A Fool-proof Beginner Introduction to NFTs

[CoinEx]

2021 saw the boom of blockchain across the board. Over the past year, Bitcoin and Ethereum reached new highs, leading to a crypto bull; GameFi was exploded by Axie Infinity’s Play-to-Earn mode; Shiba Inu, a typical new MEME coin, aroused great market excitement; all sorts of interesting DAOs, including ConstitutionDAO, BanklessDAO, and CityDAO, sprang up like mushrooms.

In the field of NFTs, Beeple’s Everydays: The First 5000 Days was sold at Christie’s for $69.34 million; Cryptopunk remained at the top as one of the earliest NFTs; BAYC, released in May 2021, led NFT avatars to a new stage. Over the past year, the entire NFT market flourished and witnessed the emergence of well-known projects such as Meebits, RTFKT, Art blocks, and Loot appearing. According to statistics from NFTSCAN, there are at least 39 million NFT assets and over 65 million NFT transactions on Ethereum.




However, beginners rushing into the market are likely to become the victim of crypto scams or purchase overvalued NFTs. This is the case because plenty of new projects are launched in the NFT market every day, and many of them are run by scammers. Today, we will start from the basic concept of NFTs and illustrate the entire process of involvement in a new NFT project, thereby offering a simple beginner introduction to NFTs.

1. Blockchain Know-how

NFTs are blockchain-based digital assets, while Opensea is now the absolute leader in the NFT market. Similar to DEXes in DeFi, all NFT transactions on Opensea interact with the blockchain. In other words, you need to purchase NFT directly through on-chain wallets like Metamask (https://metamask.io/). As such, basic blockchain know-how is required — you should understand how a crypto wallet is operated, including account registration, asset transfers, signature, etc. Meanwhile, you should also take care of your mnemonic phrases and refrain from clicking on unknown links or offering signature authorizations. In the crypto space, wallet security is a major aspect.

2. Identify Potentially Promising NFTs


The market now abounds with NFT projects, with both good ones and bad ones. Faced with a dazzling array of projects, beginners often don’t know where to start. In times like this, it is particularly important to identify potentially promising NFTs.

Here is what we suggest: Talk with your friends who have already bought NFTs and participated in such projects. NFT users differ in their experience and approach. They often share project information in chat groups (e.g. Discord), and many people are introduced to new projects when chatting in such social media groups. Moreover, NFT KOLs of media platforms like Twitter would sometimes examine new trending NFT projects in advance, which draws attention to such projects before the release of NFTs.

Additionally, the market has also witnessed the invention of NFT tools and websites that help you identify potentially promising projects. For example, NFTGO, a website focusing on NFT-related statistics, features a section called Drops that introduces upcoming NFT projects (https://nftgo.io/nft-drops). Nansen, a website dedicated to on-chain data analysis, provides a section for NFT analysis, which features a function called Mint Master that allows you to monitor the on-chain statistics of new NFTs in real-time (https://www.nansen.ai/).

3. Community Analysis

Having discovered potentially promising projects, we should then screen the information from community members or third parties like KOLs to examine the quality of such projects. Considering that some projects are promoted by KOLs who are paid to do so, we should be careful with suggestions from strangers, as they could be scammers. There are many criteria when it comes to the quality of an NFT project, and users rely on different standards. For beginners, the most intuitive approach is to observe the community of a project, starting from such aspects as the number of followers, user engagement, and popularity.

However, it should be noted that the number of Twitter followers is not an absolute standard, which is especially true considering that some projects may jack up the number by buying followers and offering airdrops. With regards to such projects, we should be careful with the quality of their tweets and their user background. If most of the users who like and comment on tweets are accounts with only a few followers, then the followers of the project could be bought. On the other hand, if the project is followed by users who are also following many KOLs, then it is more credible.

Discord has become another stronghold of NFT projects. The Discord channels of an outstanding NFT project are often clearly tagged, with community administrators guiding beginners while maintaining the order, as well as members of the project team interacting with the community.



4. Examine the Fundamentals of a Project

After preliminary screening of potentially promising NFT projects, we should then carry out more intensive analysis in terms of their fundamentals. Each NFT project comes with its own story and features, spanning factors such as team background, project profile, community culture, vision, personal interests, etc.

Team background

Investing in a project is very often equivalent to investing in the team behind it. This also applies to NFT investments. For instance, Larva Labs, the team behind the leading NFT project CryptoPunks, and the Bored Ape Yacht Club (BAYC) team are well noted in the crypto community. As such, their subsequent new projects, Meebits and Mutant Ape Yacht Club (MAYC), are also backed by a strong team and great market enthusiasm, which is not surprising as projects created by such big-shot teams are often favored by the market.

Recently, celebrities in the traditional mainstream have also started to release NFT projects that focus on themselves, including the pop superstar Justin Bieber’s inBetweeners, the Chinese iconic singer Jay Chou’s Phanta Bear, and the NBA legend player Shaquille O’Neal’s Shaq Gives Back. At the same time, from Nike to Adidas to Coca-Cola, many big brands have also ventured into the NFT market. When it comes to NFTs issued by celebrities or big institutions, we cannot base our purchasing decisions entirely on their fame. More importantly, one should check whether they have got the roadmap for the future development of their project.

That said, fame is not the only criterion for team assessment. The blockchain space abounds with grassroots success stories. For instance, when they founded BAYC, the Yuga Labs team only consisted of a few ordinary young people. In fact, a team is considered reliable as long as the members are passionate about their project, with a clear vision and roadmap.

Project profile

NFT covers a wide range, everything can be turned into NFT, as they say. On Opensea, NFT categories include art, collectibles, domain names, music, and sports cards, while some of the NFT projects we often hear about are collectibles. According to Opensea’s 30-day transaction volume, the top NFT categories include ape NFTs (BAYC, MAYC, PAP), human NFTs (CryptoPunks, Doodles, World of Women), and celebrity/brand NFTs (PhantaBear, CLONEX, Adidas Originals), and the land NFT Sandbox.



Community culture

An NFT project, especially those with a grassroots background, is often backed by a strong, cohesive community. From animal NFTs through human NFTs to other types of NFT projects, community members make contributions to their favorite projects. For instance, some give suggestions for project development, while others create NFT-based works like memes that could bring more market exposure to the project. Holders often replace their profile photos with NFT avatars, add the project name to their profile, and follow members of the same community on Twitter, which creates a new NFT-enabled social media paradigm.

Culture and personal interests


Culture and personal interests, which also come with a broad scope, are subject to more subjective factors. For example, although Jay Chou’s status in the world of Chinese pop music may not be clear to western users, the IP behind PhantaBear easily attracts the interest of Chinese-speaking users. By the same token, users from other regions may not appreciate memes popular in western countries. When investing in NFTs, instead of rushing into the market, beginners should stick with projects that they understand and appreciate. For many people, an NFT is not just a speculation tool. More importantly, it should also be a consumer product they prefer.

5. Primary Participation

Primary participation refers to participating in the sale of NFTs, which includes getting the whitelist and Mint. To ensure the scarcity of NFTs, a project often sets a limit on the number of works to be released in an NFT series, which is often capped at 10000, 8888, 5000, or even less. Before starting to sell NFTs, a project team frequently reserves a certain number of works for whitelisted users through certain events to make sure that they can have first access to such NFTs at a fixed price. Taking different forms, including registration draw, retweet draw, Discord invite competition, Discord chat upgrade, and art creation, these events aim to build an engaged community and attract sufficient market attention before the project starts selling NFTs.

The more trending a project is, the more people will try to grab the whitelist spots. As such, whitelist spots are often far less accessible than other events or programs. For beginners, the whitelist is the safest model of NFT participation. However, we must also be careful because the market is rampant with NFT projects. For instance, there are always poorly-built copycat projects that prefer to offer whitelist spots via referral competition. Such projects do not worth your time and effort.

Mint refers to the generation of NFTs at a certain production cost and transaction fee. This process is divided into two stages: whitelist Mint and open sale. Whitelist Mint makes sure that users could successfully mint NFTs within the specified time because a portion of the quota is reserved in advance, while the open sale is subject to many factors. For example, trending projects attract a large number of participants, which could trigger a Gas War. What this means is that participants compete with each other by jacking up the transaction fee. Sometimes, the gas fee may even surpass the price of NFTs.

6. Secondary Participation

After the stage of Mint, many NFT projects would start the mystery box stage, meaning that all NFTs will be displayed as the same at first, without disclosing their specific content. This interesting mechanism resembles buying a lottery ticket. Since NFTs come with different rarities, the corresponding market price also varies. Hoping to draw super rare NFTs, some would stock up on mystery boxes before they are opened. As such, the floor price of NFTs in the mystery box stage is often very high. When the boxes are opened, the project team will upload the real content, and holders could check the true NFTs they purchased by updating the boxes. Users who drew rare or top-ranking NFTs could make a fortune, while those who drew ordinary or bottom-ranking ones may sell them at the floor price

Upon opening mystery boxes, users will get NFTs with different values. If you’d like to sell them, the price can be determined based on the floor price and rarity (https://rarity.tools or https://app.traitsniper.com/). If you do like a particular NFT and plan to hold it over the long run, it is also easier to find cheaper NFTs at this stage.

7. The subsequent holding of NFTs

How can one use NFTs if he/she decided to hold them over the long term? First of all, beginners need to be clear about one thing: An NFT is not just a JPEG, and its value is not determined by whether it looks good or not. Instead, we should focus on factors like its underlying asset, social value, in-game functions, and culture. For instance, a quality avatar project represents a shared value or culture that allows community members to easily recognize each other, thus expanding their social network. As such, when users start using an NFT avatar as their profile photo, they could clearly recognize community members holding NFTs in the same series on Twitter.

Conclusion

Many people might think of an NFT as just a picture, an expensive, ugly picture. However, if you look at NFTs with an open, inclusive mindset, you’ll see that they are not all about speculation and that each NFT comes with its own community and culture. We hope to explore NFTs together with all readers interested in this brand-new world through this simple tutorial.