In 2021, the crypto industry experienced a real boom in NFT token transactions. The volume of this market grew more than 100 times in 12 months. While the total volume of NFT tokens transactions did not exceed $95 million for the entire year of 2020, at the end of 2021, the figure was close to $25 billion. No wonder NFT is in the spotlight today: journalists and bloggers write about them, they are actively used by digital art dealers and investors. What is this technology? What are the strengths and weaknesses of NFT?

About NFT in simple terms

At the beginning of the conversation about NFT we need to decipher the acronym itself. NFT is Non-Fungible Token, where the word "Fungible" is used as an economic term referring to identical goods that can easily replace one another. When applied to tokens, the term "Non-Fungible" refers to their uniqueness, their non-interchangeability.

"NFT is easier to consider with a concrete example. Let's say you come to a sports store to buy a soccer ball. In the relevant department there are dozens of absolutely identical sports equipment. Buying any of them, you get the necessary product, which can be replaced with exactly the same one. But next to it on the shelf is a ball signed by Cristiano Ronaldo. This autograph makes the sports equipment unique and irreplaceable.

It's the same with NFT - it's a part of the blockchain (a token) that holds an indelible record of the history of the purchase and sale of some unique, inimitable digital object, with royalties and ownership restrictions. In other words, an NFT token is not an object of purchase and sale, but something like an excerpt from the Uniform State Register, which contains the entire history of ownership rights to the digital object.

History of the origin of the NFT

There is some debate about the origins of NFT technology. It's clear that in the familiar form it appeared in 2017, but where did it all begin? Trying to answer this question, crypto-archaeologists discovered the Terra Nullius smart contract, created in 2015, which provided for the creation of tokens containing text messages and having ordinal numbers. However, at that time, Terra Nullius did not have the ability to buy and sell tokens.

The next significant stage in the development of NFT history was the game Blockplots, in which the entire playing field was divided into a huge number of small areas, each of which corresponded to a unique token. The gameplay included the possibility of transferring ownership of plots between users, and the history of transactions was stored in a blockchain. Thus, the developers of Blockplots, launched at the end of October 2015, can in principle be considered the creators of a fully functional NFT.

Well, the first really popular NFT project was CryptoKitties - a game with many different SEALs, each of which has a unique token. All the processes in CryptoKitties, the whole history of the life and development of the feline world are stored in a blockchain. The popularity of this game peaked in 2017. After another year CryptoKitties seemed to be forgotten about, but a surge of interest in NFT in 2021 gave the project new life.

The beginning of 2018 was spent working on a unified NFT standard. Several development teams were involved in the process, but the best result was achieved by William Entricken, the creator of ERC-721, which was completed on June 6, 2018. ERC-721 is a relatively simple Solidity-based smart contract standard that provides mapping of unique identifiers (each representing one asset) to addresses that in turn represent the owners of those identifiers. In addition, ERC-721 provides for the transfer of these assets using the transferFrom method.

A development of the ERC-721 standard was ERC-1155, which brought to the world of NFT the idea of semi-exchangeability. It happened due to the fact that identifiers in this class do not represent individual assets, but asset classes, which is very convenient in some cases. For example, in order to transfer 100 units of some resource from one player to another using ERC-1155, it is enough to make only one transaction, while using ERC-721 it would be necessary to make 100 separate transactions. But the efficiency of ERC-1155 has a downside: working with asset classes eliminates the ability to track each item individually.

The scope of NFT

The hype around NFT has clear justification. Gamers were the first to create a strong demand for digital property rights transfer, taking into consideration that almost any digital object can be tokenized, and NFT made it possible for them to buy and sell all kinds of things and objects that exist in game worlds, with or without developers' consent.

Another large category of people who have quickly become active users of the FTT are card collectors. They are willing to pay tens and hundreds of thousands of dollars for rare cards of soccer players, hockey players, baseball players, and more. Collectible cards are also issued by publishing houses based on comic books, cartoons and even games. But the number of physical cards is limited, and there are never enough for all collectors. NFT has in its own way solved the problem of those who can't fill the gaps in their collections by allowing them to own, if not a physical card, at least a unique digital image of it. How much does it cost? A lot. For example, one of the most expensive acquisitions in this market is the NFT rare Pikachu pokémon card, purchased in 2020 for $250,000.

The digitalization and tokenization of art has been active since 2021, in which some see a rapid devaluation of culture, while others see an equally rapid renaissance. One way or another, thanks to digitalization, interest in art is now on the rise, even among people who have never been interested in art before. One can argue a lot about the quality of digital works, but thanks to serious buyers entering the NFT market, professional artists, sculptors, and photographers have entered the industry, putting highly artistic content on NFT marketplaces.

Music can also be represented in the form of a non-interchangeable token. Eminem, Snoop Dogg and many other famous artists have already digitized and tokenized some of their works. In cinematography NFT is becoming an effective tool of promoting new films: they get additional advertising and profit, if the producers together with the release of the film arrange the sale of official NFT-posters, rare shots from the shooting or fragments not included in the main part of the tape. In addition, non-exchangeable tokens can be used to record the transfer of ownership not only of digital, but also of physical assets.

NFT has all the data to become the basis for the existence of meta-universes - digital environments functioning on the basis of blockchain and implying unlimited possibilities of social and economic interaction between users, including the use of augmented and virtual reality technologies. NFT tokens play a responsible role as a tool for cross-chain transactions, as well as a guarantor of property rights for all objects in the digital world.

How to Create and Sell NFTs

Today, the process of tokenization of digital objects is simplified to the extreme. The fastest way is to use one of the largest NFT marketplaces. For example, OpenSea (the largest), Rarible or Mintable. Each of them combines the properties of a marketplace and an NFT-marketplace.

To create an NFT-token, the user needs a software wallet and a file with digital content. The further steps are similar to a usual digital album: the gallery is created, the files are placed there with a title, description and... everything. All you need to do to create an NFT token is click the Create button. After that the marketplace will generate the token and put it up for sale. On some marketplaces this happens almost immediately, on others slower (due to verification). Marketplaces also differ in their approach to charging fees: some charge from buyers, while others charge from sellers, and the amount of fees may vary significantly (from tenths of a percent, to 10 - 15 percent of the transaction amount).

The main problems of NFT

As any other technology NFT is not without its disadvantages. The first thing everyone involved in the circulation of NFT tokens is accused of is environmental damage and energy misuse. The logic here is simple: information about all transactions with NFT tokens is stored in the blockchain on which the token is issued. It takes an average of 30 to 35 kW of electricity to create each new record. But the criticism of energy efficiency is only true for blockchains using the PoW protocol, and, one of the most popular Ethereum blockchains, as we know, recently switched to PoS.

NFT has other challenges, primarily of a technical and legal nature. The first one is that even if you own a non-interchangeable token that proves ownership of a particular digital art object, any Internet user can find the exact same image on the network and download it. The only way to fight this is with encryption, which requires individual effort and resources.

The legal problem with NFT is that the mechanisms of token verification in NFT-workshops are not perfect and do not exclude the risk of fraud. An intruder can take any picture he likes from the Internet, tokenize it and put it up for sale, violating all copyrights. Unfortunately, artists find their works on NFT marketplaces all the time, even if they have never engaged in the digitalization of their art.

NFT technology is not without problems related to security and storage issues. No matter how secure the servers storing the tokens are, they are still vulnerable to hacker attacks. The situation with digital assets is even more complicated: the files associated with them are not stored in the blockchain, but on regular servers, and if a hacker attack or some other action corrupts or deletes the files, the NFT-token owner will only have a unique digital key, which will no longer be associated with any digital object.

How much and how much you can earn from NFT

The main type of earning from NFT is the sale of digitized creative output. This is a growing market, with works of varying quality in demand. The vast majority of them cost buyers in a few dollars, but this is a case where the desired result of the author can achieve not only the quality of the work, but also their quantity. For a professional artist it would not be too difficult to create and digitize 15 to 20 small paintings a day.

However, there is some really big money in this market. A unique Stay Free token with documents about mass surveillance of US citizens by the National Security Agency, authored by Edward Snowden, was sold for 5.4 million dollars. A work by American digital artist Mike Winkelmann (working under the pseudonym Beeple) Crossroads, depicting Donald Trump being defeated in the presidential election, was bought for $6.6 million. The currently most expensive piece of NFT art also belongs to Beeple's "brush:" On March 11, 2021, Christie's auction house sold his painting titled Everyday's for more than $69 million. The work is a jpeg file, a collage of 5,000 of the artist's works created over the past few years.

However, you can earn money with NFT not only by selling your own digital works. NFT is also attractive from the point of view of investing in the work of successful artists and well-known people. In addition, you can earn good money by participating in airdrops - the distribution of free tokens. For example, Bored Ape Yacht Club has already held two such campaigns. The tokens that were distributed during these events are currently worth $1,300 to $1,400 and keep getting more expensive.

To sum up, NFT is an interesting, perspective and quickly developing technology, which has found its application in different spheres of our life and opened the way for tens, if not hundreds of thousands of people to make good permanent money.

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