HOW NFTs WORK & HOW THEY GET THEIR VALUE
Nonfungible tokens prove ownership of a digital item; an image, sound file or text – in the same way that people own crypto coins.
Unlike crypto coins, which are identical and worth the same, NFTs are unique.
An NFT is worth what someone is willing to pay for it, which can be a lot if the NFT is made by a famous artist and the buyer is a wealthy collector.
NFT marketplaces do not always accurately describe the value proposition of the goods they are selling. The truth is that the value of any NFT is speculative. Its value is determined by what someone else is willing to pay for it and nothing else.
Turning something as ephemeral as a tweet into an item that can be sold requires two things: making it unique and proving ownership. The process is the same for cryptocurrencies, which turn strings of bits into virtual coins that have real-world value. It boils down to cryptography.
Keys and blocks
Cryptography is the technique used to protect privacy of a message by transforming it into a form that can be understood only by the intended recipients. Everyone else will see it as only an unintelligible sequence of random characters. This message manipulation is enabled by a pair of keys, public and private keys: You share your public key with your friend, who uses it to transform his message to you into an unintelligible sequence of random characters. You then use your private key to put it back into its original form.
The special mathematical properties of these two crypto keys are widely used to provide secrecy and integrity. Two crypto keys play the role of digital signatures and are commonly used in blockchain to enable both authentication and anonymity for transactions.
Blockchain is a crucial technology for creating NFTs. It uses cryptography to chain blocks into a growing list of records. Each block is locked by a cryptographic hash, or string of characters that uniquely identifies a set of data, to the previous block. The transaction records of a chain of blocks are stored in a data structure called a Merkle tree. This allows for fast retrieval of past records. To be a party in blockchain-based transactions, each user needs to create a pair of keys: a public key and a private key. This design makes it very difficult to alter transaction data stored in blockchain.
NFTs AND CRYPTO
When you pay for an NFT, what you get is the right to transfer the token to your digital wallet. The token proves that your copy of a digital file is the original, like owning an original painting. And just as masterpiece paintings can be copied and distributed as inexpensive posters, anyone can have a digital copy of your NFT.
Although blockchain was initially devised to support fungible assets like Bitcoin and other cryptocurrencies, it has evolved to enable users to create a special kind of crypto asset, one that is nonfungible, meaning provably unique
The NFT market is likely to grow further because any piece of digital information can easily be “minted” into an NFT, a highly efficient way of managing and securing digital assets.
THE COMING CRYPTO ECONOMY
NFTs have already accelerated a larger trend of digital economic innovation. NFTs have confirmed that the public is feeling increasingly favorable toward a crypto-economy and is embracing short-term risks in return for creating new business possibilities.
IN CONCLUSION; NFTs have already made significant inroads into the luxury and gaming industries, and have plenty of room to grow beyond these initial applications. The art sector will continue to be an important segment of the overall NFT market and is likely to gradually reach maturity over the next couple of years, although it is likely to be surpassed by other digital certificate applications like trademarks and patents, training and upskilling certificates.
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