Non-fungible tokens or NFTs are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency – they cannot be traded or exchanged, one for another. This differs from fungible tokens like cryptocurrencies - BTC, ETH, SOL, etc which are identical to each other and, therefore, can be used as a medium for commercial transactions. Every file and/or NFT that is being uploaded to the blockchain needs to have cryptographic hash (unique fingerprint) in order to be uploaded on blockchain as metadata.
What makes them valuable?
The value of an NFT can lie in the utility it provides the owner (proof of ownership of a real world asset, access to a website/game, or to a community), its history, its potential future value, or just the buyer’s perception (we like the art).
How do I get an NFT?
To obtain an NFT, you can mint it or purchase it from an NFT marketplace . The minting process is how an NFT is algorithmically generated from its contract, and the price point for minting an NFT is much lower than the price on the marketplace (sometimes, free). However, popular projects usually mint out very quickly and buyers have no choice but to purchase from the marketplaces like Opensea, Nifty, etc.
Arguably the most popular secondary market for trading NFTs is Opensea. However, you can also trade on sites such as Looksrare and Gem. You might notice that all the assets on these sites are priced in Ethereum. Ethereum was the first blockchain to support NFTs and is the most popular blockchain network on which to interact with them, so by extension, the NFT markets with the most activity are on Ethereum. Other blockchains such as Solana and Cardano also support NFTs, but the Ethereum NFT marketplaces is where most new entrants to the market start their journeys. Is it possible to just make your own NFT? Yes.
Getting started
Before you buy or mint your first NFT, the first question you should ask yourself is ‘why am I buying this picture of an ape for $3,000?’ You have to be clear on your reason for entering the market. Is it because you like the art/artists, because you’re looking for utility, or because you’re looking to make some cool cash (lets be honest, this is the reason, isn’t it?). If you’re in it for the art or utility then by all means, buy all the ‘jpegs’ you can. But if you’re looking to make money by buying low and selling high, then you have to be a bit more discerning with what you purchase.
Are you Long or short (term)?
You need to decide whether you’re buying an NFT for its long-term value, or for a short term flip. If you believe in an NFT project and its team, then buy in at whatever price you think is fair and hold on to it. If you’re in it for the short term, then you’ll want to consider a few more factors, which will be discussed below:
Liquidity: A key difference between the non-fungible markets and other cryptocurrency markets is the illiquidity of most non fungible assets - an illiquid asset is one that cannot quickly and easily be exchanged for cash). If I need to sell a Bitcoin today, I just hit the sell button on my trading app and it’s done in a microsecond. However, when you purchase an NFT, you’re stuck with it until another buyer is willing to take it off you at a mutually agreeable price. If the market deems that your NFT isn’t worth buying at any price, then you’re stuck with that asset for life. So you might want to make sure you at least like the NFTs of whatever you’re buying or minting, so just in case you cant get rid of it, at least it looks nice.
Who’s on the team?
The team behind an NFT project is one of the most important factors. You want to know who is leading the project, if they’ve worked on anything before, whether they are anonymous or doxxed (identities known), and what roadmap they have for the project (if any). Teams from successful projects will often lend their clout to new projects they are involved in or are collaborating with, and because people are attracted to success, the new projects often succeed. For instance, Fishy Fam was backed by the project leads of Alien Frens, and the team behind Approving Corgis is also behind the immensely popular Tasty Bones. A consequence of this is that entry barriers for new projects by previously successful teams are much higher; the starting price for such NFTs can easily be over 1 ETH (about $3,100 today). Additionally, the whitelisting process for these projects are very technical.
What is Whitelisting? Whitelisting is a process of pre-qualifying certain individuals to mint an NFT at a pre-sale price, and ahead of the general public. Usually, this benefit is given to early supporters of the project as a way to reward them for their loyalty. This ensures that these people get in at a cheaper price, and if the project is very popular, it also ensures that they are able to mint an NFT before it gets sold out. Older NFT projects were free to mint, and barely ever sold out. However, with the explosion of NFTs, almost every project is flooded by prospective buyers. This has led to communities limiting the amount of people that can participate in the minting process by whitelisting those they deem worthy. How do you prove your worthiness? By being a ‘productive member of the community’, of course. This means anything from spreading the word on social media and inviting new members to the community, to creating artwork for the project. Because whitelisting offers an opportunity to get into a project very cheap, you quickly find that the demands to get whitelisted for popular projects can be nigh impossible. This has created a secondary jobs market where people pay others to grind out the whitelist requirements for them on Discords.
Discords? Yes, Discord. Discords are where most of the communities developing NFTs are hosted, and if you want to dig deep into a project, you will have to join their discord groups. That way, you are updated on everything happening with the project in real time. We advise following the discord groups of projects you’re in love with (here’s a good one to start https://discord.gg/PyuTdrYAjA). Otherwise, you’ll find yourself drowning in notifications before long. The one good thing about discords though – if a project is a rug, you’ll know about it 5 seconds after the contract is launched (and hopefully before you got into it). It helps with having information against ‘rug pulls’.
‘Rugging’ and Rug pulls: A rug pull is a malicious maneuver in the cryptocurrency industry where crypto developers abandon a project and run away with investors’ funds. If you are in crypto, there is a likelihood have been rugged (scammed) before. Rugs take many forms – the contract can be a rug by design; a weak contract can get hacked by a third party; or the project developers can just decide to stop working on the project and walk away with all the cash they’ve made. To prevent this, go over all the above factors as thoroughly as possible before you enter a project. In addition to checking out the team, the NFT roadmap and the discord group, here are some other tips:
If you can’t read a smart contract, wait for the community to verify that the contract is safe before interacting with it. Best believe, if there is something wrong, it will be called out in seconds.
If you can’t wait, use a burner wallet with just the funds for the purchase to interact with the contract. Once it is verified as safe, you can then transfer the NFT to your main wallet.
Also, beware of airdrops. if you see a token or NFT In your wallet that you don’t recognize, do not interact with it, as this could be used to compromise your wallet. Also make sure you revoke permissions from contracts once you’re done interacting with them.
With all of that said, you should be ready to start your journey into the wild world of NFTs. If you’re more of a short-term trader looking to flip your way to financial freedom, here are a few additional pointers to aid in your quest:
DYOR. You hear this all the time, but it is critical. Do your own research on projects before you buy in. If you are buying just because an influencer tweeted about it, you may just be exit liquidity. One of the golden rules of crypto is, do not be exit liquidity. Information can be found on projects’ official websites, Twitter, and Discord (yes, Discord again). If you want to know about upcoming NFT projects over the course of the year you can check NFTcalendar to find out what’s dropping and when.
Be ready for odd hours. NFTs are a global game, and a lot of buying power lies in the West. So you will often see minting/public sale times scheduled for when the US market is awake, and when regions like West Africa are most likely asleep. That is also when a lot of price action happens in the market. If you’re looking to enter and exit positions quickly, be ready to be up at odd hours. But hey, who needs sleep right?
Look for trends and catalysts. As with ‘stonks’ and cryptocurrencies, NFTs are very susceptible to news catalysts (both good and bad). So keep your eyes and ears peeled whenever you’re in a project. Some bad publicity can tank the value of an NFT more than 50% in a few minutes (an example is the Beeings project). In addition to publicity, keep an eye on the project roadmaps. If project miss their targets, prices can drop quickly as people lose faith in the project. Conversely, if the developers ship consistently, well then, the numbers go up!
Also keep an eye out for trends in the space. Sometimes it is the gaming narrative, sometimes it is the women empowerment narrative. But once a strong narrative is out, often led by one particular NFT collection, everything in that group of NFTs will pump, as people look to buy ‘the next best thing’, which is usually cheaper and thus, has more potential upside.
Don’t miss the Reveal. As an NFT flipper, it is important to know when to jump in and out of the markets. Aside from news catalysts, another key factor to watch is the “reveal”. Most art NFT projects will usually not have the artwork for minted pieces revealed immediately. The pieces will usually sit on the secondary marketplace for a few days before the reveal takes place. This allows for speculators to enter the market and grab as many pieces as they can. After the artwork is revealed, a market selloff usually occurs for most projects. This is because a lot of collectors buy in looking for NFTs with rare features, that sell for a much higher price than other NFTs in the collection. Once the reveal takes place, there’s a mad rush for the rare pieces, and once those are secured, many market players sell off the more common pieces, taking down the overall average price of the collection. This is not often the case but they do happen from time to time. A strong project will continue to rise in value after the reveal, especially if each NFT provides utility. But if you’re looking for a quick flip, it is usually best to sell into market strength ahead of the reveal (though there’s a small chance that you might have parted with a 1/1 rare piece).
Data is King. If you are flipping digital assets, you want to know as much as possible about them. What NFT collections are trending? How many items do the collections have in total (scarcity)? How many people are buying and selling it (volume)? What are the strong price floors and ceilings (support and resistance)? What is the the market cap, unique owners (whale potential)? The home page of most NFT marketplaces (Opensea, Looksrare) will show you the top trending collections most of the time. But more detailed data can be looked up on sites/tools such as Icytools, Defillama or Rugburners.
Bots are running the streets. Bots do everything; they join discords, spam mints from contracts, front run your buys, snipe rares, sweep floor pieces before you can snag a single one. You name it. So if you’re looking to play the game, just be aware of what you are up against. Maybe get a bot of your own, if you are savvy or a tool that helps you optimize your purchases, like Genie.
Everyone is a potential ‘enemy’. It’s not just the bots; everyone in this market is here to run one on you. Any illicit activity you can fathom is at play in the crypto markets; insider trading, wash trading, gatekeeping, outright rugging, you name it. It is the wild west out there, so do your research and be careful.
Oh, and it is advisable to store your most valubale NFTs (and all your other crypto assets) on a hard wallet - Trezor, Ledger, KeepKey, CoolWallet, NGrave, and SafePal Wallet, which have evolved to support multiple cryptocurrencies and NFTs.
The market capitalization and trading volume of NFTs grew exponentially in 2021, with trading volume surpassing $13 billion, according to The Block Research. In 2020, NFTs had a trading value of just $33 million. As at 28th December, 2021, the trading volumes of NFTs saw an increase by 42,988%. OpenSea, the leading NFT marketplace, facilitated nearly 88% of the total trading volumes for 2021, or over $12.5 billion.
NFTs have become a major topic of discussion in the crypto space, thanks to several highly priced collections such as the Bored Ape Yatch Club, as well as the celebrity effect. Increasingly, institutions, celebrities, intellectual properties (IP) and retail investors are finding their way into this emerging field. The NFT space is in its early stages of development, with projects spanning from the development of stand-alone projects such as NFT-enabled games, and market places such as Opensea, to exploring high-usability bottom-layer NFT infrastructure. There are also larger-scale projects and IPs which self-develop the blockchain for their own NFT issuance, enhancing the NFTs ecosystem. The big question is, “are NFTs scalable?”
Infrastructural hurdles in the fast-paced NFT Market
While the NFTs spaces continue to grow, NFTs are dependent on various infrastructures to ensure their sustainability. Ethereum still remains the major blockchain infrastructure NFTs are primarily minted and authenticated on. The major issues of the Ethereum network are high transaction fees, network congestion, and an unsatisfying user experience. It makes the adoption of NFTs, a high-barrier-of-entry product, even more difficult. Many retail investors do not enter this market because of the high transaction fee. In addition, Ethereum can not achieve cross-chain operation. Hence, it is critical for the NFT industry to look for a scalable solution that supports high frequency trading.
“Public blockchain, side chains and Layer 2 solutions are alternatives.”
Although Ethereum is strong in Defi, its advantages on Web 3.0 and NFT areas such as gaming, social media, and communications have not been seen. That provides new market opportunities for emerging public blockchain, side chains and Layer 2 solutions. While it is still uncertain whether there will be any absolute winner in NFT infrastructure, solutions with highly competitive technology and high-quality ecosystems could better drive product adoption in the market, and are more likely to become leading projects in NFT infrastructure.
Value of these Solutions
Different applications will choose between public blockchains, side chains and layer 2 solutions based on their respective requirements and circumstances. The characteristics and applicable use cases of the three solutions are:
Public blockchain: the advantage of public blockchain is that developers can work in the existing development environment without handling the cross-chain and anti-synchronism issues between Ethereum main chains. However, it requires highly specialized nodes to handle the foundation-layer workload and decentralization might be compromised to some extent. In addition, there is no restriction on the applicable NFT use cases. But the public chain’s ecosystem and community activeness are the major considerations.
Side chains: applying side chains to Dapps is fast and cheap, but security is a major concern. Compared to main chains, side chains are less strong in computing. Thus, it can be difficult to maintain the consensus mechanism and attacks may easily happen. Side chains are applicable to projects with small amount but high frequency transactions that are willing to compromise some level of security, such as NFT trading platforms and games.
Layer 2 Solutions: Layer 2, closely connected with the Ethereum main chain, can fully leverage Ethereum’s comprehensive financial infrastructure. Disadvantages differ among Layer 2 solutions (e.g. zk Rollup, Optimistic Rollup, etc). They are more applicable to relatively mature Ethereum-based NFT projects which want to migrate a portion of functionalities or processes (e.g. migrating the voting function).
It is difficult to find a balance among decentralization, security and scalability for scaling solutions. Some would call it a ‘trilemma’, which has been discussed in many articles about scaling solutions. We do not think there will be an absolute winner in NFT infrastructure. Instead, there will be more solutions integrating L1 and L2. For example, Polygon adopts Plasma and Rollup, as well as PoS side chains, in order to fulfil the needs of different developers.
Furthermore, Technology, ecosystem, team and investors are key metrics of NFT infrastructure evaluation.
Technical strength. Technical strength is the foundation for NFT infrastructure survival and the most important consideration factor when evaluating an early-stage infrastructure project. Whether the technology can be leveraged to solve the scalability issue and enhance user experience is the primary criteria when many NFT Dapps choose migration solutions. Developers can evaluate the technical strength of a network based on the project’s whitepaper and external media review.
Ecosystem completeness. Apart from technical strength, the quality of the ecosystem determines the longterm sustainability of the infrastructure. Ethereum is an example. The number and quality of Dapps as well as access to IP resources are key metrics to evaluate the quality of a NFT infrastructure ecosystem.
The number and quality of Dapps: The number of Dapps is easy to understand. Statistics websites such as DappRadar or project websites can be referenced to check the list of NFT Dapps on a blockchain network. In terms of quality, key indicators include active user base, transaction volume, community activeness, and external review. Assessing the number and quality of NFT Dapps is valuable to determine whether that network is suitable to build NFT projects on.
Access to IP resources: A key difference between NFT and Defi is that NFT represents the tokenization of more real-life hobbies and has higher requirements on entertainment, social engagement and markets. High-quality IPs usually bring significant attention to the projects, driving the integration of capital and market adoption and ensuring a sufficient audience base. Access to IP resources is particularly critical in the competition of NFT public blockchains. Flow is a reference of good access to IP resources. Flow is a fast, decentralized, and developer-friendly blockchain, designed as the foundation for a new generation of games, apps, and the digital assets that power them. It is based on a unique, multi-role architecture, and designed to scale without sharding, allowing for massive improvements in speed and throughput while preserving a developer-friendly, ACID-compliant environment.
The main reason that Flow can become a good reference is because of its access to quality resources in the ecosystem. An example is the sales of the popular game NBA Top Shot is approaching US$500 million now and its increasing popularity.
Team background and Investors. Users can assess whether the NFT infrastructure development team has built any successful similar projects previously. The familiarity of team members on NFT could be a supporting metric. Examples are Crypto Kitties by Dapp Labs and Gods Unchained by Immutable X.
In summary, many people believe that NFT technology is going to revolutionize entire industries and impact our daily lives in unimaginable ways This makes the investment case for NFTs pretty clear. Buying individual NFTs may not be the only approach for an investor.
One alternative option is to invest in the cryptocurrencies of the underlying blockchains or blockchain scaling solutions on which NFTs are created. You can also invest in the NFT marketplaces that are experiencing massive growth regardless of which NFT projects perform the best. Some of these have their own cryptocurrency tokens and some are listed on the US stock exchange along with other companies with NFT exposure. Also, fractionalization and utility tokens provide a way for you to invest in some of the leading NFT projects without having to buy the NFTs themselves.
Now, while these options may reduce some of the risk associated with trying to pick winning NFT projects, it is important to note that they are all still highly speculative.
ICYMI
Top [NFT] Collections of the last 24 hours. Link
Colorado to accept Bitcoin for State Taxes. Link
Art101.io releases final details for NFT based on Ethereum's creator - BASED VITALIK. Link
NYSE eyes NFT trading with trademark application. Link
JP Morgan, the first bank to enter the metaverse - ONYX Lounge. Link