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Trade to Earn 101: Part 2 – How Do NFTs Work? (A Beginner’s Guide to Digital Ownership)
Written by: ShadowThorn Studios
Dated: December 12th, 2024
In this article, we’ll break down what NFTs are, how they work, and why they have become a cornerstone of the Web3 revolution. We’ll also explore their potential beyond art and collectibles, showing how the Liquid NFT Marketplace redefines their value and utility.
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What Are NFTs?
NFTs, or Non-Fungible Tokens, are unique digital assets stored on a blockchain. Unlike cryptocurrencies like Bitcoin or Ethereum, which are fungible (interchangeable), NFTs represent one-of-a-kind items that cannot be replicated.
Examples of NFTs:
Digital Art: Beeple’s “Everydays: The First 5000 Days” sold for $69 million.
Music: Kings of Leon released an album as an NFT, offering perks like exclusive vinyl and concert tickets.
Gaming Items: Virtual swords, skins, or property in games like Decentraland or Axie Infinity.
Physical Assets: Real estate deeds and luxury goods tied to NFTs for proof of ownership.
How NFTs Work:
Built on blockchain technology (e.g., Ethereum, Solana).
Use smart contracts to verify ownership and transferability.
Metadata and digital signatures ensure their uniqueness.
Real-World Analogy: Think of NFTs as digital collector’s items or unique property deeds, secured by a tamper-proof ledger.
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How Are NFTs Created?
The process of creating an NFT is called minting.
Steps in Minting NFTs:
1. Choose a Blockchain: Ethereum is the most popular, but alternatives like Polygon, Binance Smart Chain, and Solana offer lower fees.
2. Create the Asset: The digital file (image, music, etc.) is uploaded to an NFT marketplace.
3. Mint the NFT: The asset is tokenized on the blockchain, with metadata like its name, description, and ownership encoded.
4. Set Pricing: Sellers can auction their NFTs or set fixed prices.
Example: An artist can upload their digital painting to the Liquid Platform with just the filling out of a form and an upload of the images. Liquid NFTs Marketplace features an Easy Create system and an Easy Mint system for all users of all technology levels.
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What Makes NFTs Valuable?
NFTs derive value from their uniqueness, scarcity, and demand.
1. Rarity:
Limited edition NFTs or one-of-a-kind creations (e.g., CryptoPunks) attract high demand.
2. Utility:
NFTs can grant access to exclusive events, gaming perks, or governance in decentralized communities.
Example: Owning a Bored Ape Yacht Club NFT provides entry to private events and benefits.
3. Provenance:
Blockchain records allow verification of authenticity and ownership history.
4. Community:
NFTs often tie into communities or fandoms, creating social value.
Example: NBA Top Shot NFTs tap into basketball fans' love for iconic moments.
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Challenges with Traditional NFTs
Despite their popularity, NFTs have limitations:
1. Lack of Liquidity:
NFTs rely on someone else wanting to buy them. If no buyer exists, the NFT becomes illiquid and worthless.
2. Price Volatility:
Speculation drives rapid price changes, leading to unpredictable losses.
3. No Built-In Exit Strategy:
Traditional NFTs require peer-to-peer sales, leaving sellers at the mercy of market demand.
4. Risk of Rug Pulls:
Some creators abandon their projects after making profits, leaving investors with devalued assets.
Example: Many NFT collections launched in 2021-2022 saw a steep decline in value due to oversupply and creator disengagement.
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How Liquid NFTs Solve These Challenges
Liquid NFTs introduce liquidity-backed value, ensuring every NFT has intrinsic worth.
Key Innovations:
1. Built-In Liquidity:
Each NFT is backed by a portion of its mint or sale price, ensuring it always has redeemable value.
2. Burn-to-Exit Function:
Owners can burn their NFT to withdraw its liquidity value, providing a guaranteed exit strategy.
3. Continuous Value Growth:
A percentage of every sale is added to the liquidity pool, increasing the value of all NFTs on the platform.
Real-World Example: Think of Liquid NFTs as a mix between savings bonds (steady growth) and collectibles (uniqueness).
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Why Liquid NFTs Are the Next Evolution of Digital Ownership
1. Stability in an Unstable Market
By addressing the volatility and illiquidity of traditional NFTs, Liquid NFTs offer a safer investment option.
2. Real-World Financial Integration
Liquid NFTs combine the creativity of digital assets with the financial stability of traditional investments.
3. Democratization of Ownership
Accessible tools and features make Liquid NFTs ideal for both beginners and seasoned investors.
Example: A new collector with $100 can mint an NFT on Liquid, knowing its liquidity will grow steadily over time.
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NFTs have transformed how we view digital ownership, but traditional systems leave much to be desired. The Liquid NFT Marketplace revolutionizes this space by combining liquidity, stability, and growth into one seamless platform. With innovations like intrinsic liquidity and the burn-to-exit function, Liquid NFTs provide a secure and sustainable way to trade and earn.
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Common NFT Questions and Answers:
1. What are NFTs?
NFTs are unique digital assets representing ownership of art, music, or other items on a blockchain.
2. How are NFTs created?
NFTs are created through a process called minting, which tokenizes digital files on a blockchain.
3. Why do NFTs have value?
NFTs derive value from their rarity, utility, provenance, and community.
4. What are the challenges of traditional NFTs?
Traditional NFTs lack liquidity, are prone to price volatility, and have no built-in exit strategies.
5. How do Liquid NFTs solve traditional challenges?
Liquid NFTs ensure intrinsic value through liquidity backing, continuous growth, and a burn-to-exit function.
6. Why are Liquid NFTs better for beginners?
Liquid NFTs offer predictable growth, accessible tools, and guaranteed exit options, making them ideal for new collectors.
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Next in the Series
In Part 3, we’ll compare Traditional NFT Marketplaces vs. Liquid NFT Marketplace, highlighting the groundbreaking differences that make Liquid the future of digital ownership. Stay tuned!
#TradeToEarn #LiquidNFTs #NFTExplained #DigitalOwnership #BlockchainAssets #CryptoInnovation #NFTLiquidity #Web3Finance #NFTInvestment #NFTStability #NFTEducation #NFTMarketplace #TradeSmart #DigitalAssets #LiquidRevolution
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ShadowThorn Studios News & Announcements for All the AI Infused Games built in ChatGPT as well as the custom Agents, AI Assistants, and Game Dev AI Companions.
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