What are NFTs?

Please note that VanEck has exposure to Bitcoin and holds a position in Ethereum.

A non-fungible token (NFT) is a blockchain-based cryptographic token that cannot be exchanged one-to-one like BTC or ETH. NFTs may be wholly digital assets or tokenized replicas of physical assets. They can serve as evidence of authenticity and ownership in the digital space because they aren't interchangeable with one another.

Fungibility describes the interchangeability and near-identicality of an asset's parts. Fungibility allows for unrestricted trade and since there is theoretically no way to know the past of each unit, it is a desirable quality for currency. That is not a feature that collector things should have though.

These tokens are one-of-a-kind, scarce, and completely recognizable from one another. On the blockchain, NFTs can be used to represent physical items as well as digital collectibles. Other industries that can use NFTs include the metaverse and digital identity.

Additionally, NFTs are associated with a new type of digital art that has gained popularity. However, they also have potential uses in a wide range of industries, including fine art, video games, digital identities, licenses, certificates, and even fractional ownership of goods.

How Do NFTs Work?

For the creation and issuance of NFTs, there are several different frameworks. ERC-721, a protocol allowing the creation and exchange of non-fungible assets on the Ethereum blockchain, is the most well-known.

Other standards, such as ERC-1155, have been introduced. It creates a whole new set of possibilities by allowing a single contract to incorporate both fungible and non-fungible tokens. A better level of interoperability is made possible by the standardization of NFT issuance, which ultimately benefits users. It implies that transferring distinctive assets between several applications can be done rather simply.

Your NFT will be stored on an address, much like other blockchain tokens. It's important to remember that NFTs cannot be copied or transferred without the owner's consent, not even by the NFT's issuer. An NFT-enabled wallet like Trust Wallet is a good option if you want to store and access your NFTs.

Open marketplaces like OpenSea on Ethereum allow for the trading of NFTs. NFTs are subject to price variations in reaction to changes in market supply and demand as well as cultural trends to which some NFTs are linked.

The worth is not inherent in the object itself, just like with any other valuable item; rather, it is determined by those who appreciate it. Value is essentially a shared conviction. It makes no difference if it's fiat money, gold, silver, or a car; these items only have value because people think they do. Every desirable item gains value in this manner, so why shouldn't digital collectibles?

NFT Use Cases

NFTs can be utilized as investment products, collectibles, or for a variety of other useful uses. One of the main applications of non-fungible tokens is online gaming. Additionally, adopting blockchain to tokenize in-game assets is just going one step further given that many online games already have their own economies. The frequent issue of inflation that many games face might be resolved or at least lessened by the introduction of NFTs.

While virtual worlds are already thriving, tokenizing real-world assets is another fascinating application of NFTs. These NFTs can stand in for pieces of real estate that can be kept and exchanged as tokens on a blockchain. This could introduce some well-needed liquidity to many markets that otherwise wouldn’t have much, such as fine art, real estate, and rare collectible items.

Another industry that can profit from the characteristics of NFTs is digital identity. For many people worldwide, increasing privacy and data integrity would be accomplished by storing identification and ownership data on the blockchain. At the same time, friction related to exchanging personal data may be decreased by simple and trustworthy transfers of these assets.

How Do You Invest in NFTs?

One way to invest in non-fungible tokens is to buy them on NFT exchanges. NFTs cannot simply be purchased using a credit card or a payment service provider like PayPal. This technique requires both a crypto wallet and some cryptocurrency.

A more diverse way to gain exposure to the development of NFTs is to invest in the underlying technology. NFTs at their core are simply smart contracts that adhere to a certain standard. For a smart contract to exist and execute, it needs a smart contract platform and execution layer. Many NFTs are created using Ethereum. VanEck provides a straightforward, diversified and easy way to invest in a broad and dynamic selection of smart contract platforms that enable NFTs.