Crypto

A Dummy Guide to NFTs (Part 2)

Ouriel Ohayon

How to understand NFTs? How to use them? This is the second part of our dummy guide to NFTs (Make sure you red NFT Guide Part 1).

In this second part, we will cover topics like minting, legal rights, practical uses cases, taxes, prices model, starter kit, safety and sanity tips, and more.

 

How to mint an NFT

Minting means basically issuing or “creating” an NFT.

At the core, there is a smart contract (or software code) that defines how the NFT is created and ruled after the creation. Participants/would-be-owners connect to that code with their wallets so that each item is created. The code creates the NFT and publishes it on the blockchain to put it simply.

Minting an NFT is the best way to own an NFT without necessarily buying one. Like cryptocurrencies with mining, you can participate in the process of issuance of an NFT. Once all the NFTs of a particular contract are minted the only way to become an owner is either by purchasing it “second hand” on a marketplace or having it transferred to you.

Transferring an NFT is like doing a transaction in crypto except you are not sending a coin but the item.

Back to minting: to do that you need to find an early project that is about to launch or recently launched. To participate, find the minting section and proceed. Usually what that means is that your wallet will claim the ownership of one item and in exchange, you pay for the gas (transaction fee) and sometimes a very low issuing price (most are 0.01/0.1 ETH). Once the item is minted it will be associated with your wallet address and it is your to dispose

You can also mint an NFT for yourself. The simple way to do it is to go on Opensea and click create after you have a wallet connected to it. You can add any digital file. It will be in your private vault. Now to make it available to buy or transfer you will need to “publish” it to the blockchain for which you will need to pay a network fee.

The only project where I found the process of minting an NFT incredibly smooth, cheap, and fast is Bitclout a new blockchain for creators (that many love to hate). All you have to do is create a post with the item you want as NFT, publish it and set the price rules and edition. All that can be done in 10 seconds on-chain without extension, gas fees, or wallet. 

I created a guide for it although this is not really necessary. The issue is that the adoption of bitclout is still confidential and new and the NFTS can only circulate within bitclout which has no integration with key NFT marketplaces yet. 

I wished however that other blockchains had this level of simplicity.

More original ways to buy NFTS: fractions, auctions, bulk

  • You can also buy an NFT in fractions. There are services that let you buy and own a fraction of an NFT. Why? because they are too expensive to buy at once and because the seller can probably make a better profit this way too (selling at a higher bid). PartyBid and Fractional.art will help you do that.  Of course for this to happen the owner has to agree to sell it fractionally.
  • Not well known, you can also have private sales (meaning exclusively reserved to a buyer wallet address) or you can even transfer it covering the network fees to anyone. It is basically like sending a gift to someone.
  • If you have the funds you can participate in private exclusive auctions organized by Christie’s and Sotheby’s
  • Finally, there are new ways to buy that are more sophisticated like ​​https://buy-wall.alphafinance.io/ which allow instant liquidity (meaning sell fast)  minimum slippage, and low risks of front running (for another post)
  • Bonus 1: there are still no ways for bulk buying (think “add to cart”) but some are working on it
  • Bonus 2: if you live in the USA and have a bank account you can buy /trade fractions of certain curated NFTs with Otis which is a general marketplace for art at large (it s not clear however if you have any on chain ownership)
  • Note that for now there is no convenient way to buy NFTs in a mobile app as Apple is restricting the option to buy digital goods with anything else buy In-App Purchase. This is why NFTs apps are essentially NFT viewers and not meant to be traded. This may change in the short term after Apple is now compelled to accept 3rd party payments linking.
fractional buying
Buy in Bulk. Coming up.

The different types of NFTs

  1. Artistic creations: usually unique pieces or very limited editions. You can find many of those on foundation https://foundation.app/ or Zora https://zora.co/ 
  2. Serial franchise: variations on a drawing theme (eg pixelated punks, fat penguins, drawn rocks…), brand derivatives like sports NFT (Sorare, NBA top shot, socios/Chiliz). Those are usually “hand made/crafted” and the code is guaranteeing their uniqueness and distribution. The first original NFT mass hit was the famous Crypto Kitties.
  3. Generative art: a piece of art generated from the code itself stored on the blockchain. Some good examples can be found on artsblock (Fidenza is the most iconic). Here is another example https://ethblock.art/
  4. Gaming items: Axie infinity, sandbox, Punk comics (and their mint pass). They give you access to games or game items and collectibles. 
  5. NFT primitives: This one is fascinating. Instead of issuing an item like a picture, the NFT is a primitive set of words that the community can own and build upon to develop new properties like games. Think of it as an NFT lego block. Loot (for adventures) introduced this concept and some interesting experiments start to be built upon it

But any piece of digital file could be an NFT. This blog post for example could be one. I could have published it in 3 parts. Make the first 1 available for free and the last 2 accessible only to those willing to pay for it.

Famously Jack Dorsey sold his original historical tweet for about 3m USD in ETH.

 

Anything digital file can be an NFT. it does not mean everything will be of value though. 

 

What do you actually legally own when you own an NFT?

You own the key/code that lets you view, send, sell, transfer your NFT.

But do you own all the legal rights? It all depends on the project.

For example, Cryptopunks seem to have reserved certain umbrella rights which allowed them to sign a representation deal with a Hollywood agent,  while Loot has given up on any right. 

This is usually clarified in the terms of services of the project which can be found on their site, but rarely in the smart contract. There are no standards yet in those matters but there should be.

In general, when you own a particular NFT you can do whatever you want with it including commercially (eg selling T-shirt merchandise), But you do not own commercial rights to the entire franchise itself (crypto punks).

This is an example of what Bored Apes grant to owners https://boredapeyachtclub.com/#/terms 

But not all projects have the same clarity. And it does not prevent some projects to blatantly clone famous items putting the system to the test. Here is an article to explore further and a nice Twitter thread on copyrights and NFTs

Where are NFTs actually stored?

NFTs are stored in the blockchain, well at least in theory.

Behind each NFT there is a program called smart contract which defines the parameters of issuance, ownership, rarity, and economics associated with a set of NFTS. But blockchains like ETHEREUM are not meant to store natively image files or rich media.  So where are they stored?

Each project has a different approach. Some store them in a centralized service (AWS) – how ironic – some use decentralized storage like IPFS,  arweave or filecoin. Sadly it’s not easy to find that out and the only way to know is by looking at the code. Obviously, a decentralized storage solution is better because you have guarantees this will survive any risks of censoring or damaging.

Dapper Labs (who operates CryptoKitties and NBA Topshot on the Flow blockchain) just announced that they would integrate with Filecoin for more decentralization. Those things are coming slowly but surely. It’s not perfect yet.

Note that marketplaces only show you low-resolution pictures of your NFT. You will want to look at the metadata code to find the link to the high resolution.

I wish they were making this obvious and simple

Are NFTs safe?

The code of an NFT is harmless to you but the risks associated with an NFT project can have several faces

  1. Is the smart contract security audited? based on my observations most are not. it is worse than Defi.
  2. Your NFTs are ok but your wallets are probably not. Because of the nature of the transactions your weakest points are wallets and seed phrases. Hackers are very creative at deceiving you and giving them your private keys without you even noticing. The state of affairs is horrible. And hopefully, soon better wallets are coming to change this. Until then be paranoid. Any wallet based on seed or phone numbers or even passwords is at risk. All of them. Even hardware wallets. Once your seed is taken over it is game over. And if you grant abusive contract permissions all your funds and NFTs may be drained
  3. Avoid NFT scams, don t invest without serious research.
  4. Don t be fooled by transactional stats. it is easy to game the numbers of the value of an item or a project total trading volumes since the sellers and buyers can be the same persons! Look first for organic signs of life and true community excitement
  5. Never EVER engage with any random users to buy /sell an NFT in social media. Simple rule: ignore any DM. period. And double-check all URLs before tapping.
  6. On Discord, Give higher credit to users whose profile shows the ownership label of the NFT. They are not random visitors but real owners. 

What can you do once you own an NFT?

That is where the fun begins and this is where the “it’s just a Jpeg” traditional critic will hit a wall.

  1. Keep it and do nothing. Just enjoy it.
  2. Sell it (bid/auction, fixed price, fractional sale, private/OTC sale)
  3. Transfer/gift it (as We or Gary Vee did)
  4. Receive associated benefits (airdrops, exclusive discussion room)
  5. mint/claim additional NFTs from the one you already own (eg penguin eggs NFTs with pudgy penguins, Bored Apes got free Mutant Apes)
  6. Participate in digital events (eg the apes have a bathroom and treasure hunts and penguins have a metaverse)
  7. Access exclusive digital experiences (you need a Bored Ape to get an AI friend here )
  8. Access exclusive physical experiences (Socios give priority entrance to sports games)
  9. Participate in the community of that NFT (usually discord which will have a bot to certify you own the NFT)
  10. Earn royalties (eg cryptopunks signed with the UTA for an movie/tv show/videos games and merchandise)
  11. Brag about it. why not!
  12. use it as a profile picture page (pfp) on social media (a new celebrity trend!)
  13. use it as digital merchandise (the new trend is NFT watch faces)
  14. Use it as physical merchandise (print them for eg https://maddies.co/ )
  15. expose it in a digital or physical gallery (check the cool oncyber)
  16. Have your NFT featured in popular game or even a TV show
  17. Meet other like-minded NFT owners of the same franchise (discord is the playground)
  18. Contribute to the NFT project: code for it, create for it, meme for it, social media art (and be rewarded for it….)
  19. Earn yield on your NFT https://nftx.org/
  20. Borrow against your NFT https://nftfi.com/ https://drops.co/
  21. Swap it against another https://www.nfttrader.io/ or https://swap.kiwi
  22. Based on the NFT you own, play a game (axie infinity, sandbox,..)
  23. Soon access to DAO (decentralized organizations ) which will rule the life of the community and its economic life

“But someone can copy the jpeg and do the same”

Not really. Indeed they will have the image but not the benefits of the ownership (see above)

They can do “right-click save as”. but that is it.

An NFT is a key (illustrated by a Jpeg or else) that opens the door to many benefits where a Jpeg file is the only benefit.

NFT slang, know it

The NFT industry has already been busy creating its own lingo. get used to some of the terms you will regularly see on Twitter or discord. And yes, NFT people love abbreviations.

  • “looks rare“: a way to greet your newly owned NFT. with a touch of irony and humor
  • gn, gm: good night, morning. Why? because.
  • gmi, ngmi, wagmi: gonna make it, not gonna make it – unlikely you will achieve anything in reaction to a bad idea. Wagmi > We are gonna make it. 
  • ser, fren, fam: sir/friend/family. Weird i know. Welcome to crypto.
  • rn: right now
  • Pfp: profile page picture. Self-explanatory. Often replaced by the NFT you own. (here is a primer on how to prove this is your and not a fake)
  • floor price: the lowest price you can acquire a particular item part of an NFT series
  • ENS: an ENS is a human-readable format of a wallet address on Ethereum (usually a long “0x….” string) . The format is “whatever.ETH” and you can use it instead of wallet addresses. Mine is ouriel.eth. for eg. You create one on the ENS domain service and buy it with ETH. It is in a way an NFT . 1 tip: buy it for many years to save on gas.
  • rugged: when the founders of a project scam their users and profit from a project and defraud the users.
  • Airdrop: the act of sending/minting/transferring NFTS over to a group of people (inherited from cryptocurrencies)
  • Probably nothing: an ironical expression indicating that that something is actually a big deal

here is a great thread on the vocabulary you should know 

Shall I pay taxes on NFTS?

Short answer: yes.

Medium answer: yes if you sell with a profit.

Long answer: consult your tax attorney. It’s complicated.

When you purchase anything with crypto (including other crypto assets) you are creating a “liquidity event” which is likely a tax event resulting in you needing to pay taxes. Now it depends if the crypto you purchased the NFT with is already cleaned of taxes but in general, any crypto purchase should be declared.

It is also likely that this will be qualified as short-term capital gain if your NFT was purchased with crypto you did not hold long enough. If you purchased your NFT with fiat money, no tax event would occur at the purchase (ironically). However, you now own an asset that has value and needs to be considered in your list of properties.

If one day you resell that NFT you will have to pay a tax on the profit (short/long term capital gain or revenue depending on the period you held that NFT). You may even be able to deduct the loss if you sold that item at a loss compared to the cost basis of your acquisition

To calculate your profit you need to deduct every cost associated with the NFT you just sold. That includes the price of the NFT itself but also the fees associated with the transaction (marketplace fee, network fees  of the purchase and sell, etc)

If you are an NFT creator and sell an NFT this is straight revenue. No sweat. You will pay income taxes on it even if you stay in crypto.

And remember all crypto transactions are public. You will not be able to hide – unlike you plan to knowingly use a mixer (which the regulators hate and punish). Tax administrators have the tools to trace and analyze all crypto transactions

Be wise. Pay your taxes.

Where to safekeep my NFTs and why is your favorite exchange useless?

Unlike cryptocurrencies, there are no “exchanges” or custodians for NFTs (yet). That means you cannot use Coinbase or even less Robinhood to host your NFTs for you. Even if they did it would be a bad idea because to enjoy the ownership and benefits of your NFT you need to be “on-chain” (vs siloed in a database). 

So your only option is an “on-chain” wallet. The most popular wallets (hardware and chrome extensions) are incredibly tedious to use in particular if you plan to do so regularly and with extreme safety in mind (auto-lock, hardware + extension, wallet connect ….). If you are on the mobile and not in front of a computer it is even worse. For now, that’s the level. We are in the fax machine era.

Your wallet does not “store” the actual file. Think of it as a browser allowing you to access your files that are stored on the blockchain. They allow you to control the rights of transfers (send-receive).

If you own multiple wallets make sure to remember where you store what. It is easy to get lost in all the transactions and wallets you have been using

Crypto wallets are currently a UX tax on crypto. This is a fact and many teams including us are working on making that a thing of the past.

OK, but how shall I get started?

Here is my best recommendation. Own one NFT. Any. This is the best way to start

The act of owning one will make you understand the benefits and duties that are upon you. This will trump any guide and any advice. Make sure you first own ETH which you can acquire in many ways including on Zengo.

My recommendation is to run and learn. Learn by doing. Learn by owning.

At Zengo we are going to give every single team member an NFT. We want everyone to know what it feels like to own one before we start building around it. This is also why we decided to jump heads on and buy a penguin (but a further post will explain more in detail the core motivations)

Apply extreme caution at first. Be armed with patience, and with a full box of Advil after many wallet manipulations. 

Here is an  NFT starter kit: 

  1. A computer (easier to browse NFTS when you don’t know yet)
  2. ETH (buy it if you don’t own any)
  3. A web 3 wallet. Many recommend a hardware wallet too. 
  4. Safe browsing tools (VPNs, privacy blockers, anti-virus, anti-malware)
  5. Discord: where all NFT community discussions happen
  6. Twitter: where discovery, social status and public showcase currently happen
  7. Time and Patience

Is it possible to own an NFT without buying one?

Yes. You can make your own.  You can have someone transfer one to you. You can win one in a giveaway contest. You can mint one (see above). You can earn one (get paid in NFT instead of $). Some NFT will grant you additional NFTs too, no need for buying. 

That said, always be aware of the network fees on ETH in particular.

Can you predict the price volatility of an NFT? What if it crashes?

No. There is no way to do that. Most new NFT projects are highly illiquid (even with NFT marketplaces) particularly subjective to sentiment and can fluctuate brutally. Be aware of the risks. The floor price (the price of the cheapest item) can widely vary in particular if the price of ETH shoots up since the market prices the floor in USD first and not in ETH. You could buy your NFT at price X and still lose money on it. You need to factor that in when you come into an investment. The risk is lower when you obtain the NFT during the minting phase but nothing guarantees the project will take off because of the amount of noise and projects there are right now. “Mint to flip” is not a guaranteed winning trading strategy in particular in periods of high network fees.

Actually, chances are high there will be a major price correction soon because the cost of starting a new NFT project is so low that many will be tempted to do so and they will be hit by a demand crash (not enough buyers, killing slowly projects without a community of owners). This is why your best bet is to join an active community that has chances to survive the hype phase.

Here is a convenient site to monitor “floor prices” evolution. Yes, the name is cool 🙂

 

Tips for NFT Sanity

I remember when ICOS was a thing. You could easily lose your mind. The same thing is being repeated here. Here are few tips to help you keep your sanity in particular if you are a beginner

  • No refund: sending, buying, minting, selling NFTs are irreversible actions. Once this is done, it is done. No way back. Think carefully before pressing that confirmation button and make sure to check all the parameters of your order (amount, address…)
  • In order to optimize the cost of gas on ETH (unless you use layer 2 or another “cheap” blockchain) here are my best tips: avoid US time zone trading, use a chrome extension like gasnow and gas monitoring tools like https://ethgas.watch. Usually, Sunday morning EU time is a better time (but not always). Careful because a transaction on a smart contract to buy/mint an NFT is order of magnitude more expensive than a simple transaction in ETH. The gas cost is not related to the price of the item you buy. Even if you buy an item at zero cost you will have to pay the same tax gas.
  • Be fully focused when you are in the process of transacting. Turn off notifications, be paranoid and watch all parameters and addresses, and permissions. double-check everything before you click on particular URLs. Most known projects have some sort of blue check verification mark on the marketplaces. Beware of fakes and clones.
  • If you have ad blockers on your browser be aware they may conflict with your operations
  • if you use a hardware wallet make sure to allow contract data options (it may be reset from time to time) I lost hours because of that setting
  • Manage your FOMO factor; you will be exposed to hundreds of projects. It s ok to feel Fomo. just handle it with reason. You will not be able to invest well in all and you will miss many good projects. That’s a fact.
  • Discord sanity check: Discord is a mandatory tool in the NFT space. I never used it really until there. Turn off all notifications or you will go nuts. The most important channels are “announcements” where critical events happen. You do not want to miss critical contract updates, airdrops, giveaways,.. Of course, the main channel is to be followed (there is always a core one). Ignore all DM and spam except those you really expect. All the hackers are on discord coming for you.
  • If you plan to keep your NFT make absolutely sure to “delist” your item making sure it is not for sale because someone could scoop it without you wanting it.
  • Hold a journal of all your NFT positions. You will need to for tax purposes and also for remembering your moves. It is easy to lose track
  • No communication: Unless you know the creator or buyer personally there is no way to communicate with them before or after a transaction. However, there are hacks  
  • Remember that all your transactions are public. If you brag about a particular item you bought or an ENS you will expose yourself. If you care for privacy, create a new segregated wallet from your main crypto holdings for NFTs alone. This way the rest of your activities are not obviously exposed (although they can be connected)

Stay Zen!

Last words: Enjoy the journey

NFTs are one of the most exciting things I have come across ever since I discovered crypto a few years back. The roots of adoption are deep and are expressed via a new generation of creators and owners who want more freedom from gatekeepers. 

The depth of the space is amazing and the level of creativity and creation is rich. It takes crypto to a whole new level of adoption and uses cases that go beyond pure financial speculation and alternative money. It makes wallet and ownership more central, it opens new fields of expressions and revenue streams for creators

I cannot wait to have NFTs supported in Zengo.

Be curious. have fun

Disclosure: This post is not investment advice. As usual, do your own research before any investment. This piece is far from exhaustive and there is so much more to cover.