Non-Fungible Tokens (NFT)

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Coinmonks

8 min readJan 25, 2022

Brief Overview

The word ‘fungible’ means equally replaceable or exchangeable. For instance, I collect an N100 note from you and give you another N100 note. You won't feel cheated, because the two notes carry the same value. This is what fungible means.

Non-Fungible, on the other hand, means non-exchangeable. An item that is non-fungible cannot be replaceable with another, it is unique. For example, the Mona Lisa painting is a unique piece of artwork. There is no other one except knock-offs and fakes. Any item that is unique is non-fungible. Paintings, drawings, music, movies etc. can be called non-fungible items.

To put it together Non-Fungible Tokens (NFT) are unique items on a blockchain.

Ethereum is the most popular smart contract blockchain. This made it the popular space for NFTs to thrive. As more smart contract blockchains are launched, we will see more activity there.

NFT starting becoming popular in 2021. In March 2021, Vignesh Sundaresan bought an NFT called “Everydays: The First 5,000 Days” for $69 million. This, to date, is the highest price paid for an NFT. It also contributed to the popularity of NFTs.

At the end of 2021, the entire NFT market was valued at $41 billion

How to Profit from NFTs

For Creators

These are persons who create music, artworks and videos. They are able to mint (upload) their unique work in the NFT Marketplace such as OpenSea, Rarible, BinanceNFT etc.

After minting, they can then set a price at which the NFT will be sold. NFTs can be priced at a fixed price or an auction price. Fixed price would imply setting a price at which the NFT will be sold. For auction pricing, the final selling price will be determined by a bidding process. The creator would only set a start price and people would bid for a specified period of time. At the end of which the highest bidder secures the NFT.

For both pricing methods, the creator needs to take into account mint fees. A Mint fee is a charge for the energy used in processing any NFTs transaction. Like I mentioned earlier, Ethereum has the highest NFT activity, however, the system is usually congested leading to high gas (transaction) fees. This has affected the overall activity on the blockchain. Transactions fees are too expensive, sometimes even larger than the amount the user wants to transfer. This has led to the creation of Layer-2 scaling solutions and Rollups like Polygon Network, Arbitrum, Optimism etc. This is also part of the reasons Ethereum plans to migrate to Proof-Of-Stake creating Ethereum 2.0.

OpenSea is the largest NFT Marketplace and it is on Ethereum. Minting Fees are around $100 at least. The payment of this fee doesn't guarantee the NFT will be minted. This, along, with other fees has raised the barrier of entry for creators, especially in low-income countries like Nigeria. Unless a creator has reasonably large capital, they cant mint their NFT.

BinanceNFT is a good alternative. The gas fees are low as it is not on the Ethereum network. BinanceNFT is on the Binance Smart Chain (BSC). The mint fee is 0.005 BNB. This is really cheap compared to OpenSea. However, BinanceNFT pre-registered and screened creators before launching the platform. They are not currently allowing new creators on board. This is a major drawback, unlike OpenSea is totally decentralized and anyone can mint an NFT.

OpenSea is currently working on ways to enable creators to mint NFTs for free.

Apart from the earning from the selling price, creators can also set a royalty percentage on their NFT. This means they will continue to earn a percentage of the selling price at every point the NFT changes hands.

That is from the creator’s angle.

For Non-Creators

This applies to people who don’t have any artistic skills — you can’t draw, paint, sing, design etc. You can still profit from trading NFTs.

Trading and investing in NFTs like investing in cryptocurrencies, requires carrying out research to examine certain metrics to determine if an NFT has future potential.

These metrics need to examine for anyone investing in an NFT — this applies to both creators and non-creators. This is pretty much how to Do Your Own Research (DYOR) for NFTs.

This method or framework was developed by Guy of the Coin Bureau on YouTube. Here are the things to look out for:

1. Art

2. Founding Team

3. Roadmap

4. Community

5. Trading metrics

1. Art

Now, as much as the valuation of art can appear so irrational, it is not actually. There are certain factors that determine if a piece of art is valuable or not. If pieces of art are irrationally valued, then almost anything can be valued highly. Most of the art pieces that have sold for millions of dollars like a Van Gogh, Picasso and so on have certain things that make them valuable, the same applies to NFTs.

For NFTs, the rarity is King. For instance, Bored Apes Yacht Club (BAYC) has Bored Apes NFTs with 172 unique AI-generated traits that are individually assigned. This is one of the reasons why Bored Apes are so valuable.

This is why NFTs are not necessarily “beautiful”, some may appear disgusting but they are very valuable. Last year, Bored Ape #8585 NFT was sold for $2.7 million making it the most expensive one of the BAYC. Eminem recently bought a Bored Ape NFT for $460,000.

It is very important to check the number of rare and unique traits. If a collection has a high volume of NFTs but a low number of unique and rare traits, it is not good. For instance, a collection has 20,000 NFTs with just 20 unique and rare traits, this means there will be little or no rare NFT in the collection.

The higher number of unique and rare traits in a collection, the higher the value of the entire collection. Certain NFTs are more valuable than others because they have certain rare traits that increase their value. Remember, these NFTs are randomly generated by AI, the algorithm randomly assigns traits for NFTs, so buyers have to be on the look to acquire these valuable NFTs.

Rarity is really hard to spot for NFTs. Rarity.tools is a site where rarity in NFT collections is ranked. OpenSea also shows the rarity of various unique traits under the Properties section of each NFT.

2. Founding Team

The team behind the NFT collection is also very important. They play a huge role in determining the value of the collection. For example, Matt Furie is the creator of the Pepe The Frog cartoon which later became a meme (In Nigeria, the comrade meme). In August 2021, he launched his Sad Frogs District collection with 7,000 frog images on OpenSea. According to Vice, within a week, Sad Frogs District had netted $4 million in trading volume, with a median price of $450 in ether per sad frog.

This level of trading activity and high valuation wouldn’t get possible without the credibility of the founder.

This is a general rule of acceptability in the cryptocurrency space, however, the team behind BAYC is totally anonymous. They refer to each other with weird names. It seems to still work for them and BAYC is one of the most valuable collections today

3. Roadmap

A project roadmap in cryptocurrency contains the various stages of the project, milestones and timeline. It essentially contains the project lifecycle.

Roadmaps were not common in NFTs. CryptoKitties was one of the first NFT collections to be minted on Ethereum, it was minted in 2017 to experiment with the ERC-721. The same is the case of CryptoPunks

This narrative was changed by BAYC, roadmaps are now more important than ever before for NFT projects. Roadmaps for NFTs would contain future goals, partnerships, token drops and utility of these NFTs.

It is important to read the roadmap for the NFT collection you intend to buy. It also shows how the project intends to drive adoption and improve the image of the collection. Certain actions such as offering free NFTs for holding existing ones, exclusive membership for long-term holders, access to launchpads and NFT stakings can increase the value of a project in the future.

Finally, it is important to note that a roadmap is just a story — even scam projects create roadmaps. It is until milestones are hit before such a roadmap becomes reliable.

4. Community

This is another factor to consider before investing in an NFT collection. It is important to examine the level of engagement a project has online, especially on platforms such as Twitter, Discord and Telegram. A project with higher followership and engagement is generally a good sign for the overall valuation of a project.

This is because it shows there is high demand for NFTs in that collection, this presents a market to sell NFTs as many people are willing to buy. In short, it provides good liquidity

An NFT collection with little to no community means there is will few people to sell those NFTs to.

5. Trading Metrics

This refers to the level of trading that occurs in the NFT collection. A high trading volume is generally a good sign, it shows a high level of liquidity as well as high trading activity.

It is important to ensure that the supply is balanced with the number of holders — a good supply to demand ratio. The supply side is usually fixed; BAYC has 10,000 NFTs and CryptoKitties have 2 million NFTs.

To examine the supply to demand ratio, you need to examine the number of holders to determine this. On OpenSea, BAYC has 10,000 NFTs with 6,200 owners, this brings the supply to demand ratio to 1.61 NFTs per owner. This is good as in a situation someone sells all the NFTs they owner, it would not affect the value of the entire NFT collection.

In contrast, if a collection has 10,000 NFTs with 200 owners, this results in a supply to demand ratio of 50 per owner. This is obviously bad a single seller can drop the value of the entire collection.

These are the fundamentals you will need to understand before venturing into trading or investing in NFTs, especially if you want to be profitable in the long term. Again, a systematic approach to investing in NFTs is very important just like any other cryptocurrency.

There are a lot of things I didn’t mention when I did the overview of the NFT space, I didn’t mention NFT games like Axie Infinity, Sandbox etc. I also didn’t talk about NFTs in the metaverse.

The NFT space is still relatively new and it is set to not only revolutionize the art sector but also be at the forefront of the rise of the metaverse. In 2021, MorningBrew reports that the total NFT sales ($41 million) nearly equalled all global sales ($50 million).

That’s massive. Expect a lot more growth as NFTs would find more use cases in the metaverse

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Written by Opeyemi