This is a guide for people who are familiar with everything discussed in the Beginners Guide to Crypto, and for people familiar with the basic function of a DEx I outlined in section 2 of the Beginners Guide to DeFi.
You should also be familiar with the concepts in the previous Advanced DeFi Guides linked below.
The most important thing that you should know about NFTs before you continue reading is that 99.99% of them will be valueless in the span of a few years. If you’re holding one and it has value at the moment, that moment will likely last a single market cycle at best. We’re going to get into the 0.01% here in this guide and how to best identify them.
Table of Contents
What is an NFT
Why Most NFT’s are Ponzi’s
I bought an NFT
Airdrops
Community Access
The 1%
Conclusion
Internal References
1. What is an NFT
This is a basic explainer for those who know nothing about NFTs but understand blockchain. If you do not understand blockchain at all, you should consider reading my Beginner Guides to Crypto.
Beginners Guide to Wallets & Transactions
If you have a basic understanding of crypto, an NFT is a type of token that can be created on a blockchain. NFT stands for Non-Fungible Token. This is essentially a unique token written on top of a Layer-1 blockchain. The token itself is wholly unique and there cannot be, nor will there ever be another identical token on the blockchain. However, what the NFT represents can be derivative, common, profane, or a copy of something basic. Just because the token is unique does not mean it represents anything with any unique value.
Since an NFT is unique, it can be used to denote ownership. So if the NFT that links to a piece of art created by an artist’s verified wallet is in your wallet, you can prove ownership without a shadow of a doubt.
This brings a few things into consideration when buying NFT art. Can you track it back to the original artist or someone claiming ownership of the original? Anyone can make an NFT of an image they right-click saved and put it up for sale. Yet, the value of ownership only tracks if it’s linked to the original wallet or work that created it.
In the above case, the group bought the original art and burned it in a fire, they then listed an NFT of an image of the art to the blockchain and sold it for nearly $400,000 on the blockchain. In this case, the buyer values the NFT because of the story and its tracking back to the burned painting. For similar reasons, you can go to art and decor stores and buy prints of famous paintings for $19 on a poster, but if you were to try and buy the original “Starry Night” or some other such painting it would cost you hundreds of millions of dollars if not more. When people buy collectible artwork, they buy a story that they can tell others. Similarly, your NFT must also tell a story if it is to hold value.
There is one other distinction that you must understand about NFTs if you are to buy them. The artwork for the NFTs can either be stored on-chain or can be represented by a weblink that links to artwork stored off-chain. At the moment, very little data can actually be stored in a single block on-chain, so it’s quite common for most NFT projects to link to an off-site decentralized storage database like IPFS (InterPlanetary File System). If you wanted to speculate on this aspect of decentralized storage services, you could certainly speculate on FIL (Filecoin) which is another service provider of decentralized storage. Both of these function similarly to projects that those of you who pirated movies and games in the late 2000s may be familiar with, BitTorrent.
However, decentralized file storage isn’t in the spirit of NFTs. In my opinion, artists should work within the limitations of the technology of the time. The most popular NFT collection on ETH (Cryptopunks) is a collection of 24x24 pixelated images. They pre-date the ERC-721 token standard that was created for NFTs and are a custom contract. The images for every single crypto-punk are on the ETH chain itself and at the time each one cost about 0.0268 ETH to put on chain.
The CryptoPunks were the first NFT collection on ETH and represent the users who were the most active in the DeFi space at the beginning. If you own one, it is assumed you are such a user, and the wallets holding these NFTs are often targeted for Airdrops and Whitelists as it is assumed that any project that can get these users to participate in it is a project with significant clout among its userbase. Essentially, owning one is a ticket to free money, but more importantly to clout within the space.
This is not the only project on ETH that is a surefire winner to hold value over time, but if you had to make a Lindybet on which NFT project will hold its value the most over 10 years, this would be it.
So, an NFT is an individual token minted on a blockchain. I’ve given examples of art NFTs above, and of NFTs that store data directly on the blockchain as well as those that reference data stored off-chain. But an NFT doesn’t always have to be art. Some other theorized uses of NFTs are membership to clubs or chats, tickets to events, or even ownership of Real World Assets. We’ve seen very little of this materialize as of yet though.
An example of such however is the Chainsmokers “So Far So Good” Album NFT. It was released 2 years ago alongside the album to 5,000 fans. It pays out 0.0002% of streaming royalties to NFT holders every 6 months (~$4.40 so far per NFT) and grants holders access to exclusive events, a discord with the band members, and backstage access at shows.
The last NFT sale was $19.80 on December 15th, and it’s quite likely that as time passes this NFT will become less and less valuable, but the actual value wasn’t the point. To a fan of the artists, the discord access and backstage access at shows were probably priceless over those two years. The streaming revenue of the NFT was probably an afterthought for most. The NFT as a membership for a fan in the moment is an example of how membership can be token-gated in ways that are easier to verify and trade than a physical ticket which can be forged/faked/duplicated and harder to trust.
It wouldn’t be surprising to see event tickets and club memberships eventually financialized on-chain in this way in the next 5-10 years, but for now, most uses of NFTs have been centered around speculative trading. In this cycle we will see chains like AVAX launch games where characters, items, weapons, and skins all become NFTs as well, and maybe this will begin to enter mainstream gaming in a short time, but that is not the focus of this guide.
Instead, we’re going to focus on how to identify value within NFT projects in the current market, and you’re going to need to know why most NFTs are Ponzi’s before you can do that.
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