What are NFTs? Why are people paying $69 million for jpegs? Well, I have tried to sum up what NFTs are and how they work in this article “What is NFT?“.
But, if you are still not sure about what NFT means, here’s an even simpler explanation. Let’s try to relate NFTs, tokens, royalties and all these fancy words you’ve been hearing to the financial terms of today.
Yes, the title is a bit click-baity, so your five year old is probably not going to understand what NFT is even after reading this article. However, if you have any slightest clue about the current stock market, shares, etc, you will find this article useful.
Let me explain NFT like it’s the stock market, as tweeted by Eric Siu on his Twitter.
How does the stock market work?
A stock is a financial instrument that represents ownership in a company or corporation and represents a proportionate claim on its assets (what it owns) and earnings (what it generates in profits). Stocks are also called shares or a company’s equity. – Investopedia
I am sure you can do your own research about the stock market if you want more details.
How are NFTs similar to the Stock Market?
NFTs are shares, which means, a NFT is a financial instrument that represents ownership in a project.
(NFT = Shares)
An NFT project functions like a company. When you buy an NFT from an NFT project, you are essentially buying shares of a company. (NFT Projects = Companies)
You need to do just as thorough of a research buying NFT as you would buying a share in the stock market. Let’s say the first thing you look at are the company founders. In the NFT world, the founders of the company would be the Creators of the NFT projects. (Creators = Founders)
You have a company, its founder, and now you need the management. In the NFT world, the management would be the equivalent to the DAOs. DAOs stand for Decentralized Autonomous Organizations, which is one of the major features of digital currencies. DAO basically means that these digital currencies are not controlled by any single institution like a central bank or government. Instead, they are divided (decentralized) among a variety of nodes, networks and computers.
(DAOs = Management)
When you buy an NFT, you become a collector of the said NFT project. In the real world, that would be equivalent to buying shares of a company and becoming a shareholder. (Collectors = Shareholders)
Important bit: Are NFTs just overpriced jpegs?
That still begs the question. Why would anyone pay thousands of dollars for a Jpeg? To simplify, the Jpeg is your share certificate. Maybe that’s overly simplified as you can have unlimited copies of your Jpeg. But the NFT jpeg is bound by a digital signature which verifies your ownership and the information is available publicly. (Jpeg = Share Certificate)
Have you heard of the term Royalties? Traditionally, let’s say a musician drops out an album via a music company. Everytime an album sells, the musician receives a percentage aka royalties for his album sales. Similarly in the NFT world, NFT creator receives a percentage aka royalties every time someone sells one of his NFTs. So, royalties are basically revenues you get for owning a project, much like owning a company.
Utility in NFTs are clearly defined intrinsic value associated with the NFT, which could be anything from exclusive access, perks, and other opportunities. General scarcity associated with NFTs aside, utilities of NFTs is what creates the real value of any NFT project. (Similar to how a company’s value is determined by their utility)
Have you heard of an NFT project called Bored Ape Yacht Club? The one that’s currently (as of Jan 2022) valued for $1 billion? Well, you should. Other than the 10000 ape Jpegs, what are the perks of BAYC NFT? Collectors get exclusive access to yacht parties, first access to new NFT drops, and so much more than my tiny brain can handle. Eminem bought a Bored Ape NFT for $452,000. And honestly, that’s all I need to know. If people more successful than me are getting into NFTs, it might be smart of me to follow.
(Utility = Product)
Lastly, you might have heard of NFT communities on Discord, Twitter, Reddit and more. Essentially, the main function of these communities is marketing. It starts with a word of mouth and before you know it, one day you wake up at 10 am – lazily, grab your phone for some mindless scrolling and voila!! Pictures of monkeys just got sold for $69 million. And now you have two choices, kick yourself on the balls and regret not having tried to understand it, or start reading everything you find on NFTs and start a blog. Okay, that was eerily accurate.
The point is, the comments/forum on this blog could be a NFT community some day and those of us who are in the community from day one will be the first ones to hear about a – say, IPO of a company that’s about to blow up. (community = marketing)
The fact that digital objects can be minted, owned and exchanged rather than being copied untraceably is mind-blowing. No one can accurately predict how or what is going to happen, but it is clear that blockchain technology, cryptos and NFTs are here to stay. It’s the dawn of the new age of internet. And, people have already given it a name. The Web3.0.