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How to Kickstart Your Journey into the NFT Space: The Ultimate Beginner’s Guide

If you are coming across this sort of NFT beginner’s guide for the umpteenth time, then this piece is definitely not for you. Well, except if you are looking for information that has been omitted or not mentioned in other materials you have read previously.

Before we get started, it is important to state that this piece is strictly for beginners. Hence, we will try as much as possible to avoid the use of complex terminologies, or where applied, we will break them down into understandable chunks. That said, let’s dig into the history of NFTs!

 

Background of NFTs

Non-fungible tokens (or NFTs), as they are prominently called, have been around for about a decade now, first appearing in the public spotlight sometime in 2014. However, it wasn’t until sometime in 2020 that NFTs gained significant recognition from potential investors.

While 2020 wasn’t all that rosy for NFT projects, it was in March 2021, following the sales of Beeple’s ‘Everyday: The First 5000 Days’ digital art collection for a whopping $69 million that NFT suddenly became a buzzword in the crypto space.

 

Let’s take a few steps back into the early years of NFTs. Although many would argue that NFTs became a subject of discussion in 2017, or 2014, as we mentioned earlier, the initial NFT dates back to 2012/2013 when “Colored Coins” was conceptualized

Colored Coins was an exceptional project that was led by Meni Rosenfeld, according to the project’s whitepaper. It also had the input of notable figures in the crypto space including Mike Hearn, James McCarthy, and Vitalik Buterin, who ended up co-founding Ethereum, the second-largest blockchain project after Bitcoin. 

Colored Coins, the earliest attempt at an NFT, was conceptualized to operate on the Bitcoin blockchain infrastructure. Having revolutionalized currency, Bitcoin creates a medium of exchange that can be stored and transferred digitally without third-party interference. 

Colored Coins, on the other hand, aimed to extend this ability to other assets that had not been able to achieve the same thing traditionally. As such, Colored Coins is meant to create a virtual representation of an otherwise non-digital asset i.e., alternative currencies, commodity certificates, property documentation, as well as other financial instruments such as stock certification, bonds, and so on.

After Colored Coins, the next major attempt at an NFT was spearheaded by Kevin McCoy back in May 2014. Kevin reportedly became the first person to mint an actual NFT art piece named “Quantum.”

While many find Quantum a bit confusing to describe, a blog described it as

a pixelated image of an octagon filled with denoting circles, arcs or other shapes which share the same center, with larger shapes surrounding smaller ones and hypnotically pulsing in fluorescent hues.”

The piece is shown below.

Quantum is arguably the first NFT art piece, so one would typically expect it to be the most expensive. However, it is now on sale for $7 million, making it just one of many popular digital art pieces.

If not Quantum, what is the most expensive NFT, you may wonder. Well, the most expensive piece was bought by a group of 28,983 collectors. The Merge, which sold for approximately $91.8 million in December 2021, officially became the most expensive single NFT art piece ever sold.

Likewise, one of the mono versions of CryptoPunk, labelled Punk #4156, recently sold for $10.4 million, approximately 2,500 ETH. This piece takes the accolade for the most expensive CryptoPunk sold natively to a single owner (Justin Sun) to date. 

That said, the NFT space witnessed its biggest breakthrough in 2021 when the market value ballooned to a whopping $41 billion from a meagre $340 million recorded in the preceding year. 2021 also marked the most active year for investors, as the number of active NFT wallets grew to 28.6 million from barely half a million recorded in the previous year. 

So far, the NFT space has seen a significant increase in the number of investors, while corporate interest in the space has also increased significantly in recent months. With that in mind, we will move on to explain what NFT means, the technology behind it, and how it works.

 

What Are NFTs?

To begin with, non-fungible tokens (or NFTs) are best described in the same manner as crypto assets such as cryptocurrency; however, they are non-exchangeable with one another. 

In other words, NFTs operate in the same manner as your regular BTC token, ETH token, or SOL token, to mention a few, but unlike these crypto assets, which are interchangeable, NFT assets are not interchangeable. For instance, an NFT piece cannot replace another, even if they are identical or share a resemblance.

Technically, the inability to interchange NFTs is what makes them ‘Non-fungible,’ which according to Wikipedia, is used to describe an item or commodity whose individual units are essentially not interchangeable. Even when a part is indistinguishable from another part, they cannot be interchanged. 

A relatable context of fungibility is depicted in the issuance of any local fiat currency. For instance, a $10 note can be used interchangeably with another $10 note, or even two units of $5 notes.

On the other hand, the same mechanics are not applicable to non-fungible assets, which are designed as unique items and are represented on the blockchain as such.

In other words, a non-fungible object is assigned a unique identity (which in some cases could convert to value). For example, a new club jersey may be purchased for $20, but the same shirt might also be purchased for $100 elsewhere because it has a superstar footballer’s autograph on it.

That said, an NFT item could also be described as the digital or virtual representation of real-life objects. Each NFT depicts or represents the existence of another object in the physical realm or perhaps, of another digital item that is not based on blockchain. An NFT could represent artwork, music, a movie, meme, avatar, virtual property, paper document, and so on. 

Mind you, these NFT assets could be a representation of either tangible or intangible items. However, they are only interchangeable with cryptocurrency assets. Thus, you can only acquire an NFT asset using any acceptable cryptocurrency asset as a medium of exchange. With that in mind, you are probably curious to understand how the underlying technology really works. Here we go!

 

How Do NFTs Work, and What Is the Underlying Technology?

It is almost impossible to understand how NFTs work without having a grasp of how the underlying technology really works. Just like we mentioned earlier, NFTs work pretty much like any cryptocurrency out there (only with the exception that they are not interchangeable). 

The implication of the aforementioned is that an NFT, just like any other crypto asset, is hosted (i.e. stored and transferred) on blockchain technology. But there’s more. 

Before we move on, it is important to note that, besides Colored Coins (as discussed earlier), which was designed to exist on Bitcoin infrastructure, the earliest forms of NFTs were hosted on the Ethereum blockchain. However, years down the line, there are several blockchain platforms that now host NFTs as well; some examples include Solana, Cardano, Tezox, Flow, and Zilliqa, to name a few.

Technically, NFTs are built to the standard of their host blockchain. For instance, the majority of the earliest and current NFT items are built using either the ERC-721 Ethereum token standard or the ERC-1155 Ethereum token standard. You can read up about the token standards here

Other blockchain platforms also have their own custom token standards. For instance, NFTs that are built on Solana use the SPL token standard, while those built on Cardano are designed based on its custom token standard as well. In the same vein, each host chain has its own token standard based on which NFTs are built/minted. 

Some token standards are compatible with multiple blockchain platforms, while others are limited to their immediate host chain. In other words, an NFT item that is hosted on Ethereum may exist on other networks if the token standard permits inter-chain transactions. 

On the other hand, if an NFT is designed in such a way that it can only exist on its host chain, that means it cannot be migrated to other blockchain networks or their marketplaces. So, how do NFTs work in practical terms?

For a digital asset to become non-fungible, it must be ‘blockchainized.’ This is the same as saying an ordinary digital item of any form such as artwork, music, images, virtual property etc., is “minted” on a blockchain network. 

By undergoing the minting process, a digital item is issued a certificate of ownership for an original copy of the digital item. Mind you, the said certification is not issued separately; instead, it is embedded in the digital item itself, thereby making it a unique item. At this point, a blockchainized/tokenized/minted digital asset is referred to as an NFT. 

Furthermore, each NFT item is deemed unique since it contains specific information such as the issuer’s title, name, mint time/date, hash rate, and other critical information that distinguishes it from other items regardless of resemblance. It is for this reason that they are impossible to interchange with each other.

While an NFT doubles as a unique proof of ownership, the ownership can be transferred between holders and collectors. In other words, it can be bought and sold. To finish out our discussion, let’s highlight the notable characteristics of NFTs.

 

What Are the Notable Characteristics of NFTs?

In case you missed any part of what has been said earlier, the following are peculiar characteristics or attributes of NFTs. They are what you look out for when distinguishing between an NFT item and a random digital asset.

  • Non-Interoperable: The most important and noticeable attribute of an NFT is its interchangeability. Unlike cryptocurrency, you can’t exchange an NFT item for another. They can only be swapped for fungible digital assets like cryptocurrency.
  • Indivisibility: Because they are unique items, NFTs are indivisible, implying that you can’t buy a single NFT in multiple parts. Rather, several collectors can come together to buy a single NFT. With cryptocurrency, a single buyer can purchase a smaller percentage of a single unit of a crypto token. For instance, a person can buy 0.05 BTC, which is a fraction of 1 BTC. On the contrary, NFT items are not sold in smaller fractions.
  • Verifiable: Because they are embedded with unique details, each NFT can be verified. You can imagine an NFT item as a barcode, which once scanned, brings out hidden and specific information about each item. More so, because they are stored on a blockchain network that operates like cloud storage, it is easy to retrieve hidden data ASAP.
  • Indestructible: The best part about NFTs is that they are indestructible i.e., you can’t delete, alter, or duplicate them. The reason for this is because they are encoded on a blockchain network via smart contracts, which makes it relatively impossible to tamper with. 

Furthermore, ownership of digital assets is irreversible, implying that collectors – rather than the corporations that generated or minted them – maintain absolute ownership over each NFT item.

Have you learned a thing or two from this guide? If you want to keep learning, then stay tuned for our next piece on

“How to Mint an NFT, and Make a Profit While You’re at It.”

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss

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