What are NFTs? How do you separate the signal from the noise and avoid being overwhelmed when deciding whether to get involved in digital collectibles? Why are people paying millions for pictures of rocks, pixelated faces, and apes? How do you get started?
It is not easy to find your way when there is a tsunami of information out there. It is overwhelming and possibly even risky to get involved with those digital collectibles without proper understanding.
I received so many questions lately that I wanted to share my journey of learning, understanding, buying, and owning my first NFT – a pudgy penguin featured above that we called “Zenguin“.
This is far from exhaustive but contains everything I learned the hard way and wish I knew when I started. It’s written to be understood by a total beginner or a knowledgeable user looking to increase their understanding – it isn’t meant to be technical.
This is Part 1 of a 2 part blog post (updated: part 2 is here). We will start with the basics of understanding NFTs and why they make sense, how to evaluate them, and eventually purchase them.
- 1 What are NFTs?
- 2 Why do NFTs even make sense?
- 3 Why are creators rushing in?
- 4 What makes an NFT truly valuable?
- 5 The Walt Disney analogy
- 6 Why are expensive NFTs so expensive?
- 7 How to find an NFT you will love
- 8 How to evaluate any NFT project before you buy one
- 9 How to buy/sell “simply” and successfully an NFT
- 10 Coming up in Part 2
What are NFTs?
tl;dr: Nfts are simple unique digital files you can collect
NFT stands for “Non-Fungible Token”. What an utterly unintelligible expression 🙂 It is not surprising many prefer pronouncing it “Nifties”. In simple terms, non-fungible is the word economists use to mean non-replaceable.
NFTs are any digital file or unique piece of code you can collect and own. An image, a sound file, a movie, a 3D art, a piece of text, a piece of software. What makes it different from other digital files is a special property: provable uniqueness. The blockchain can guarantee that an NFT is both unique and belongs to you.
As with any crypto asset, it can be stored by, sent to, or received by anyone. The principal blockchain used to mint (aka, create NFTs) is Ethereum but you start to see healthy development on new blockchains that compete for efficiency and speed with Solana, Tezos, Flow, Bitclout, and more. On Ethereum there are parallel chains that can be used for reducing costs and transaction time (Polygon is the most popular).
But to be honest, the best way to know what they are is to own one. More on that soon
Why do NFTs even make sense?
tl;dr: NFTS are the digital expression of our need to build up our identity and cultural references
Before jumping into the details of buying and selling it is important to understand why NFTs are creating so much interest. This will help you make better decisions.
If you ever collected baseball cards, stamps, rare stones, pokemon cards, or anything similar the following should resonate. Collecting things is part of the human DNA because it materializes passions, empathy to a story that is near and dear to your heart. From rare stones, stamps to pokemon cards every human connects with something to collect. Collectibles provide a sense of ownership but also a sense of belonging and on a more philosophical level a sense of meaning. Culture, in a way, is brought to life and remembered through collections.
I collect, therefore I am.
For me, for example, it was about certain comic series (Thorgal, XIII, …) and Music CDs of my favorite jazz artists (Bill Evans, Erroll Garner). Including special rare editions. I enjoyed owning them, watching and reading them, and talking about them with like-minded people.
NFTs translate this human behavior into software and with an additional dimension: by adding provable scarcity to whatever is being collected and by multiplying the ways we can enjoy them because everything is digital, programmable, and easily transferable.
Because our lives are becoming increasingly digital (if not primarily digital) it was inevitable that this natural need for owning and collecting would come to our own digital screens.
NFTs have an interesting additional property – you can’t get scammed to buy a fake because you can trace its uniqueness and ownership through the blockchain (the “provenance”).
Finally, we should not forget the power of digital memes. They capture the imagination in ways physical matters and even money can’t. Stonks (GameStop) and DogeCoin are illustrations of how powerful themes that rally communities can build up to financial realities. NFTs amplify this trend even more because they allow you to own a piece of internet history.
So if cryptocurrencies had the power to become a digital store of values, NFTs have the power to become a digital store of culture. They are not (just) financial assets, they are first and foremost cultural and personal assets.
Why are creators rushing in?
tl;dr: Creators and users need a way to bypass gatekeepers who have controlled them for decades. NFTs unlock a much better set of options for them
To make money of course. But this hides more profound reasons
For decades the only way for creators to make a living was through intermediaries: agents, music labels, movie studios, art galleries, app stores, music stores, gaming platforms, etc…
They were gatekeepers to discovery and payment and would take a major fee for these jobs. Creators were exclusively dependent on them and you would have to be an immense rock star to bypass them (Prince for example did).
With NFTs, creators now have a direct channel without an intermediary. They can have their creation distributed, sold, and transferred directly without any gatekeeper. Even better, they can program the rules of further royalties in their NFT to directly earn additional revenues from future sales.
This is a 10x value proposition for them. No surprise this would excite them
But that is not all. The roots are deeper.
Now, every single user of the internet is also a creator. You are one when you post something on social media or play a free game. Even with a sentence or a picture or …your time.
For two decades social media companies and free-to-play games have been the exclusive financial winners of this phenomenon. They have monetized it insanely well, keeping all the profits. Some lucky very popular users (“influencers”) could sometimes strike a “deal”, but with onerous terms and severe censorship or restrictions. NFTs finally offer an alternative. You can directly sell your creation to whoever wants it. No permission or deal with a third party is required. You can also play to earn (Axie infinity) and not just play to spend. Creators interact only with the code of the contract which is transparent and open. No more hammers and sticks. Just carrots.
NFTs are the ultimate solution to problems created by the concentration of power with gatekeepers, asphyxiating creators. It is oxygen for a generation of creators that need to breathe again. It is truly an economical renaissance.
What makes an NFT truly valuable?
tl;dr: Value is derived from what you consider and can prove to be rare and unique to you and to the world
Some NFTs sell for millions of dollars. Why are people paying so much money for NFTs? The answer is simple and not simple: it is worth whatever someone is willing to pay for it.
Some NFTs will resonate with you instantly and you will find it urgent to own it, like a precious piece of jewel. Other NFTs will look meaningless and unworthy to you at any price.
And that is ok.
Unlike the price of cryptocurrencies, which can be thought of as a commodity, the value of an NFT is determined by the highest price one person is willing to pay for it. A crypto punk at $8m is probably putting you in a state of utter disbelief. But to some, it means more than owning a Rolex or a Rolls Royce. You will not get it and that is fine. Not everything wants to be owned by everyone. The world would be sad otherwise.
Where most people have difficulty is in the understanding that by buying an NFT you are not buying just a file. You are buying access to a strong signaling social status, access to a community of owners, access to exclusive rights, including significant financial benefits. You are buying your way to a stronger and more unique digital identity and citizenship. And their digital-first nature makes this proposition even stronger
If you ever played any popular video game seriously you can relate to that fact. If you have not just watch your kid’s social life. Digital video games and items are so central to them. They get it.
You can also reverse engineer the interest of NFTs by looking at it another way.
The Walt Disney analogy
Imagine if a still young and unknown Walt Disney was living in 2021. He would start by drawing Mickey Mouse and Donald Duck and all his now-famous characters but would stop at the still drawing. No animated cartoons. Walt would show and sell those digital drawings at a high price because they are insanely cute and awesome but also reveals he plans to make movies out of them and a theme park at some point and more. You just know great things may be coming and if they are successful you will benefit from it too (it’s coded in your purchase). Would you want to be the owner of Mickey Mouse’s drawing today with a promise of a future? Knowing what you know now about Walt Disney Corp would you agree to pay a high price for it? I bet you would.
This is what is really happening today.
An NFT is a bit like a restricted club where each member has a digital item which opens the door to a new digital identity, digital benefits (one of which is the ownership of it), and digital citizenship.
Think beyond the Jpeg. When you own an NFT you own a fraction of a creative network.
Why are expensive NFTs so expensive?
tl;dr: there is a lot of money in the market in search of new ways to store value but also dark technics to launder money
Millions of dollars for rock? Where is all this money coming from? How does Opensea manage to wrap billions of dollars of transactions in a single week?
The answer is simple: there is a lot of “F..k you” and Yolo money on the market right now that has been generated by years of bull run in crypto but also continuous waves of IPOs, SPACS, and massive large-scale VC fundings.
There are thousands of new millionaires and billionaires on the market. Most of them were professionally born in the crypto era. For many of them paying a high price for an NFT is a simple investment they can afford (to lose) as well as a way of expressing they made it. It is a digitally native way of expressing their social status.
A lot of early NFT investors have also made enormous profits trading their items and very commonly re-invest those NFT profits in newly minted projects. And it’s not just investors. Creators too, make some nice profit they like to re-invest in NFTs instead of cashing out, like this 12-year-old kid who made nearly half a million dollars selling Weird Whales and like to support other early projects.
The money flows in a closed circle continuously from NFTs to NFTs.
Finally and this is not to be excluded there is a large part of the activity that is simple money laundering. Not every NFT transaction is a pure act of purchase. Some are certainly operated with the goal to clear funds obtained illicitly (hacks and more).
Add to this media amplification, influencer, and celebrity endorsements and you got a recipe for an explosive hype cycle.
Once you have this in mind, things become a little clearer too.
How to find an NFT you will love
tl;dr: come for the art, stay for the community, and network
First off you may not find one that is right for you immediately. It’s ok. Don’t rush. Own something only if you feel this is compelling to you.
Some are motivated entirely by the possibility of a financial flip: that is ok and if this is your motivation be aware this is time-consuming and risky. But if you want to understand this economy you need to connect naturally with the project
The best ways to find a project are either on popular market places: Opensea, Rarible, Artblocks, Foundation, or specialized services like Sorare (for sport). Some services help discovery like TryShowtime or NonFungibles.com. But all the discussions and discovery of new projects happen on Twitter.
Follow as many accounts as you can and get “in the flow” of what is happening. it will be overwhelming at first. Follow a mix of creators, artists (Beeple is one of the most famous for selling an NFT nearly $70M), entrepreneurs, investors. Some crypto bots like crypto punk sale bots or pudgy penguin bots are fun to follow to get a sense of the pulse of what is selling
NFT is not a magic word that transforms any Jpeg into Gold.
Many projects out there are outright scams, ugly, ridiculous, and useless. But do not discount projects too quickly. Many deserve your attention even if you do not decide to jump in right away
You can find a wild range of creations from cute animals and pixeled faces, to sophisticated gorgeous photography, unique piece of digital creation like music, gifs, and more.
Browse until you find one that resonates with you. You will know when you see it.
How to evaluate any NFT project before you buy one
tl;dr: do your own research on rarity, community sentiment, project road map, and the team but more important find something that will resonate with you
There are a few parameters you can look at. And it’s more art than science.
But the best way to think about NFTs is like a living creative organism.
Find signs of vibrant life, activity, and growth. Check their creations, of course, their social activity (in particular the energy on discord), the trading activity on each platform. Search in particular for “proofs of work” that attest to the creative process. This is sometimes called provenance for digitally created items
Services like Cryptoslam will help you navigate the ranks of new projects.
For a particular item you are considering buying, you can use tools like rarity.tools or rarity snipper that will give you a rank on their “rarity” and therefore their value. The rarity is based on the characteristics and traits /metadata associated with the NFT (the colors, the drawing items, the glasses and equipment of that character, etc etc.).
Make sure the NFT project has plans. Serious plans. Check if they have a public road map that is not wrapped in BS wording with actual deliverables in the short /medium time frame. Check their GitHub repository too if any. A good test is to reach out to the founders directly. A good team is usually very responsive to complex random questions. If they show no signs of life privately or publicly it is usually a bad sign. See how the team behind it is active and committed.
Keep track of the sentiment around a project is a good proxy. One way to do that is by measuring what I call the ‘Holders ratio”: how many issued /minted items are actually owned by unique owners (which you can find in Opensea for eg). Ratios of over 50% are usually very healthy signs (pudgy penguin for eg is in that territory) because it means it is less concentrated in more hands. Obviously, new projects will not be there. So this is all relative to age
I wish there was a clear, obvious data source to show how long investors of an NFT are holding (vs Flipping). This would be a healthy metric to know.
Finally, consider your motivation to own a particular NFT. You may be ready to pay an extra premium if you absolutely want that particular item (like for example the historical tweet of Jack Dorsey)
In short: a jpeg is easy to fake but a community and network of creators and owners is much harder. This is what you are looking for.
How to buy/sell “simply” and successfully an NFT
tl;dr: purchasing an NFT is an adventure. This is the step you have to go through if you missed the minting process (see below). It’s like buying second-hand. Where minting is like fresh first-hand ownership.
Unlike cryptocurrencies, you cannot just buy NFTs easily with credit cards or USD (at least not yet). The most common way to buy NFTs is with cryptocurrency via a crypto wallet.
A Step by Step guide
- The traditional way to purchase an NFT is to connect to an NFT marketplace like opensea, an eBay for digital art, connect with a “web 3” wallet (aka crypto wallet – which for most will give you a headache if you are new or not to the space). Careful with fake NFTs (check for the little blue check mark next to the item – see below)
- You will need enough funds to place a bid if the item is sold at an auction or purchase it at a hard price if the seller agreed to. Most, but not all, of the action is happening on the ETHEREUM blockchain. Ethereum layer 2 allows sellers to sell on a faster/cheaper blockchain like polygon or Matic.
- If you buy using Ethereum be careful with the gas price (gas price is the economic unit you are charged to pay for a network fee of a transaction). It’s currently very expensive (at the moment of me writing this about $70/$80 per transaction) and this is why layer 2 side chains have some interest. Know that you can buy NFT directly with Ethereum but in order to bid you will need WETH (wrapped Ethereum) which is a coded version of Ethereum that can interact with smart contracts (which codify the terms and rules of an NFT).
- How do you get WETH? You can use a decentralized exchange like uniswap or do it directly on Opensea. You will also have to pay a gas fee for this . However, the bid will be “gasless”.
- If an NFT is listed on layer 2 you will NOT be able to buy it with ETH or WETH. You will need a specific version of ETH for that layer 2 which requires you to swap ETH to it and introduces another step. Yes, this is complicated. This is why NFTs are still essentially only happening on ETH. New blockchains like Solana and Tezos are growing on developers and investors because they are natively fast and cheap but the supply of NFT is way inferior to date. The density is essentially on ETH. Not layer 2 and not other blockchains. It may change one day.
- Once you have connected to a platform to place your bid and the purchase matches the demand for the seller, the NFT will be transferred automatically to your crypto wallet and will appear in your NFT gallery on that same platform. It’s not instant but fairly acceptable.
- To verify that the NFT is indeed yours you can use an “explorer” like Etherscan. Simply said it is a site that indexes all the public transactions made on the blockchain and will show which wallet address owns what. This below is the etherscan snapshot of the NFT Penguin we bought.
Coming up in Part 2
You made it until here. Congrats 🙂
In our upcoming second part, we will cover the following topics
- How to mint simply an NFT
- More original ways to buy an NFT
- What you legally own when you own an NFT
- How you should think about taxes
- The different type of NFTs you can own
- How and where they are stored
- What you can do with an NFT once you own one
- NFT slang and language
- How to safekeep your NFTs
- A starter kit
- How to predict NFT prices
- And sanity tips that will save you many headaches
Finally, here is also a great video summary