Lauren McDonagh-Pereira

Lauren McDonagh-Pereira is a photographer from Massachusetts, USA. She captures the beauty of the world around her, favoring Nikon cameras and lenses. She is drawn to shooting landscapes, wildlife, flowers, and people enjoying time together.

January 5, 2023
8:11 pm

What is an NFT? (And How Do They Work?)

What IS AN NFT?

NFTs are more than a passing fad. They represent an emerging technology that will change multiple industries including art, music, video production, publishing, health care, supply chain management, property management, and finance. If you hope to stay current with the changing tides, you need to understand what NFTs are, and the blockchain technology where they live.

My name is Lauren McDonagh-Pereira. I am a photographer, NFT artist, NFT collector, and web3 blogger. I have been fully immersed in the NFT art space since February 2022.

Curious? Read on beyond my disclaimer for a crash course in NFTs.

Disclaimer

A red stop sign against a blue sky, with a red rocks on either side — ⓒ Lauren McDonagh-Pereira Photography 2013

Before we get into it, please consider a few quick DISCLAIMERS.

I am not a financial advisor, an art expert, a lawyer, or an accountant. Always do your own research before purchasing NFTs and never spend money that you cannot afford to spend.

This post represents my personal opinions and is NOT financial advice.

I am an NFT artist. At the time of posting, I have works minted on the Tezos and Ethereum blockchains. Links contained in this article may point to my own minted NFTs or may point to the NFTs of other artists that I have collected from. If you choose to collect NFTs referenced in this article, I may earn money from your purchase.
Review my Privacy Policy here.

What is an NFT in Simple Terms?

NFT stands for non-fungible token. NFTs are digital assets that carry a unique code as proof of authenticity and ownership. They are traded online, and are most often purchased with cryptocurrency. (Source: Forbes)

They are called “non-fungible” because each NFT is unique and represents ownership of a specific piece of digital content. Unlike traditional digital assets, such as MP3 files for music or JPEGs for images, NFTs cannot be easily copied and shared. Each NFT is a one-of-a-kind which cannot be replaced.

As of early 2023, most NFTs are bought and sold as collectibles (See: Why Would Anyone Spend Real Money to Collect NFTs for more). Artists use digital art, music, and video files to create NFT art. Video game developers use NFTs to deliver in-game items. NFT projects use PFP (profile picture) tokens to verify membership in online clubs and communities. In each of these cases, the NFT is functioning just like a physical collectible item.

People have been collecting baseball cards since the 1860s (Source: ARTpublika Magazine). Baseball card collectors enjoy the art on the cards, they are fans of the players the cards tokenize, or they appreciate the rarity of finding a limited edition card in pristine condition. NFTs are simply a digitized version of trading cards. NFT collectors enjoy the art that is minted as NFTs, they are fans of the artist who is creating the NFTs, and they enjoy the thrill of owning a NFT that is rare and difficult to acquire. NFTs have taken the common hobby of collecting physical items, and made the process digital.

How Do NFTs Work?

NFTs are minted (created) on a blockchain network. Think of NFTs like a file on your computer. Your computer file was created when you saved a Microsoft Word document. The file, and the information it holds is stored on the hard drive of your computer.

NFTs are assets that are created on a blockchain. The information stored by the NFT is then held on a blockchain where it can be transferred between different users. The key difference is that you can choose to produce an infinite number of copies of that MS Word document on your hard drive. You cannot, however, produce any copies of the NFT that was created on a blockchain. That asset is unique.

An NFT asset can contain a piece of digital art, such as a JPEG of a photograph or digital art piece, an MP3 file of a song, a GIF file of a short animation, or a MP4 file of a video. When you collect the NFT, you are collecting two things; access to the traditional digital file for your personal enjoyment, and a record that you are the verified owner of the official file that had been originally sold by the artist.

This is great for the artist, because it eliminates many of the fees and gatekeepers that previously separated them from their fans. (See: The Future of NFT Arts – Why Artists are Still Excited About NFTs in November 2022). It is also great for the collector, because if the artist becomes more popular, the value of that specific digital file may raise over time. Ultimately NFT art allows artists to have a more direct relationship with their fans without intermediary art dealers, record companies, or ticketing agencies.

What is Blockchain Technology?

A blockchain is a shared ledger that publicly records all of its transactions, allowing people to transparently track digital assets in a process that cannot be tampered with. (Source: IBM). Because the blockchain is immutable, multiple parties can record and verify transactions without needing a central authority (like a bank or law firm) to confirm the authenticity of the transaction.

A blockchain is a continuously growing list of records (referred to as blocks) which are securely linked using cryptography. Each block is linked to the previous block with a cryptographic hash, a timestamp, and transaction data creating a chain of information. The blocks are decentralized and distributed across a network of computers. It is very difficult to tamper with the information stored on blockchain because no one server holds all the pieces of the file.

Cryptography is a practice that dates back to ancient Egypt (Source: Software Lab.org). In ancient history, cryptography was used to create complex codes to transmit messages that would not be decipherable by anyone other than the intended recipient. Today, computer scientists use cryptography to create mathematical algorithms to secure digital information. Blockchains use these complicated codes to connect one block in the chain to the next, making them virtually impossible to corrupt.

The security and ability to easily verify the authenticity of data stored on a blockchain is why blockchains are used to create and track digital currencies, such as Bitcoin, Ethereum and Tezos. Blockchain technology can be used to store and secure medical records, to manage supply chains, and to create and trade NFTs. As the technology continues to evolve, I have no doubt that a greater variety of digital assets will be saved on blockchain networks instead of private servers.

What is an NFT Project?

An NFT Project is a company that is built up around an ecosystem of NFTs (Source: Harvard Business Review). A team of founders creates and sells a series of related NFT art. Think Bored Ape Yacht Club (@BoredApeYC) or VeeFriends (@VeeFriends).

The founders publish a road map of what collectors can expect in return for holding onto one of their NFTs. Holders gain access to private Discord communities for networking, gain entry into in-person events, or have early access to future NFT releases by the company. The initial sales of the NFT, and the royalties from collectors selling their NFTs to third parties, are put back into the company to create better perks for holders and increase the value of the original NFTs.

In essence NFT projects are private clubs that use tokenized digital art as their entry fee. Some collectors buy NFTs from NFT projects because they want to join the club, while others purchase NFTs because they hope the company will follow its road map, become more popular, and increase the demand for club membership. If this happens, the original collector will be able to sell their NFT to a new collector and earn a profit.

There is always risk when collecting NFTs from an NFT project. There is no guarantee that the company will be able to fulfill their roadmap promises or become more popular. Many NFT projects quickly lose all value as the hype around them fades, and the project’s team fails to meet their goals. If you plan to collect from NFT projects in the hopes of flipping them for profit, you will have to spend a lot of time researching projects in an effort to figure out which companies you believe are going to make it, and which companies are going to fall short of the mark.

What is an NFT Collection?

An NFT Collection is a series of NFTs created and curated by an artist, or by a collective of artists. NFT Collections usually lack roadmaps laden with perks, and are instead focused on trading art for the sake of the art.

I am an NFT artist, and I minted several NFT collections over the course of 2021. I build my collections around themes. For example, my Westward Bound collection is a series of 9 pieces of NFT photography that explore the American Southwest. This was my first NFT collection, and I chose a topic (South Western road trips) as the theme that tied my NFT collection together. For my second collection, Follow Me Down, I decided to create a collection based on various examples of leading lines photography that I had taken over the years. In this NFT collection, empty paths and open roads are the glue that hold the 9 images together as one collection. It is up to the artist to decide what makes an NFT collection a cohesive body of work.

Sometimes, an entire NFT collection is popular, and people will scramble to pick up each piece in the collection. As this happens, collectors start selling their collected NFTs on the secondary market for an increased price. The floor price (or the lowest cost to collect an NFT in a collection) rises as a popular NFT collection sells out, and is traded between collectors. For example, Victoria West’s self-titled collection of fine art portrait photography is sold out, and pieces are listed on the secondary market for dramatically higher prices than Victoria initially listed them for.

There are also cases when the NFT collection as a whole is not that popular, but one piece of art within the collection commands a higher price than the others. In this case, collectors might compete to collect one particularly stunning piece of art, while the rest of the collection receives a mediocre response.

The NFT art space is in its infancy and the unwritten rules of the game are constantly changing. The rules that govern “What makes a successful NFT art collection” today, might be completely different by the end of the month. If you want to sell or collect from NFT collections, its best to jump into the NFT Art community, attend Twitter spaces, and stay up to date with the constant changes in the market.

Conclusion

NFTs use cutting edge technology to trade digital assets and affirm ownership of those digital goods. In the coming years, the NFT ecosystem will continue to evolve, new use cases will crop up, and trends in NFT art collections and NFT projects will come and go. It is a fascinating world as it combines technology, art, culture, and internet communities.

What questions do you still have about NFTs? Let me know in the comments!

Don’t forget to follow me on Twitter (@LAMPphotography) to stay up to date on my blog, and to get a first hand glimpse at the NFT art community.

References

Conti, R. and Schmidt, J. (2022, April 8). What is An NFT? Non Fungible Tokens Explained. Forbes.com. Retrieved January 5, 2023 from https://www.forbes.com/advisor/investing/cryptocurrency/nft-non-fungible-token/

IBM. (n.d.). What is Blockchain Technology? IBM.com. Retrieved January 5, 2023 from https://www.ibm.com/topics/what-is-blockchain

Kaczynski, S. and Kominers, S. D. (2021, November 10). How NFTs Create Value. Harvard Business Review. Retrieved January 5, 2023 from https://hbr.org/2021/11/how-nfts-create-value

Moses, T. (2023, January). What is Cryptography? Types and Examples You Need to Know. SoftwareLab.org. Retrieved January 5, 2023 from https://softwarelab.org/what-is-cryptography/

Publica, Liz. (2020, August 17). An Abridged History of Baseball Cards and How they Evolved into Collector’s Items. ARTpublika Magazine. Retrieved January 5, 2023 from https://www.artpublikamag.com/post/an-abridged-history-of-baseball-cards-and-how-they-evolved-into-collector-s-items