NFTs explained like you’re five.
Over the last two years, we have heard about NFT collections everywhere, including from friends and mainstream media. Even people with no interest in technology have heard about someone who bought an NFT for crazy money.
This article will be a simple explanation for ordinary people to understand the basics of NFTs.
Let’s begin:
Tl;dr: NFT (Non-Fungible Token) is a technology that leverages the blockchain and can be used to prove unquestionable ownership over a digital asset.
It can be extended to the physical world, but this is a story for another day.
NFT is an acronym for Non-Fungible Token.
This means that every NFT can not be replaced. So if we both have $1 and give them to each other, in the end, we will still have one dollar. With NFTs, this is not possible by design. If you trade them, you will end up with something completely different.
There are many types.
But most notably: ERC-721 (the “gold standard”), ERC-20, and ERC-1125.
They live in the “blockchain.”
We won’t dive into what blockchain is. Think of it as a shared Excel sheet. You can read more here.
They come into collections.
Think of collections like a sports team. Every NFT is a player, and all of them form the team, the NFT collection.
Every digital thing can be an NFT.
A song, an image, a domain name, a collectible, or a piece of land on some metaverse. Even books can be NFTs, but we won’t see them in a long time because the industry is tech-averse.
Why buy an NFT?
Because most collections have a functionality. An NFT can be a ticket to a show like VeeFriends, an in-video game item like Axie Infinity, or a pass to an exclusive community like Bored Ape Yacht Club. It also can be just something you love, like a song. Think of your favorite song. Wouldn’t it be cool if you actually own a part of your favorite song? Chainsmokers released their album as an NFT, and they are sharing the royalties with the holders.
What drives the price of a collection?
Think of NFTs as company stocks. A stock’s price can go up if the company’s revenue beats the stock analysts’ expectations by a lot. Something similar happens with NFTs, but the strong revenue report is communities in their case. Communities can hype up a collection, or the lack of it will make them disappear into the crypto-abyss. No one bought a strange image of an ape in the case of BAYC (mentioned above). Instead, they purchased a pass to an exclusive community with high-profile people and the right to flex on social media.
You have to own a crypto wallet to buy one.
A Crypto wallet is like your Google account and your bank account combined. Whether on YouTube or Google Docs, you use the same account and stored data (e.g., YouTube subscriptions). The same is true for wallets, but instead of subscriptions, you have cryptocurrencies (money) and NFTs. But the most significant difference is that you own the account, not Google.
The creator(s) gets paid every time an NFT is purchased.
When Mrs. Watson creates an NFT, she can set a percentage to take of every future purchase of that NFT. Let’s say she sets 10%. On the minting day (release date), Buyer1 buys the NFT for $1000, and she takes 100% of that ($1000). When Buyer1 sells the NFT for $2000 to Buyer2, then Buyer2 gives $2000, Buyer1 takes 90% ($1800), and Mrs. Watson 10% (200%). The above will happen in every transaction.
That is all, folks. The conclusion is simple: NFTs are revolutionary because they bring ownership over digital assets. If you have any questions, don’t hesitate to contact us here.
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