Everything You Should Know About NFTs — Meaning, Pros, and Cons Explained

Published on 27 June 2022 6 min read

What Does NFT Stand For?

The term "NFT" stands for "non-fungible token." Non-fungible, meaning the token is not interchangeable with a similar or identical item. Unlike bitcoin, which is a peer-to-peer type of electronic cash, NFTs are like a snowflake in the cryptocurrency world, where every item is unique. This is the fundamental idea that you should understand when it comes to NFTs.

What Is an NFT?

An NFT is a non-fungible token that holds data on the blockchain and can be sold and traded. NFTs can be associated with any type of media, such as photos, videos, artwork, music, audio files, or gaming code.

One of the unique features of an NFT is that you can't break it down into smaller units. However, an NFT can represent the fractional ownership of an asset.

Who Creates NFTs?

There is a diverse range of creators who are currently creating NFTs. Because they can be associated with almost any form of media, you will find NFT projects by people from all walks of life.

Artists: Today, artists are selling NFTs of their paintings, drawings, photographs, or other visual media on NFT marketplaces such as OpenSea or SuperRare.
Musicians: Many musicians are taking advantage of NFTs to sell their music directly to fans.
Celebrities: Numerous celebrities, from Paris Hilton to Snoop Dogg, have created NFT projects in the last two years.
Game creators: We are seeing a number of games and platforms selling game assets and characters in the form of NFTs.
Entrepreneurs: A number of business owners and entrepreneurs are selling fractionalized ownership of an asset via NFTs.

Advantages of NFTs

Fully understanding what an NFT is includes knowing its biggest advantages. Here's a look at the top four benefits NFTs have to offer.

1. They can fractionalize ownership of tangible assets.

One of the reasons so many entrepreneurs love NFTs is that they can easily sell fractionalized ownership of almost any asset. As an example, there are companies that now sell fractionalized ownership of real estate via NFTs. Platforms such as Futurent, Labs Group, Aqar Chain, and RealT sell fractionalized real estate as NFTs. Another excellent example is the band Kings of Leon, who are selling a part of their album as an NFT.

2. They can provide ongoing royalties to the creator.

One of the big reasons artists love NFTs is the fact that they set a royalty rate for every sale of the NFT. For example, a digital artist can set a royalty rate of 10% for each sale of his NFT. Therefore, if the NFT changes hands four times in a 12-month period, the artist will automatically receive a 10% royalty from each sale.

3. The technology is safe.

NFTs provide a digital ledger of every sale, which is secured on the blockchain through a smart contract. A person can create an NFT knowing that they will be able to track the chain of ownership anywhere with access to the public ledger.

4. They make the markets more efficient.

NFT creators can now sell a large collection of digital assets easily. From minting (which is the process by which digital files are converted to NFTs through smart contracts) to the secondary sales, all transactions are seamless, and the artist can easily collect proceeds or royalties from each sale.

Disadvantages of NFTs

While NFTs are an incredible innovation, there are some downsides to this new type of technology. Here are some disadvantages of NFTs.

1. Minting can be expensive.

All NFTs need to be minted in order to come into existence. Creators or collectors who wish to mint NFTs on the popular Ethereum blockchain will need to pay what is known as a gas fee. In some cases, gas fees can be extremely expensive.

2. The market can be volatile.

Because the NFT market is relatively new, it can be extremely volatile. It is not uncommon for some NFTs to double in value in a matter of hours due to pure speculation. Also, some NFTs can lose almost all of their value in a matter of minutes.

3. Creators and collectors need to be wary of fraud.

For every popular Cryptopunk NFT, there are dozens of cheap imitators. Additionally, some unscrupulous actors have created NFT projects with the sole intention to "take the money and run" without fulfilling any promises set out in the roadmap or whitepaper. Because of these situations, some people perceive NFTs as a sort of "Wild West" of the digital world.

4. They can be harmful to the environment.

Because NFTs are created on the blockchain, there are some environmental concerns. That is because some blockchains use what is known as "proof of work" in order to validate a smart contract transaction. Proof of work involves a high level of energy expenditure, which can be harmful to the environment.

Significant NFT Projects and Creators

You may be wondering what types of NFT projects are leading this new digital revolution. For the most part, the NFT world is driven by community-focused collections that have become worth tens of millions to billions of dollars. Here's a look at some of the most significant NFT projects and creators in 2022.

1. Bored Ape Yacht Club

You may have already heard of Bored Ape Yacht Club, or BAYC. This NFT project consists of 10,000 cartoon illustrations of, well, Bored Apes. This collection has become so popular that the cheapest Bored Ape is worth hundreds of thousands of dollars. Celebrity owners of Bored Apes include Mark Cuban, Steph Curry, Jimmy Fallon, and Justin Beiber. The creator of the BAYC project, Yuga Labs, recently raised $450 million to bring their company's valuation to over $4 billion.

2. VeeFriends

VeeFriends is a collection of cartoon illustration NFTs created by entrepreneur Gary Vaynerchuk. What makes VeeFriends unique is that each NFT comes with a number of benefits, including the opportunity to participate in Facetime conversations with Vaynerchuk. As of 2022, VeeFriends is in the top 10 in terms of transaction volume.

3. Beeple

Beeple is the alias of South Carolina digital artist Michael Joseph Winkelmann. For almost a decade, Beeple has been creating digital art before entering the world of NFTs. Beeple is significant because he once held the record for the most expensive NFT ever sold. The NFT in question, "Everydays: The First 5,000 Days," was a collage of the first 5,000 digital works from the artist. The piece sold for $69 million in an auction at Christie's.

The Growth of NFTs

NFTs have experienced exponential growth over the last two years. In 2020, the entire NFT market was about $85.5. Just one year later, the market exploded with over $17 billion in sales. In March of 2022 alone, total NFT sales topped $2.2 billion.

Summing Things Up

Here's a summary of what you need to know about NFTs:

NFT stands for non-fungible token.
NFTs are created on the blockchain and provide a digital record of every transaction that can be viewed by the public.
NFTs can be associated with any type of digital media.
NFTs are currently being created by artists, celebrities, and entrepreneurs.
Advantages of NFTs include fractional ownership of assets, royalty payments to the NFT creator, safe technology, and efficient sales.
Disadvantages of NFTs include high minting costs, volatile pricing, and a high prevalence of imitation projects and fraud.
From 2020 to 2021, NFTs have grown 206x in terms of annual sales.

Understanding NFTs as a Creator

If you are interested in learning how to create your own NFTs, it's a good idea to join the right community. Daisie brings together artists in a series of classes and forums focused on the creation, marketing, and growth of NFTs. It's a great place to start, whether you are an experienced artist or you just want to learn more about the space.