Introduction to NFTs

Here's the lowdown on the what, the how and the why of NFTs.

So, you’ve heard of NFTs. Perhaps, you’re wondering why NFTs are such a big deal… here’s the lowdown:

What is an NFT?

An NFT is a digital asset stored on the blockchain. The term itself, NFT, stands for non-fungible token. To be non-fungible means that an asset is unique and non-interchangeable. This means that every NFT is a 1/1, a uniquely identifiable asset with a visible history of ownership. If I purchase an OG Flowers NFT, for example, that digital image is added to my Solana wallet and I have verifiable ownership of it. Someone could right click and save it but no-one owns the rights to the original, a unique instance on the blockchain, besides me. 

You’ve probably seen some popular collections of NFTs, most of which look like a jpeg. Not all NFTs are images though! The NFT itself is a customizable unit - NFTs can contain any digital file format including photos, videos, gifs, audio, and even documents.

How are NFTs Stored?

Data storage on the blockchain is quite expensive, so the files for most NFTs are actually stored off-chain through a system called IPFS. IPFS (interplanetary file system) is a peer-to-peer hypermedia protocol that stores files in a secured and distributed manner. When an NFT is minted, the ID that points to this file on IPFS will be stored on-chain. 

When an NFT is listed on Magic Eden, a user transfers their NFT to Magic Eden’s smart contract which then handles the buying and bidding functionality.

Where do NFTs derive their ‘value’ from?

On a fundamental level, NFTs are valuable because they are non-interchangeable. When it comes to pricing, it all comes down to the perceived value given to an item by prospective collectors. For example, certain NFTs are more rare than others, which can lead them to trade at higher prices than other items in the collection. Some NFTs grant access to unique opportunities that make them more valuable. 

To the creator, NFTs are valuable because they allow them to create and share their work in a way that gives them both credit and rightful commission for their sales. An item’s royalty percentage can be built into its smart contract, which guarantees that the creator will automatically and perpetually receive a royalty every time that NFT is traded in its original marketplace. On Magic Eden, this royalty amount is set by the creator and can vary by item.

But — wait a minute, you’re a collector! What is the value to you?

Collectors have all sorts of different motivations for purchasing an NFT. Here are a few reasons:

  1. Digital Ownership: at its most basic, motivation to buy an NFT is motivation to claim ownership over a piece that no-one else can. If you really enjoy the work of a collection, it is an easy way to own a piece that speaks to you.
  2. Creator Support: if you are a fan of a creator, purchasing an NFT from their collection is a great way to show support for their work.
  3. Token-Gated Access: some creators offer unique experiences or opportunities to owners of their NFTs. Ownership may provide VIP access to unreleased works, or allow you to attend members-only IRL events. For example, artist and producer Chief Keef released an access card NFT for his new album ‘4NEM’. Owners of these NFT cards will get exclusive access to unreleased works, merch, content, and events.
  4. Project Participation: owning an NFT from an interactive project can allow you to have a say in the project roadmap or play a certain role in a game. For example, the NEONEXUS Commercial collection includes properties that you can purchase to take part in a soon-to-be-released cyberpunk city game.
  5. Trading and Speculating: some people collect NFTs that they think will appreciate in value over time. Typically seeking to make a profit, they may be buyers who hold for long periods of time or traders who elect to swap frequently in order to acquire more valuable pieces.
  6. Community Membership: joining a project ecosystem can allow you to connect with like-minded collectors, make new friends, and signal your affiliation with a larger community. You can participate in the project discord, set your NFT as your Twitter profile picture, and/or get involved in conversations about the project both online and IRL.

Now, go on and browse Magic Eden. Find an NFT project that excites you!

The information provided on this website is provided for general educational purposes only and is in no way financial or investment advice. Certain information may have also been provided to us or prepared by third parties; these materials are provided for convenience and are not an endorsement by Magic Eden. Magic Eden is not liable for any errors, changes or amendments to such information, including any actions taken in reliance on such information.