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NFT Basics - Some Boring Tech & Terminology

Artist on Instagram - @bj00100

It's been hard to at least not have heard of NFTs, especially if you're a creator / artist. But for most artists it's a point of intrigue, but producing and selling art as NFTs is still not a least for now.

This course is designed to make it easy to understand NFTs and be able to post your art on a NFT marketplace. But, to we need to start with the basics and that's understanding the technology and terms.

Frankly, I think the tech, terminology and confusing contracts and costs are likely the biggest reason more artists have not started selling physical art as NFTs. Don't be discouraged after reading all the technical stuff. We're going to take you all the through the actual posting of art for sale on OpenSea, where we'll address all the technical stuff in this lesson.

What is an NFT?

Simply stated, an NFT is a Non-fungible token. Wikipedia's definition - A non-fungible token (NFT) is a non-interchangeable unit of data stored on a blockchain, a form of digital ledger, that can be sold and traded. Types of NFT data units may be associated with digital files such as photos, videos, and audio. Because each token is uniquely identifiable, NFTs differ from blockchain cryptocurrencies, such as Bitcoin.

NFT stands for "non-fungible token." At a basic level, an NFT is a digital asset that links ownership to unique physical or digital items, such as works of art, real estate, music, or videos. NFTs can be considered modern-day collectibles. They're bought and sold online, and represent a digital proof of ownership of any given item. NFTs are securely recorded on a blockchain - the same technology behind cryptocurrencies - which ensures the asset is one-of-a-kind. The technology can also make it difficult to alter or counterfeit NFTs.

So, “Non-fungible” more or less means that it’s unique and can’t be replaced with something else. For example, a bitcoin is fungible — trade one for another bitcoin, and you’ll have exactly the same thing. A one-of-a-kind trading card, however, is non-fungible. If you traded it for a different card, you’d have something completely different.

By creating an NFT, creators are able to verify scarcity and authenticity to just about anything digital. To compare it to traditional art collecting, there are endless copies of the Mona Lisa in circulation, but there is only one original. NFT technology helps assign the ownership of the original piece.

At a very high level, most NFTs are part of the Ethereum blockchain. Ethereum is a cryptocurrency, like bitcoin or dogecoin, but its blockchain also supports these NFTs, which store extra information that makes them work differently from, say, an ETH coin. It is worth noting that other blockchains can implement their own versions of NFTs, but the most common at this time is Etherum.

While the NFT that conveys ownership is added to the blockchain, the file size of the digital item doesn't matter because it remains separate from the blockchain. Depending on the NFT, the copyright or licensing rights might not come with the purchase, but that's not necessarily the case. Similar to how buying a limited-edition print doesn't necessarily grant you exclusive rights to the image.

I warned you, the tech stuff is kind of boring. But IT IS THE TECH that is the foundation for artists to benefit financially from digital art forms. Perhaps the biggest financial impact is the ease of selling art to buyers globally...without shipping charges.

How are NFTs sold?

You can buy, sell, trade, and create NFTs from online exchanges or marketplaces. The creator or current owner may choose a specific price. Or, there may be an auction, and you'll have to bid on the NFT.

  • Foundation: A community-curated marketplace that requires creators to be invited by other creators who are already part of the platform.

  • Nifty Gateway: An art-focused marketplace that works with big-name brands, athletes, and creators.

  • OpenSea: One of the first and largest marketplaces where you can find NFTs for a wide-range of collectibles.

  • Rarible: Offers a range of NFTs with an emphasis on art. Uses its own RARI token to reward members.

  • SuperRare: A marketplace that focuses on curating and offering digital art.

What Costs are Involved to Buy and Sell NFTs?

Gas Fees

Gas fees are the fixed fees involved in buying NFTs. Apart from the value of the collectibles, there are transaction fees. Whenever you do a transaction through blockchain, there is a blockchain transaction fee called a gas fee. It is a fixed fee, which does not depend on the value of the transaction. Essentially, it refers to the amount you pay miners* for the computing energy they require to validate blockchain transactions. It is an additional charge in Bitcoin or Ether required to transfer the main cost.

The gas fee fluctuates depending on the demand and supply of the cryptocurrency. If ‌demand is high, the gas fee might even exceed the cost of the NFT.

*A note about Miners. Mining is the process of creating a block of transactions to be added to the Ethereum blockchain. Ethereum, like Bitcoin, currently uses a proof-of-work (PoW) consensus mechanism. Mining is the lifeblood of proof-of-work. Ethereum miners - computers running software - using their time and computation power to process transactions and produce blocks.

The research we've done to date, shows movement to reducing gas fees. We found one article that referred to using Polygon with Ethereum as a way to greatly reduce gas fees. We'll dig deeper into the cost challenge as we document our process for putting our first NFT on the OpenSea Marketplace.

Conversion Fees

To get started on trading NFTs, you need to set up a cryptocurrency wallet. There, you will need to convert your currency, say USD, into a cryptocurrency, say Ether. You might also want to convert from one cryptocurrency to another, if required. To do so, your wallet will demand a conversion fee, which can amount to upwards of 1.50% of the transaction amount.

Creating, Selling & Re-selling NFTs

Just as buying can be an expensive affair, creating an NFT can be so, too. In Ethereum, a creator may be required to pay anywhere between US$100 and US$500 to create the smart contract* (an agreement between the buyer and the seller). The cost may be lower on other blockchains, but it is one to be considered regardless. Additionally, when selling an NFT, creators might need to pay a part of their earnings, say 5 percent, to the marketplace.

Many people buy NFTs to later sell them for a profit. However, reselling NFTs is not so straightforward. Sellers are required to pay a royalty, typically 10 to 30 percent of the amount earned, to the marketplace they sell it on.

*A note on smart contract costs: Some research shows that smart contracts are include in the marketplace and do not need to be created. However, the standard smart contract may not express the terms of the transaction that fits the individual seller's requirements.

Cashing Out

When you sell an NFT, you earn cryptocurrency that you might want to shift to your bank from the crypto wallet. For that, you will need to convert the crypto into fiat currency (government-issued currency) through the crypto exchange or a peer-to-peer platform. That, again, won’t be free of cost, as you will need to pay blockchain fees. Blockchain fees, which typically occur when withdrawing money from exchanges, have increased dramatically due to the demand. U.S. dollar Tether (USDT) usage is now mostly on the Ethereum blockchain, but, at the same time, many of the other coins are using the same blockchain, which increases the competition between transactions.

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