get NFTs is to participate in an airdrop. In this case, NFTs are given away for free. Increasing brand awareness and audience loyalty, accelerating the adoption of tokens, and collecting user data are the reasons why the project is giving away its NFTs for free.
AIRDROP
MetaMask meets all the requirements in almost every scenario, which is why it is where you can create an account. Other wallets that can store NFTs: Enjin, Trust Wallet, AlphaWallet.
Now you need to fund your ETH wallet to cover the gas fee (the cost of making a network transaction). Gas fees vary greatly depending on how busy the network is, but typically the fee can cost anywhere from $10 to $300.
When purchasing an NFT, it is important to set a limit on the price an investor is willing to pay for the asset. As with any form of investing, you should only invest what you can afford to lose, so you should avoid drops that go over your budget.
You need to avoid FOMO , there are many new drops every week, so you shouldn’t buy an NFT that doesn’t meet the investor’s criteria.
There are a huge number of scammers in the web3 space, and any transaction, including airdrops, should be approached with caution and thoughtfulness at every step of the way. It’s always worth remembering safety precautions. Compliance with them will protect your existing assets.
SECURITY AND FRAUD
• Under no circumstances should you transfer the private key and secret phrase from your wallet to anyone. The same goes for passwords and any other personal information.
• You should not transfer your funds to participate in the airdrop. This is exactly a free distribution of tokens. The maximum that can be required of you is to perform a number of tasks mentioned above (subscription, repost, etc.). A request to transfer funds may be a signal of a scam project.
• Sometimes you need to go through KYC verification to participate in an airdrop. If you do not trust the project, then be careful when transferring personal data. Perhaps you should refrain from participating.
• You need to be careful with URL links, they can lead to phishing sites. If in doubt, it is better to copy the link, for example, into Notepad and double-check the address visually. Phishing sites visually copy the original ones. But the url differs by one or more similar characters or domain.
• It must be remembered that the project’s top management and community managers on social networks are never the first to contact members of their community in private messages. Very often they directly indicate this in their profiles. If such a message came from the supposed founder of the project, then this is most likely a hoax.
If a random NFT appears in your wallet, without your knowledge and from an unknown source, you need to be extremely careful, do not sell it, do not trade it, do not touch it at all. When making transactions with it, you can lose all your assets in your wallet. OpenSea is set up so that anything sent to you is automatically placed in the Hidden tab of your OpenSea profile.
FREE NFT
Sometimes scammers deliberately complicate the procedure for obtaining NFTs or pretend to be the support service of the NFT marketplace. Subsequently, an offer of assistance is received by providing access to the computer screen of the airdrop participant. You shouldn’t agree to this. This ends with the theft of assets from the wallet .
REMOTE ACCESS
In NFTs, unscrupulous individuals are working on a pump-and-dump scheme. This term refers to a situation where one person or group of people buys NFTs and artificially increases demand. Once successful, scammers cash out when prices get high and leave everyone with worthless assets. You can be safe from this situation by studying the number of buyers and transactions for a certain NFT collection on the marketplace. It’s also worth double-checking the merchant’s transaction history on Etherscan. The Chainalysis report notes that there is a practice of repeatedly reselling an NFT token “to oneself” in order to inflate the price of the token.
PUMP-AND-DUMP
In order to study the topic of NFTs in a comprehensive way, it is worth reading the opinion of the author , who considers this technology useless. Key points of the article: NFT is a token, and any token has no value in itself. A token can only be exchanged for value in a system that is willing to accept that token. Similar to a token for travel on the subway.
OPINIONS OF NFT OPPONENTS
Another possibility of losing your funds is to buy a fake NFT. It’s worth remembering that minting a piece of art as an NFT is not the same as owning the intellectual property of it. Thanks to OpenSea’s user-friendly software, anyone can turn any photo or image into an NFT, regardless of whether they own the rights to the item. Fraudsters can easily steal an artist’s work and open a fake OpenSea account where they will auction off the fake art. This will render the NFT virtually worthless once the community finds out about it. Before you buy an NFT, you need to make sure that the artwork belongs to a verified account. On OpenSea and other marketplaces, a verified account has a blue check mark next to the NFT creator’s profile picture. If there is no one, you need to find the author on Twitter, on his website or on other social networks. And ask directly whether the works of art belong to him. The same information can be obtained from members of the author’s community, if such a community exists.
PLAGIARISM
In some cases, scammers hack celebrities’ social media accounts to reach out to audiences on their behalf. For example, this is how, in July 2020, scammers defrauded subscribers of a number of celebrities, including Microsoft founder Bill Gates, of assets.
To attract attention to the project, scammers can use the technique of creating fake advertisements allegedly on behalf of celebrities. Not all netizens verify the authenticity of celebrity participation. Before the hype begins, scammers may have time to deceive many gullible investors.
FAKE MESSAGES FROM CELEBRITIES
To be fair, it is worth noting that at one time both Bitcoin and cryptocurrencies in general were also associated with money laundering. That didn’t stop cryptocurrencies from becoming a multi-billion dollar industry.
It is also possible that the SEC (US Securities and Exchange Commission) recognizes NFTs as securities. In this case, the SEC will directly regulate the market.
Cryptanalyst Mr.Whale believes that money laundering operations played a significant role in the sharp growth of the NFT segment. Apparently, the problem is widespread, since US regulatory authorities have already paid attention to it. A number of measures are being developed to curb such activities. It is quite possible that NFT marketplaces will soon be equated with art brokers. If NFTs are recognized as cryptocurrencies, which is not excluded, then AML (Anti Money Laundering) and KYC verification mechanisms will become mandatory on NFT platforms.
In terms of illegal ways to use NFTs, it is worth mentioning tax evasion. The problem is widespread, market analysts are already talking about it . Buy a token, sell it at a lower price, record a “loss” – compensation for tax obligations has been fulfilled, because there is no profit.
On the website Hacker News, users call NFTs the best method of money laundering in the world of cryptocurrencies. No transportation, no need for physical storage, minimal or no KYC verification requirements. There is no difficulty in creating, for example, a jpeg file and “selling” it for several hundred thousand dollars.
De facto, the industry is practically unregulated, the value of tokens cannot be objectively assessed, it is possible to maintain anonymity for both the seller and the buyer – an ideal laundromat for dirty money.
To see the full picture of how NFT tokens are used, it is worth mentioning money laundering. Unscrupulous persons are trying in every possible way to legalize material assets obtained illegally. And NFTs are very suitable for these purposes.
MONEY LAUNDERING
In general, we can say that the NFT sphere is in its infancy. Thanks to the hype that has now arisen around this type of asset, we are seeing enormous movements of material assets. If we look at the situation impartially, we can see that most often behind the huge prices for popular NFTs there is only an expectation that the asset will rise in price. And most often, there are no practical justifications for such expectations. The only thing that moves the price of a popular NFT is the actions of professional marketers.
CONCLUSIONS
Also, the NFT sphere is currently flooded with scammers. Since this industry is controlled mainly at the level of the rules of certain sites, participants in this market should pay increased attention to security.
Still, this technology has great potential. The community that is interested in NFTs is huge. The NFT subreddit alone has around 400,000 members. This technology has yet to find a more useful implementation than simply pumping prices into pictures.
Probably, one of the important vectors of NFT development will be metaverses. NFTs fit well there.
Comparing the data from Table 1 (see section “Comparative table by sectors”), we see the following situation. The Metaverse category has the smallest indicators in terms of total market volume, number of sales, and number of active wallets. Let us make the assumption that this is still due to the underdevelopment of the metauniverses themselves and their number.
Obviously, metaverses are a strong trend. There are powerful players in the market and huge amounts of money have been invested. Other indicators that confirm the potential of NFTs in metaverses include the average price and average holding time of an asset. And they are the highest among all the segments displayed in the table. The values of these indicators indicate that NFTs are expensive in metaverses and metaverse participants own them more for practical use. But not for speculation, which is more typical for “Collectibles” or “Works of Art” with average holding periods of 40.9 and 33.3 days, respectively.
The same applies to the “Utilities and Finance” segment, where NFT technology has yet to find itself.
And NFTs are, of course, here to stay in both collecting and art. It will simply take on a more stable and civilized appearance.