How to be an expert on NFTS... well kinda
The ultimate beginners guide on NFTs! Here you will learn the basic topics that will let you ramp-up quickly in the space! It's a long read, so feel free to skip to the sections you care about!
Disclaimer: None of this is financial advice. I am not a professional. I am simply exploring my opinions of NFTs thus far. As always, do your own research before making a financial decision.
"You just paid $20,000 for a JPEG???" This is probably the most common response when I tell strangers, even friends or family, about my profile picture. My profile picture (the same image used as my author avatar) belongs to a special community called The Bored Ape Yacht Club. What exactly is this club? A limited NFT collection of 10,000 Bored Apes and 20,000 Mutants. The entry? Around 40 ETH ($140,000 USD) for a Bored Ape and 5 ETH ($17,000 USD) for a Mutant. Okay, so why? To understand why this is important, we need to understand NFTs.
In this guide, I'll explain everything you need to know about NFTs. From what is an NFT, some background, blue-chip/historic projects you must know about, and much more. Basically teaching everything I've learned about this space and to give context about the evolution of NFTs throughout 2021. If you're new, this is perfect for you. If you're an expert in NFTs, maybe you'll learn something, but feel free to check out the table of contents and skip to any section!
Table of Contents
- What are NFTs?
- How are NFTs generated and sold?
- Notable Project History
- What makes NFTs so valuable?
- Okay you got me hooked, how do I buy an NFT?
What are NFTs?
NFTs, or non-fungible tokens, are unique parts of data stored in the blockchain, most commonly the Ethereum blockchain. Unlike fungible items on the blockchain i.e Bitcoin, non-fungible items are one-of-a-kind and each one has its own value. While there could be many things classified as an NFT, today we commonly refer to this as digital art.
So how is this not just a jpeg?
In order to understand why people are paying ridiculous amounts of money for NFTs, we have to understand their potential. At its core, NFTs serve as certificates of authenticity. Thanks to the power of the blockchain, all data must be public, validated, and immutable. For those who aren't familiar with the blockchain, this basically means we will always know who owns which NFT.
This has led to some pretty cool areas for where NFTs are being used such as:
- NBA licensed digital collectible moments
- Music licensing and royalty from DJs such as 3LAU
- Virtual art galleries and experiences showcasing your digital art such as OnCyber
- Virtual real estate used in the metaverse for gaming such as Sandbox
- Digital Art (particularly generative art)
There's been growing popularity and investments into these new areas. The NBA partnered with Dapper Labs to create NBA Topshot, which recently entered a partnership with Google. Drake had an NFT artist create the album cover for Certified Lover Boy. Beeple sold an NFT for 69 million dollars while an NFT of a rock sold for $1.3 million.
There's much more to NFTs if you want to understand why people are about willing to pay such insane prices. But before you can understand that, you need to learn the backstory of NFTs.
How are NFTs generated and sold?
While I earlier mentioned a lot of different types of NFTs, one of the most popular types are digital art. In particular, a form called generative art has been increasingly popular. In generative art, artists program/code the design and the number of editions to be produced. The code used to generate these are called smart contracts.
One of the prime examples of generative art is Art Blocks, a generative art studio that has had a meteoric rise in 2021. Pieces such as the Fidenza have gone for 1000 ETH, which was roughly $3.3 million at the time of sale.
Minting an NFT
Minting an NFT is simply the process of adding the digital art to the blockchain. Once the NFT is minted the digital art is revealed, which adds a gambling component to NFTs since you have a random chance of getting a rare NFT. Minting an NFT will generally have a price, which is used to both pay the artist and fund the project. You can expect mint prices to be anywhere from 0.02 ETH to 0.1 ETH, with some major projects leading up to even 5 ETH.
To mint an NFT, the project created by the artist or company will generally have an option to directly mint through their website. On some occasions, you will have to directly interact with the smart contract.
Once all NFTs are minted, people generally will buy them through what we call secondary sales which is buying an NFT at the price of a different seller and through a marketplace such as OpenSea.
Back in the old days, maybe like 4 months ago, the NFT space wasn't nearly as popular and a project would be released every day or so. Most projects were trying to figure out how to sell out.
During the time of this article, October 2021, dozens of NFT projects release each day. A lot of people and money have entered this space, and everyone is trying to find the next big thing. Now, a lot of hyped projects are trying to figure out how to prevent bots and gas wars.
If you're unfamiliar with gas, we can think of this as a transaction fee but for the Ethereum blockchain. Specifically, the more gas you pay, the faster your transaction can be processed by a miner. This has led to projects requiring 1-2 additional ETH on gas alone.
This is definitely a complaint for the Ethereum blockchain, but many people are dedicating solutions to this both on the blockchain side and NFT project side including ETH 2.0 which moves from a proof-of-work to a proof-of-stake. You can read more about how this works here.
Notable Project History
In this section, I think it'll be important to go over the history of NFTs, especially for beginners who have just began their NFT journey. Basically consider this section a 3 minute history class dedicated towards NFTs.
It almost feels wrong not to start here. After all, many people have considered punks as the top blue chip project with many NFT influencers, OGs/whales, and celebrities rocking them. Currently trading at 100 ETH ($300k+ USD), Punks are considered a piece of NFT history. Created by Larva Labs in 2017, CryptoPunks are one of the earliest NFTs, predating even the ERC-721 contract that basically every NFT uses these days.
On release, 10,000 Punks were created and could be claimed for free by anybody with a wallet. Like all of the current NFT projects today, Punks are pixelated images generated through computer code. Punks were not hidden and did not have a reveal like NFT projects today, you were able to select which Punk you wanted.
What makes this special? Punks are simply a piece of history. No utility is expected from owning a Punk unlike the thousand of NFT projects these days promising you the world. Christies, a fine art and antiquity holding company even says that Punks are the alpha and omega of the CryptoArt movement
Punks were an NFT with the early concept of generative art, using computer code to generate digital art. Art blocks took this artistry to a new level. Art blocks specialized in on-demand generative art stored immutably on the Ethereum blockchain. What does this mean? Unlike Punks where you could choose the specific Punk you liked, Art Blocks randomly generates a version of this content. You might see an example of what it could potentially look like, but specific traits, interactions, etc, are all random.
Art Blocks are also curated collections. They have a specific board to carefully select projects and artists to work with. This separates them from the standard profile picture project and incentivizes people to buy into Art Blocks for liking the art.
Bored Ape Yacht Club
The digital ape that brought the NFT world in shambles in August 2021 when celebrities such as Steph Curry, Chainsmokers, Marshmello, etc, started using this NFT for their Twitter Profile Picture. Created in late April 2021 by Yuga Labs, The Bored Ape Yacht Club has only been around for ~6 months and has quickly established itself as a top 3 profile picture NFT project.
The NFT project paved the way for the thousands of future NFT projects by being one of the first projects to outline a roadmap - an outline of the team's entire plan for the project including releasing Mutants (my profile picture), a treasure hunt, and hypebeast merch. Nowadays, nearly every project has something similar to this, but the Apes were one of the first. An original BAYC costed 0.08 ETH to mint, and every owner was airdropped a serum, with the most basic M1 serum immediately granting them access to a Mutant Ape that has been consistently selling for 4-5 ETH.
With their roadmap 2.0 released, even more utility is in the works for people in the BAYC community. An IRL clubhouse in Miami, Ape Fest in NYC, DAOs, blockchain games, and collabs/partnerships really makes owning this NFT more like access to a private country club, which is why its the ultimate flex. It's similar to holding a Black AMEX card. So many perks are given to these cardholders but not everyone can get it, and if you have it, everyone knows you must be somebody.
Licensed by the NBA, NBA Topshot was created by Dapper Labs to create collectible basketball highlights as NFTs. Specifically, Topshot takes the concept of trading cards to the next level, with basketball highlights representing the ultimate digital collectible for fans. The coolest part about this is that moments must be ripped through booster packs or bought in secondary sale, and both the rarity and the total editions are all available due to the power of the blockchain.
Unlike 99% of the companies out there, Dapper Labs is a billion dollar company with investors and backers from VCs such as A16z, Google Ventures, etc. What does this mean? It means that Topshot is here to stay and that the team around it is experienced. They have much more obligations and plans than the average NFT project. Dapper Labs even built their own blockchain, Flow, and accepts credit card and non-ETH payment types, making it a beginner-friendly place to NFTs for the basketball fans.
What makes NFTs so valuable?
So we've learned about what NFTs are and a brief history on the most popular ones right now, but why are these valuable? Sure, some NFTs are purely digital art and the artist's popularity drives the price, but the vast majority of projects in the NFT space don't have a Damien Hirst or Beeple designing them. So let's focus on some of the more hidden aspects that make NFTs valuable.
Probably one of the strongest aspects of NFTs is the community. Remember, you're not just buying an NFT, you're buying into a club. The entire space is full of friendly and helpful people, and the networking opportunities are just amazing on both Discord and Twitter, especially when you use your NFT as your profile picture.
Communities are filled with strong and passionate members. One of my favorite examples is again the Bored Ape Yacht Club. One member, Jenkins The Valet, created his own NFT project called the Writers Room. What is this exactly? Basically, the Writers Room is planning to create a book about the Bored Ape Yacht Club. Specifically, the story of Jenkins and his life as a low-level valet ape for the Yacht Club and all the crazy stories he's witnessed during his time there. Owning this NFT gives you voting access for how the story should go, licensing agreements to use your ape/mutant or someone else's with royalty fees, and a finished copy of the book! Oh the coolest part? Jenkins recently partnered with the Creative Artists Agency for representation, the same agency that represents A-list celebrities such as Justin Bieber, Cristiano Ronaldo, Beyonce, etc. How cool is that???
Jenkins The Valet is probably one of my favorite stories of how the community has taken an existing NFT project and made it their own. It really utilizes the IP given from BAYC (you own the commercial rights to your ape) and gives holders an opportunity to both profit and showcase it. But community isn't just that, many projects have derivatives created from pure fans. Cryptoadz is one of the first that come to mind where holders created Cryptoflys, Creaturetoadz, Choadz, etc. All in all, the community really is strong with NFTs.
Bored Ape Yacht Club really paved the way with its Roadmap and Mutants. Basically, they provided utility - or some form of value by just owning the NFT. In this case, we saw merch collabs and a free NFT airdropped to holders. Projects since then have taken this similar concept and now almost every project tries to provide some form of utility. Whether this is a group meetup, community fund, or even a derivative of the project, it's almost certain that owning an NFT will provide some value.
NBA Topshot is a great example of providing real-life utility, especially with their partnership with the NBA. Roham, the CEO of Dapper Labs, once asked the community what collectors wanted for utility, with the result being real-life utility. What did Topshot do? They brought 8 collectors to Game 5 of the NBA Championships in Phoenix. Then they sent 8 more collectors to the NBA Draft in NYC. It still didn't stop there, 8 more also went to Summer League. Finally 38 collectors and their guests were sent to NBA Tip-Off to see the Bucks receive their championship ring and take on the Brooklyn Nets. Not only did they attend the game, they got 2 Suite-level tickets, an exclusive backroom tour of basically everything, and airfare and lodging included. Talk about a once-in-a-lifetime opportunity by owning an NFT!
Something that has becoming increasingly popular for NFT projects is the idea of yield farming, or passively generating income with your NFT. The first project is Axie Infinity, a play-to-earn game where you can earn $SLP tokens to breed new Axies, the game's version of Pokemon. This token and $AXS are both used and traded inside and outside of the game.
Outside of play-to-earn games, profile picture projects such as CyberKongz have also generated methods to earn money, although perhaps not intentionally. 1,000 Cyberkongz Genesis were created and are now at a whopping 130 ETH (~520k USD). Why? Because they are generating passive income through their $BANANA tokens. Each holder of a Genesis is granted 10 $BANANA tokens - which are currently worth $55 each - daily for the next 10 years. This comes up to an insane $200k/year at the current price of $BANANA tokens. These tokens are used to rename their Kongz, alter their biography, exclusive channel access, and breeding Baby/Incubators (which has a current floor price of 7 ETH or 28k USD).
Disclaimer: Taxes with NFTs are pretty new and unknown. It's unclear what tax implications these projects will have. Do your own research, and do not consider any of these projects as financial advice.
This aspect of NFTs is more align with how we are as humans. Naturally, we want things. Especially rare, unattainable things. One example is the Hermès Birkin Bag, which is basically the pinnacle of designer bags that greatly appreciate in value. Why? Because not everyone can get it. It's exclusive. Not only is it from Hermès, one of the most high-end brands out there, you also need to spend enough to be invited by a sales associate to buy one. The bag itself is also crazy expensive and at least in the 5 figure range.
NFTs can be thought of the same way. Not everyone can get them, and they're the ultimate flex symbol. Having someone see a Bored Ape as your Twitter picture and then seeing celebrities such as Steph Curry, Chainsmokers, and Dez Bryant in the same club? It's status now. Similarly to how people walk down the street with a Birkin, drive a Ferrari, or wear a Patek Phillipe watch. The craziest thing? There's only a finite amount of NFTs ever created. NFTs such as BAYC will never introduce anymore in the ecosystem. Imagine if there were only 10,000 Ferraris in the world, how sought-after each car would become.
Okay, you got me hooked, how do I buy an NFT?
The process of buying an NFT is relatively simple, but how to select an NFT to buy is a pretty big topic that is subjective and something I'll maybe cover in the future, so subscribe! For now, let's go over the simple-ish process of how to buy an NFT.
1) Getting crypto funds
The first step to buying an NFT is to first transfer and buy some cryptocurrency. There are many exchanges to choose from, but a good beginner-friendly exchange is Coinbase or Coinbase Pro. They have slightly different structuring for fees so do your own research on the right one for you. I typically use Coinbase Pro and transfer using wire transfers to be able to immediately trade and withdraw crypto (bank transfers will typically take 5-7 business days).
2) Transfer funds to a wallet
If you used something like Coinbase to buy your crypto, then you used what we call a hosted wallet. It's called hosted because a third party like Coinbase keeps your crypto similar to a bank. We need to transfer these funds to a non-hosted wallet that gives us full control of our crypto.
A non-hosted wallet proves a pair of public and private keys used to identify and sign transactions on the blockchain. Your public key is viewable to everyone while your private key/seed-phrase (a randomly generated 12-24 word phrase) is the only way for you to access your wallet and should never be shared with anyone. Write this down or memorize it. Never share this with anyone and don't keep it digitally on your laptop or phone since they can be hacked.
There are two types of non-hosted wallets, software and hardware. Software wallets (hot wallet) typically live on your browser and are more convenient but easier to hack while hardware wallets (cold wallet) are more secure but cost over $100 to buy.
Some popular hot wallets are Coinbase Wallet and Metamask while popular hardware wallets are Trezor and Ledger. Generally, you'll want to utilize both.
You can transfer funds from Coinbase to Metamask by withdrawing the funds and sending it over to the public key address of your non-hosted wallet.
3) Buy an NFT through a marketplace like OpenSea
Great, so we've bought funds and transferred it to a wallet where we have complete control. How do we find NFTs to buy? Typically we will use a marketplace such as OpenSea, which allows consumers to both buy and sell their NFTs.
Buying an NFT on OpenSea is quite simple. You can explore collections through direct search or their discovery page and sort by typically shopping filters (low to high, NFT property traits, etc). There are two main ways to buy on OpenSea: Fixed price and bidding.
Fixed price, or buy it now, allows you to buy an NFT of a particular collection at a price chosen by the seller. Typically, we use the floor price (cheapest fixed price listed) along with features of the NFT to gauge the value of an NFT listing.
Bidding allows you to bid on an NFT you like, even if it's not for sale. Bidding allows you to potentially get NFTs for cheaper than floor, especially if the seller needs liquidity. One caveat to this is that this is only in WETH, wrapped Ethereum. Typically, beginners won't have any WETH in their wallet, so you must exchange ETH for WETH and pay a gas fee.
What is a gas fee? You can think of it as a transaction fee on the Etherum blockchain. It's what you pay to get your transaction validated and completed. For more information, check out this.
Once you find an NFT you like, you confirm the transaction by signing the transaction. This tells the blockchain that the rightful owner confirmed the transaction. How? By using cryptography to match the transaction with public and private keys.
If your transaction is successful, then the NFT will be sent to your wallet and viewable through OpenSea. If the transaction failed because the NFT was already taken or because of other reasons, then your transaction is cancelled and gas fees set are lost.
Research, research, research!
Okay, so we've figured out how to buy our first NFT now. Now what? Research. A phrase you'll always hear in crypto/NFT space is do your own research. The space is incredibly new and everyone, even the OGs, make mistakes and don't know what to expect. The best thing you can do is to put time in and research. I'll outline some basic things you should look for and tools/platforms to start out with.
Twitter is a great platform for NFTs. There are a lot of knowledgable people in the space who constantly tweet good information. It's also one of, if not the main, social media platform to use your NFT as a profile picture. Before you start following people though, there some lingo that you should learn:
- GM or "good morning". We are a friendly-optimistic community and we always say good morning to each other.
- GN or "good night". Similarly to gm, we say gn whenever we are about to sleep.
- WAGMI or "We're all gonna make it". We'll have made it once everyone understands NFTs.
- Looks rare. Rarity is a strong indicator of price for an NFT in a specific collection. We generally use this ironically.
- Probably nothing. When something happens but most definitely means something. "Steph Curry just bought an Ape. Probably nothing"
- Mint. When we create an entry on the blockchain for our art. When somebody mints an NFT, it means that they were the one to create that entry.
- Floor price. This is the cheapest price of the NFT for a particular collection and a key metric we use when evaluating the price of an NFT collection.
- Whale. A big player in the space. Usually someone who's crypto or NFT rich and has some sort of F U money.
- Alpha. Similar to stock trading, alpha means giving advice that will put you ahead of the market.
There's a lot more, and I definitely recommend reading up on it from a thread by punk6529 which nicely summarizes all of the terminology used in this space.
Almost every NFT project will have a Discord. If you aren't familiar with it, Discord is a messaging chat application where you join servers and can chat about different topics in the "channels" of each server. It's a great place to learn about a project, as most projects will have developers and team members making announcements, talking about roadmaps, and other key launch/project decisions. Whitelists have been more popular for new projects too and generally are rewarded to early and active Discord member.
Discords are also a great way to get a feel for the community for each project. Discord activity, friendliness, and how passionate the members of the Discord are about a project. Some projects even have paid Discords, which drop alpha for its members. I'm not a part of any or know if these paid channels are that helpful, but Cyberkongz paid channel is often known as "Wall Street Kongz", as a reference to r/wsb.
A lot of tools exist out there to discover NFT trends and provide analysis of certain collections. I'm not going to recommend using or paying these, but I just wanted to provide a list of some that I know of so you can do your research and discover if it's helpful for you.
- Icy Tools. This gives floor price updates and trends for NFT collections by the last 30 minutes.
- Nansen AI. This analyzes NFT collections and recommends projects for you to buy.
- Evaluate Market. This gives you access to the sales and activity history of a particular NFT collection over a large date range. This is useful to seeing the history of the NFT especially since the activity section on OpenSea is not the most representative.
- Rarity Tools. A tool to give the rarity of your NFT in a particular collection. Some people use this to determine if there are any hidden gems priced near the floor, but the exact algorithm this tool might not match up with what the community likes and values.
Once you get more familiar with NFTs, I highly recommend learning how to use Etherscan - a free blockchain explorer that allows you to search through transactions, blocks, wallet addresses, smart contracts, and other on-chain data.
An example of something that Etherscan can do is to spot if someone truly minted an NFT. Blockchain allows us to see the activity of anyone, it's all public. So maybe on OpenSea you are following someone and see that they minted a project.
OpenSea will say that they "minted" this project but this isn't indicative on whether the owner of this public key minted the NFT. This is because when you mint an NFT directly through the smart contract, you can set a mintTo address which will mint the NFT to the given wallet. Projects typically spam wallets of high profile collectors in hopes that people who "track" these wallets will follow their lead.
Etherscan can directly view this transaction and see what address sent the NFT, allowing you to verify if the true owner has minted it.
If you've made it this far, hopefully you have a better idea of what NFTs are and what to expect! The biggest takeaway is to do your own research. The community is very helpful and friendly and it's easy to get answers to questions you have regarding the blockchain, smart contracts, and projects.
My goal of this long post was to inform you at a high level different parts of NFTs you should consider. For beginners, I hope this is something you can reference as you start your journey and allow you to ramp-up in this space a lot faster than I did.
If you like this type of content, subscribe for free emails and updates! I try to share my journeys of NFT, crypto, and tech as much as I can. I hope my more colloquial style of writing also helps explain concepts easier to people!