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NFT Explained: What They Are, How They Work, and What's Next

NFT is a new direction in blockchain technology. Market participants and real businesses are diving into new trends to find a use for this type of token.

NFT, non-fungible token, what is NFT, how NFT work, how to make money on NFT

Written by

Alex Crypto
Published on

February 15, 2023

NFT is a non-fungible token implemented through a record in the blockchain about the ownership of a unique asset. What is the difference between fungible and non-fungible tokens?

A fungible token has essentially the same properties as another token in its class. For example, US dollars, bitcoin, and concert tickets Banknotes can be simply exchanged for one another. If they have the same value, there is no difference for the holder between, say, one dollar bill and another.

Non-fungible tokens are unique and have only inherent characteristics within their class. For example, works of art or music, a domain name.

NFT is a digital asset that contains information that identifies it and is recorded in a smart contract. It is this information that makes each NFT unique, so one token cannot be directly substituted for another, as no two NFTs are the same.

An NFT can be 1:1 (one out of one)—a single, unique object, such as a painting, or part of a collection like Bored Ape Yacht Club or CryptoPunks. Each of these collections consists of 10,000 NFT tokens.

Terminology 

Ape In - mindlessly purchasing because of the hype (also spelled Aping, Aped).

Collection - a collection of NFTs united by a common theme.

Collector - An investor who buys NFTs for collection and/or market speculation purposes.

Copyminting - is a scam where an investor passes off someone else's NFT as their own.

Copy Cat - is a creator that imitates someone else's ideas, appearance, or behavior in the NFT space.

Dry Powder - Refers to cash in NFT community jargon.

Flex - is bragging when someone posts, for example, CryptoPunk or BAYC as their profile picture on Twitter.

Floor/Floor price - The lowest asking price for an NFT.

Fractional ownership - the right to partial ownership of NFT. Merchants can sell NFTs in installments, and buyers can purchase as many parts of one NFT as they can afford.

Genesis Drop - is the first NFT drop a creator makes on an NFT auction platform like OpenSea.

Loot Box - a transaction in which the owner has no idea which NFT he purchased until he opens the Box.

Metadata - the actual content and description implied in the smart contract stored on the blockchain, including a set of data that defines ownership and distinguishes one NFT from another.

Minting - the process by which NFT becomes part of the blockchain. Once an asset is placed on the blockchain, it is "minted" as a token and cannot be changed.

NFT-fi - P2P lending platforms that use NFTs as collateral for transactions.

PFP (Profile Picture) - NFT is used as an avatar, often to show off (for example, BAYC).

POAP NFT (Proof of Attendance Protocol) - NFT for attendees of physical or virtual events.

Project (NFT project) - a collection of works of art or digital assets released as part of the same overall roadmap or story. Good examples of recent collections are Fluf World and Loot. Typically, the artist or creator shares a "roadmap" of their idea, which is designed to help understand the scope, purpose, and direction of the main project. Once you understand the project, you can decide if you are interested in participating. Always do your research before investing in a project.

Rekt - is an investor who has suffered significant financial losses as a result of poor investment decisions.

Royalty - money earned by the NFT creator by reselling the token. An NFT can be hard-coded to always pay royalties to its creator on every token sale.

Rarity - is one of the critical factors for determining the value of NFTs. Based on the unique properties or traits of the NFT: Common, Rare, Mythical, and Legendary.

Reveal - is the term for the moment when the NFT token will be revealed. Only after the purchase does the buyer learn the rarity of the token he purchased. It is up to the creators of the collection whether it will be revealed immediately when the collection is sold out, or, for example, with a delay of 24 or 48 hours.

Sharding - splitting NFT into parts.

Types of NFTs

Types of Nft

NFT is a new direction in blockchain technology. Market participants are making numerous attempts to find a use for this type of token. Some of them are more successful than others. There is hype, the durability of which is still in question. However, certain trends in the use of NFTs are starting to emerge.

Some of the popular ways to implement a non-fungible token are:

  • Works of art
  • Collectibles
  • Games
  • Metaverses
  • Utilities and Finance

Current statistics:

  • About 40% of objects are added to games as NFT tokens.
  • 30% are common collector's items without reference to any particular sphere of use (mostly art).
  • 15% settled in real estate.
  • About 9% is accounted for by collectible card entertainment.
  • The rest are distributed among tokenization: domain names, videos, music, and other intellectual property.

Works of art

NFT art is the preferred route by which most digital artists buy and sell digital art. It is not unique, but limited, creating scarcity and a sense of authenticity that results in value creation. Everyday: The First 5000 Days by Beeple is one of the most expensive NFT artworks ever sold.

Artists, musicians, singers, writers, and other creative people can now make money from their work much more easily and quickly thanks to new technology. As a result, they will create many times more creations and leave a significant mark on history. NFTs also allow artists to earn royalties, that is, to receive a percentage of each subsequent sale of their work since it is possible to program a special code to send a percentage of the resale to the artist.

On the other hand, connoisseurs of beauty and just ordinary investors buy crypto art in NFTs without unnecessary difficulties, bypassing legal procedures or auctions.

Most of the number of sales in 2021 came from the primary market, almost 60% of sales, however, the primary market accounted for only a quarter of the volume in dollar terms. Assets traded on the secondary market have a higher volume in monetary terms, which can be explained in two ways:

  • Assets increase in value in the secondary market.
  • The art market is flooded with new low-value assets created by artists looking to enter the market.

Works of Art

In 2021, the “traditional” art market will total over $14.6 billion, compared to $2.8 billion for crypto art. Thus, today, cryptographic art accounts for less than 16% of the entire art market. This percentage should be put into perspective given that the technology that enabled crypto art was developed less than 5 years ago. Of the $14.6 billion sold, 45% of this volume is post-war and contemporary art, which underlines the great interest of collectors in recent works. The craze for crypto art and NFTs is part of this trend.

Collectibles

This is a collection of different objects united by a storyline or having some kind of unifying factor, for example, in terms of semantic load. Often, a collection is created based on a single object, and this object has one or more characteristics that vary.

A different combination of characteristics for one object allows you to determine the rarity of this NFT.

An example of a collection is the sensational Bored Ape Yacht Club (BAYC), consisting of 10,000 NFTs with images of monkeys. Each character has unique traits. However, some NFTs are rarer than others, which makes them more valuable. The acquisition of Ape provides owners with exclusive access to future collections, as well as other BAYC membership benefits.

Each monkey consists of seven possible characteristics: background, clothes, earrings, eyes, fur, headdress, and mouth. Each attribute has many variations and styles. For example, monkeys can have golden, multi-colored, or gray fur. Some skins are limited to a certain number, so some stats are much rarer than others.

Collectibles are valuable items that are often sought after by traditional collectors. NFTs first appeared with the development of crypto cats, which are a great example of digital collectibles. NFTs have taken collecting to a whole new level. They added useful properties to scarce objects and removed disadvantages.

Thanks to tokenization:

  • fixed the problem of the obsolescence of materials;
  • storage complexity;
  • the need for additional materials (the necessary additional information and descriptions are already embedded in the blockchain);
  • The future exchange has been simplified.

The two flagship collectible projects of the year were undoubtedly CryptoPunks and Bored Ape Yacht Club, which account for over $3.5 billion in transaction volume, more than a third of the segment's activity. CryptoPunks leads a bit, but in 2022, the rankings between the two giants of the segment could very well be reversed. It should be noted that Meebits, which is ranked 3rd in terms of USD trading volume, was created by LarvaLabs, the studio that is also behind CryptoPunks.

Collectibles

As can be seen from the chart, the collectibles segment was largely dominated by the secondary market, which accounted for almost 85% of the volume of trade. As in the art market, the difference between the number of sales and the volume of trade in monetary terms sold on the secondary market suggests that assets tend to appreciate on the secondary market.

Games

Game items, game objects, and areas of game worlds—all this can be sold in the form of NFTs. And the rarer the game item, the higher the status of its owner.

Game developers are implementing NFTs to allow players to win digital in-game items such as digital swords, shields, and other collectibles.

The tokenization of game items into digital assets has also made it easier to transfer tokens between players or different games through a specialized NFT blockchain ledger.

Axie Infinity is by far the top gaming project of 2021, accounting for almost 2/3 of the gaming blockchain industry.

Games

According to the chart, the secondary market accounts for slightly more than half of the segment's activity in terms of sales, and more than 85% of the total value in the secondary market. As with most other NFT segments, assets quickly appreciated in the secondary market.

Metaverses

The Metaverse segment generated the most interest in late 2021, thanks to the sensational announcement by Facebook (which became META) that it had begun working on creating its metaverse.

The principle of the metaverse is very important in the NFT industry. One of the very first NFT projects on Ethereum in 2017 was the Decentraland project. A metaverse is a form of parallel universe that can be accessed digitally through a screen (computer, mobile phone, etc.) or a mixed, augmented, or virtual reality experience. As in Ready Player One, the metaverse will offer gaming and social experiences, but it can also open up the possibilities of a parallel economy: selling items in the metaverse (clothes, accessories, 3D objects, etc.) or traditional e-commerce through the experience of working in the metaverse.

Sandbox is the metaverse project that benefited the most from Facebook's announcement of its renaming to Meta. Sandbox will account for over 50% of the market activity of the Metaverse segment in 2021, followed by the sector's historical player, Decentraland. All other metaverses together account for less than a quarter of the total Ethereum blockchain. In the coming year, this segment will undergo a profound transformation given the hype around digital universes: the market is expected to become more competitive and diversified.

The main market for the Metaverse segment is primarily Sandbox, which continues to have regular pre-sales.

Metaverses

In the meantime, Decentraland stopped selling LAND in December 2018, and since then LAND sales have only taken place on the secondary market. It should be noted that the volume of new sections of the Metaverse released to the market remains relatively high, with 45% of sales coming from the primary market. The value remained focused on the secondary market, with over 80% of trading volume in monetary terms.

Utilities and Finance

The NFT Utilities market is perhaps the most difficult to comprehend and undervalued segment to date. The most famous use case for this type of NFT is blockchain domain names. In 2021, a major trend emerged with NFT splits and ownership splits. This financial use case opens up new perspectives for using NFTs as a store of value.

Utilities refer to any asset that is intended for a very specific use that is not directly related to gaming, or where the primary purpose is simply to own it. Today, there are many use cases, especially in the areas of finance, digital identity, access and authentication, ticketing, security, physical asset tokenization, product certification, supply chain, healthcare, etc. It should be noted that the very nature of individual assets in the utility segment does not allow for the creation of a market: identity cards, identifiers, diplomas, and medical cards. The nature of the assets in circulation makes the Utilities segment, by definition, difficult to compare with other segments of the NFT industry.

Utilities and Finance

The market for Utilities is very different from other segments. Due to the nature of the objects of circulation and their functions, the secondary market is extremely weak (only 10%). These assets, which find buyers in the secondary market, have a very high value: just under 50% of the total value traded in the segment (over $264 million). 

Examples of the most unusual NFTs

Examples of Most Unusual Nf Ts

A digital toilet paper was sold for $4,100 by the American company Charmin. This is by far the most bizarre and unusual custom-designed token.

Cyber Eau des Parfums is a digital fragrance by Look Labs from Germany. The scanned packaging of the bottle and fragrance sells for $18,000.

A photo of model Emily Ratajkowski, sold for $175,000. In 2014, artist Richard Prince integrated this image into his painting, and the model bought it, putting it up for auction at Christie's as a digital painting.

The source code for the WWW web browser is now owned by an unknown buyer. The $5.4 million deal took place in June 2021 at Sotheby's and confirms ownership of the original 1989 files of Sir Tim Berners-Lee, creator of the World Wide Web.

Unique "Vampire Black" or "YouTube red" colors from one of the platforms that can be resold in the auction. The cost of such exotic digital shades is $100.

Blockchain wedding — Two San Francisco-based Coinbase employees used a special token and an Ethereum smart contract to get married. The exchange of wedding rings was also carried out in NFTs, which are now displayed in the couple's crypto wallets as a currency.

“Project N” random set of numbers: 8,888 tokens in total consist of 8 random numbers from 0 to 14, and the cost of one is approximately $4,500. You can store your lucky number on the blockchain indefinitely. Incredibly, in September 2021, Project N had a market capitalization of $40 million.

How to make money on NFTs

First, let's determine what factors affect the value of NFTs.

Practical use

If there are scenarios for the use of the token, then this may raise its price in the future. Otherwise, the token may turn out to be useless ballast in the wallet.

Rarity

Maybe it was created by a famous person? Or is the token tied to some rare object from the real world?

Community

This is a liquidity generator because the more people know about and are interested in a certain asset, the more likely it is not to lie as dead weight in the owner's wallet.

Easy way to earn, using tools available for everyone:

Create your NFT for selling.

Create your own NFT to earn royalties. There is information on the network that says royalties can be 5–10%. That is, with each resale, the NFT creator will receive such a percentage of the amount. Alternatively, you can give away NFTs for free with the expectation of future royalty payments.

Producing NFT authors is a way for those who are well-versed in the industry, and have the experience and financial capabilities to bring NFT to the market. The method is not for everyone.

Receipt of NFT tokens in anticipation of their rise in price with a subsequent sale. Receiving means both the purchase of and participation in the airdrop. If market knowledge, experience, and financial capabilities allow, then regular NFT trading can bring significant profits.

Play-to-Earn - by participating in the game, you can get different NFT items and then sell them on the secondary market. The NFT token can not be sold but rented out. For example, a piece of land in a virtual universe. In some blockchain collectible card games, individual rare cards can be rented or leased out to help increase the chances of winning. Users themselves set the fee and the duration of the transaction.

Staking with NFTs enables you to earn in a novel way. This was made possible by the close relationship between NFT and DeFi. Staking involves depositing or “freezing” digital assets in a DeFi protocol smart contract to generate passive income. The assets in which the rewards are paid may differ, for example, from Ether or the platform’s governance tokens. In addition, it is often possible to reinvest coins earned from NFTs in different yield farming protocols.

Liquidity supplies. Decentralized exchange Uniswap, along with the launch of the third version of the protocol, added the expression of positions of liquidity providers in the NFT format (ERC-721), also known as LP-NFT. Based on the pool and the parameters selected in the liquidity interface, a unique NFT is minted, representing a position in a particular pool. The owner of the NFT can change or redeem the position or sell it on any marketplace on the Ethereum blockchain.

Farming. This way of earning is derived from the previous one: receiving LP-NFT for supplying liquidity to Uniswap. This token can be used as collateral in other protocols, thus forming a multi-level income model.

Networks that have NFT

Networks That Have Nft

There are a lot of networks that support NFT technology. Consider the most popular of them.

Ethereum (ETH)

To date, the Ethereum network is the most popular in matters relating to NFT technologies. This blockchain has different standards for tokens that function in its system. Accordingly, all non-fungible tokens have their standards.

The most popular types of NFT tokens in Ethereum are divided into three standards:

  • Tokens of the ERC-721 standard are unique and always have only one copy. Completely non-interchangeable. It is this type that is most often described when explaining which tokens belong to NFTs. They provide a complete analog of rights, such as when purchasing a collectible painting or a work of classical art.

  • ERC-1155 tokens are a less popular option, offering the possibility of issuing multiple copies with identical characteristics. Enjin multiverse items are an example of a token of this standard. The peculiarity of these tokens is that they can be used in different games in the Enjin multiverse.

  • ERC-998 tokens are tokens that confirm the right to own other tokens. Classic example: such a standard can often be used in NFT games. You have an NFT character who is additionally equipped with some kind of ammunition: a sword, a shield, armor, and a helmet. Each of these elements is also an NFT. However, it is not the main one, but an auxiliary one. This standard can combine the main NFT and its subjects. So you can buy or sell a character with all his equipment at once. By previous standards, this is simply not possible.

Solana (SOL)

This blockchain is a noteworthy alternative to Ethereum. With its high throughput and low fees, Solana is ideal for NFTs of all shapes and sizes. More than 5.5 million NFTs have already been issued on the blockchain.

Solana currently has two main NFT-related projects:

  • Metaplex Storefront is a universal NFT standard. Allows you to create and mint NFTs, run various auctions for primary/secondary sale, and visualize NFTs for wallets and applications.

  • The Candy Machine v2™ is a tool focused on the easy creation and minting of NFTs and profile pictures (PFPs).

Metaplex has become the new NFT standard for Solana using Sealevel smart contracts. Solana can process tens of thousands of contracts in parallel using as many cores as are available to its validator. Metaplex is a protocol built on top of Solana.

Thousands of NFTs can be minted and traded with the Candy Machine v2™ tool.

Another tool, Gumdrop, using the Solana blockchain and Merkle trees, makes it easy to airdrop tokens to a large number of whitelisted users at a low cost to creators.

Solana allows you to create advanced NFT markets: Solanart.io, and DigitalEyes.market, Solea.

Cardano (ADA)

This blockchain can also be seen as an alternative to Ethereum, with its high transaction costs. And already quite a lot of web3 developers use this blockchain for their projects, including NFT: SpaceBudz, ADA Dolls, ADA Monsterz, etc.

One SpaceBudz leader claims that all 10,000 NFTs were sold in just three days for 50 ADA each, and there is already an active secondary market with especially rare SpaceBudz selling for $40,000 each.

Even though the Cardano NFT blockchain is still not perfect, creating a token here is significantly cheaper than on Ethereum, it costs about 2 ADA, or about $1.5.

Cardano has a variety of non-fungible tokens: NFTAs are translated as "Non-Fungible Appreciation Tokens." NFTAs support the CIP-721 standard developed for NFTs. It allows you to attach metadata to tokens and store information in the blockchain.

The minting process for NFTA and other Cardano tokens is different from Ethereum. Cardano tokens are minted like the native currency, ADA. That is, smart contracts are not involved in the process. The process of issuing tokens can be checked using a QR code that redirects to the Cardano blockchain explorer. In addition, tokens can be verified on the official page of the NFTA Cardano Foundation.

Based on the information provided on the Cardano website for developers, there are still some issues with NFTA minting.

Binance (BNB)

The huge ecosystem of Binance allows you to fully interact with NFTs. It must be taken into account that Binance is a centralized service, so participants need to pass KYC verification. For some, this is a disadvantage, but thanks to this, the likelihood of meeting a scammer on the site is much less. Binance is one of the largest crypto exchanges in the world, bringing together a huge community of both NFT sellers and buyers. Airdrops and sales of NFT boxes are constantly held. All this allows us to consider Binance a reliable and safe platform.

Why should NFT market participants pay attention to Binance?

  • Fast transactions;
  • Binance NFT has the highest liquidity ratios;
  • Low commissions - on the trading platform, the commission is 1%;
  • Beneficial for NFT creators: for the issuance of a token in the BSC network, the commission is only 0.000001 BNB.

The BSC network supports standards that are similar to those of Ethereum:

BEP-721 (similar to ERC-721) - to create an NFT in a single copy:

  • Low fees compared to Ethereum;
  • Faster transactions.

BEP-1155 (similar to ERC-1155) - for creating multiple NFTs with similar characteristics. Features of the BEP-1155 standard:

  • Issuing several unique tokens at once in one smart contract;
  • Tokens in a set can be both fungible and non-fungible.
  • Support for atomic swaps;
  • Support for batch transactions;
  • There is no need to wait for a block to be created to complete the transaction.

This standard is most suitable for blockchain games, as it was created specifically for them. However, it is also useful in other industries, namely the art industry. Like BEP-721, it has all the benefits of the Binance Smart Chain blockchain.

Flow (FLOW) 

Flow is a proof-of-stake blockchain specifically designed for the next generation of NFT applications and large-scale crypto games. Dapper Labs, developers of one of the first NFT-based games, CryptoKitties, created Flow when CryptoKitties transactions flooded the Ethereum network in 2017.

One of the most famous basketball marketplaces, NBA Top Shot, also runs on the Flow blockchain. Flow has collaborations with the Ultimate Fighting Championship, Animoca Brands, Warner Music Group, and Ubisoft.

Flow's unique multi-node architecture solves scalability issues by enabling low-cost and fast transactions.

The developers point to several advantages implemented in the Flow standard for NFT:

  • Withdrawal and deposit events are defined in the contract, so the recipient will always be notified that someone has sent them tokens with their deposit event.

  • The standard may support NFT packet transmission. Although not explicitly defined in the contract, a batch transfer can be done within a transaction by simply withdrawing all the tokens to transfer and then placing them where they should be, all in an atomic swap.

  • Transmissions can trigger actions because users can define custom receivers to execute specific code when sending a token.

  • Simple Ownership Indexing: Instead of iterating through all the tokens to find the ones you own, you store them in your account collection and can instantly get a list of the ones you own.

How to get NFT?

How to Get Nft

Drop

This means buying an NFT token. The term "NFT drop" refers to the point at which a particular NFT becomes available for purchase by an investor. Since part of the appeal of NFTs is their uniqueness, investors can keep an eye out for upcoming NFT drops to be the first to try to buy them. As a result, the NFT drop provides investors with a great opportunity to get a one-of-a-kind piece of digital art at a low price, which means there are plenty of opportunities to make a profit.

The hardest part about an NFT drop is being one of the first to know about it. Of course, you can search for drops using various services, such as Nftcalendar.io. This is a calendar that posts announcements about upcoming NFT events and new NFT release dates. But this information is also being seen by thousands of other NFT hunters. Therefore, one should strive to get such information first-hand, on the pages of social networks of projects, influencers, specialized groups, and channels on Twitter, Telegram, and Discord. There is a huge thematic community on Reddit. It's important to check your sources as social media is littered with misinformation and the potential for scams is high.

When planning to participate in a popular NFT drop from a well-known artist, brand, or designer, you need to prepare as best you can. Keep in mind that the more hyped and exciting the NFT collection is, the more competition there will be when it launches. It is necessary to study the creator of the NFT. Conducting research is a critical aspect of any form of investing, and even more so in the world of NFTs. When buying an NFT, an investor is essentially buying a brand (or public perception of a brand) as that is what will determine the value.

After choosing an NFT, you need to find out on which platform it will be sold. Some of the most famous sites: are Opensea, SuperRare, and NiftyGateway.

Most NFTs are based on the Ethereum blockchain, which means you will need some ETH and a compatible wallet.

MetaMask fits the bill in almost every scenario, so it's where you can create an account. Other wallets that can store NFTs: are Enjin, Trust Wallet, and AlphaWallet.

Now you need to replenish your ETH wallet to cover the gas fee (the cost of making a network transaction). Gas fees vary greatly depending on network congestion, but typically fees can cost anywhere from $10 to $300.

When buying an NFT, it is important to set a limit on the price an investor is willing to pay for an asset. As with any other form of investing, you should only invest the amount that the investor can afford to lose, so drops that go over budget should be avoided.

FOMO should be avoided, there are many new drops every week, so you should not buy an NFT that does not meet the criteria of an investor.

Airdrop

The second way to get NFTs is by participating in an airdrop. In this case, NFTs are distributed free of charge. Increasing brand awareness and audience loyalty, accelerating the adoption of tokens, and collecting user data are the reasons why the project gives away its NFTs for free.

There are two types of airdrops:

  • Traditional airdrop, when free NFTs are distributed according to a certain algorithm. For example, a marketplace can distribute its partner's NFT among marketplace users. The project can distribute tokens to participants who have registered on the whitelist. No response is required from airdrop participants.

  • Bounty-airdrop - rewarding users with tokens for performing simple tasks in social networks, for example, for subscribing to Telegram, reposting on Twitter, etc.

To participate in the airdrop, you need to be on the NFT distribution list (whitelist). Next, fulfill the conditions of the promotion, if it is a bounty airdrop, also provide your wallet address. After that, it remains to wait for the results of the distribution. Very often, a limited number of whitelist participants receive tokens, especially if the project initially has good potential (strong team, successful project portfolio, etc.).

The benefit of participating in an airdrop is obvious - with virtually no material costs, it is possible to get a potentially profitable asset. Do not count on large sums. This can be seen more as start-up capital for further growth. Although, if in this way it is possible to participate in a project with the potential of the CryptoPunks type, this can be a very profitable acquisition.

Security and Fraud

Security and Fraud in Nft

There are a huge number of scammers in the web3 space, and any transaction, including an airdrop, should be approached with caution and thoughtfulness every step of the way. Always remember to take precautions. Following them will save your existing assets.

In no case should you transfer the private key and secret phrase from your wallet to anyone. The same goes for passwords and any other personal information.

You should not transfer your funds to participate in the airdrop. This is exactly the free distribution of tokens. The maximum that may be required of you is to perform several tasks that were mentioned above (subscription, repost, etc.). The requirement to transfer funds can be a signal of a scam project.

Sometimes you need to pass KYC verification to participate in an airdrop. If you do not trust the project, then be careful when transferring personal data. Perhaps you should refrain from participating.

You need to be careful about URL links, they can lead to phishing sites. In case of doubt, it is better to copy the link, for example, into Notepad and double-check the address visually. Phishing sites visually copy the original ones. But the URL differs by one or more similar characters or domains.

It must be remembered that the top management of the project, community managers in social networks are never the first to address the members of their community in private messages. Very often they directly indicate this in their profiles. If such a message came from the alleged founder of the project, then this is most likely a hoax.

Free NFT

If a random NFT appears in your wallet, without your knowledge, and from an unknown source, you need to be extremely careful not to sell it, not exchange it, do not touch it at all. By making transactions with it, you can lose all your assets in the wallet. OpenSea is set up so that anything sent to you is automatically placed in the "Hidden" tab in your OpenSea profile.

Remote access

Sometimes scammers deliberately complicate the procedure for obtaining NFTs or pretend to be the support service of the NFT marketplace. Further, an offer of assistance is received with the provision of access to the computer screen of the airdrop participant. You shouldn't agree to this. It ends with the theft of assets from the wallet.

Pump-and-Dump 

In NFT, unscrupulous individuals work out the pump-and-dump scheme. This term refers to a situation where one person or group of people buys up NFTs and artificially increases demand. Once successful, the scammers cash out when prices get high and leave everyone with worthless assets. You can play it safe in this situation by studying the number of buyers and transactions for a particular collection of NFTs on the marketplace. It is also worth double-checking the seller's transaction history on Etherscan. The Chainalysis report notes that there is a practice of repeatedly reselling an NFT token “to itself” to increase the price of the token.

Plagiarism

Another opportunity to lose your funds is to buy a fake NFT. It's worth remembering that minting a work of art as an NFT is not the same as owning its intellectual property. Thanks to the user-friendly OpenSea software, anyone can turn any photo or image into an NFT, whether or not they own the rights to the object. Fraudsters can easily steal an artist's work and set up a fake OpenSea account where they put the fake art up for auction. This will render the NFT virtually useless once the community finds out about it. Before buying an NFT, you need to make sure that the artwork belongs to a verified account. On OpenSea and other marketplaces, a verified account has a blue checkmark next to the profile picture of an NFT author. If not, you need to find the author on Twitter, on his website, or other social networks. And ask directly if the works of art belong to him. The same information can be obtained from members of the author's community if such a community exists.

Fake celebrity addresses

To draw attention to the project, scammers can use the technique of creating fake advertisements purporting to be celebrities. Not all netizens verify the authenticity of celebrity participation. Before the hype rises, scammers may have time to deceive many gullible investors.

In some cases, scammers hack celebrities' social media accounts to address audiences on their behalf. For example, this is how, in July 2020, scammers lured assets from subscribers of several celebrities, including Microsoft founder Bill Gates.

Money laundering

To see the full picture of how NFTs are being used, it is worth mentioning money laundering as well. Unscrupulous persons are trying in every possible way to legalize material resources obtained illegally. And NFTs are very suitable for these purposes.

De facto, the industry is practically unregulated, and the value of tokens cannot be objectively assessed, it is possible to maintain anonymity for both the seller and the buyer - the perfect laundry for dirty money.

On the website Hacker News, users call NFT the best money laundering method in the world of cryptocurrencies. No transportation, no need for physical storage, minimal or no KYC verification requirements. There is no difficulty to create, for example, a jpeg file and "selling" it for several hundred thousand dollars.

In the context of illegal ways to use NFT, it is worth mentioning tax evasion. The problem is widespread, market analysts are already talking about it. Buy a token, sell it at a lower price, and record a "loss" - the tax liability is compensated because there is no profit.

Crypto analyst Mr.Whale believes that money laundering operations have played an important role in the sharp growth of the NFT segment. The problem is of a large-scale nature since the US regulatory authorities have already paid attention to it. Several measures are being developed to curb such activities. NFT marketplaces may soon be equated with art brokers. If NFTs are recognized as cryptocurrencies, which is not excluded, then mechanisms for AML (Anti Money Laundering / Anti-Money Laundering) and KYC verification will become mandatory on NFT platforms.

It is also possible that the SEC (US Securities and Exchange Commission) recognizes NFTs as securities. In this case, the SEC will directly regulate the market.

In fairness, it should be noted that at one time both bitcoin and cryptocurrencies, in general, were also associated with money laundering. That did not stop cryptocurrencies from becoming a multi-billion dollar industry.

Opinion of opponents of the NFT

To study the topic of NFT in many ways, it is worth reading the opinion of the author, who considers this technology useless. The main points of the article: NFT is a token, and any token in itself has no value. A token can only be exchanged for value in a system that is ready to accept that token. By analogy with a token for travel in the subway.

Conclusion 

In general, we can say that the NFT sphere is in its infancy. Thanks to the hype that has now arisen around this type of asset, we are seeing huge movements of material resources. If you look at the situation impartially, you can see that most often behind the huge prices for popular NFTs there is just an expectation that the asset will rise in price. And most often, there are no practical justifications for such expectations. The only thing driving the price of the popular NFT is the actions of professional marketers.

Also, the NFT sphere is currently flooded with scammers. Since this industry is controlled mainly at the level of the rules of certain sites, participants in this market should pay increased attention to security.

Nevertheless, this technology has great potential. The community that is interested in NFTs is huge. The NFT subreddit alone has about 400,000 members. This technology has yet to find a more useful implementation for itself than simply inflating prices into pictures.

Probably, one of the important vectors for the development of NFTs will be the metauniverses. NFTs fit in well there.

The same applies to the Utilities and Finance segment, where NFT technology has yet to find its way.

And NFT, of course, will remain both in collecting and in art. It will just become more stable and civilized.

 

 


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