There are many ways in which the NFT marketplace can conduct its business. Varying from platform to platform, the world wide web offers a space limited only by the imagination of its users. From the types of sales to the NFTs themselves, there is a creative and wonderful space on the net.
But understanding how it all works is key to participating in this new and exciting online business. Let’s take a deeper look into how the NFTs are sold online. Knowing the inner workings of the business will help you become a collector and investor in no time.
Table of Contents
What Is an NFT?
Understanding how they are sold is one thing, but knowing precisely what you are purchasing might be a wiser first step. An NFT, or non-fungible token, is a virtual item sold online. They are digital representations.
The Token
The token portion of the phrase is easy enough to understand. A token stands in for something else. For example, think of the tokens of the old arcades. Children could play video games in an entire, specialized area.
To do so, they typically had to obtain tokens for play. Regular dollars could be inserted into a machine, and tokens would be dispensed in return. In many cases at the time, one token represented one-quarter of a dollar (in the United States). Instead of simply putting a government-issued quarter into the arcade games, users had to have the specialized token.
NFT platforms today often work similarly. A user must obtain the native currency of the platform to interact. For example, if you are interacting on the Ethereum network, the currency of use is the Ether (ETH). Whatever type of funds you bring to the table, you must first convert those funds into the native cryptocurrency, or in this case, Ether, to conduct business.
Non Fungible
The remainder of the phrase non-fungible token simply means that there is no equal. If I have two quarters, one is the same value as the other. It doesn’t matter which one I give you, as they are both worth one-quarter of one dollar in U.S. currency. These two quarters, therefore, are fungible.
Non-fungible tokens are those that cannot be traded equally, as there is no equal. They are irreplaceable, one-of-a-kind. Think of them like snowflakes: no two NFTs are alike.
One Clear Owner
Because of the technology backing the NFT, there also can be only one true owner of an NFT. Many users new to the NFT scene question the value of digital art that can be easily copied.
For example, if you own the NFT of a million-dollar Bored Ape Yacht Club NFT, you own that image, its rights, and its entire existence. However, there is nothing technically stopping another user from taking a digital screenshot, a picture on their phone, or making a copy of the same file. So, how does an NFT have an actual value?
Think of an NFT as you would in the traditional art world. There is only one Mona Lisa. You may purchase a poster. There may be copies even on canvas. You may have it on a T-shirt or coffee mug. You can own those things.
But, there is only one true Mona Lisa. It is a unique piece of art, authenticated and secured in a museum. Only one person (or museum, or corporation) can own the one, true piece.
An NFT is similar. While others may copy it, there is only one true owner of the authentic file itself. This ability and fact are secured by the use of blockchain technology.
The Blockchain
In its simplest terms, a blockchain is a peer-to-peer, publicly accessible, and distributed ledger of sorts. It is secure and locked-in documentation of a platform, file, or transaction. In the case of NFTs, the ownership of that one, true item is stored in a blockchain.
Blockchains are a series of data storage units (blocks), linked together chronologically (chain). Once created, a block of information is immutable. This allows for the owner, for example, to be established and undeniably clear to all.
It also provides an ownership log of sorts, showing every transaction that the piece has endured. Each change of hands is documented on the blockchain, and any owner, potential buyer, or interested party of any type can view this transaction list.
Blockchain technology is what keeps the system of NFTs secure, transparent, decentralized (via its distribution), and unable to be controlled or altered by any individual.
NFTs in a Digital Art World
NFTs can technically represent nearly anything in the world. They can stand-in for a piece of real estate in the “real world.” They can represent an actual, tangible vehicle. But, most often, NFTs are digital files.
These files are most often digital artworks. The works can range from a .gif or .jpg file to an mp3 or mp4. From a full-length movie to an 8-bit “punk” face, there is an entire artistic world out there.
Art Sales
At the center of the NFT space, there was a noble goal: to allow artists to fairly and rightfully be paid for their work through online marketplaces. The blockchain, by way of making each transaction documented and immutable, also gave artists a chance to earn revenue in subsequent sales, something that is unheard of in the world of art.
Additionally, through the authentication of the NFT itself, artists had a fair and secure way to prove a creation was theirs, and sell the NFT as they see fit, in a method they choose.
In a Wild West world of online sales (and thefts), so much is taken for free, illegally or not, from the Internet. NFTs gave artists a way to make transactions securely, and gain a source of revenue that did not previously exist.
Type of NFT Sales
Once it became clear that these NFTs were here to stay, secure and authentic, and worth value, the marketplace scene blossomed. From live auctions to pre-set, fixed-price sales, each seller had a choice to make in how they wanted to conduct their business.
The Fixed Price Sale
One method of sale was to simply set a price, and sell it. Think of it as an online store. A seller may say this is worth $5. If you want it, you simply provide the seller with the $5, and the item is yours.
The NFT Auction
Alternatively, sellers and creators of NFTs, especially as business began to skyrocket, found they could fetch a far better selling price if they allowed the public to decide the worth of their NFTs. To do so, the vast world of auctions became a growing space overnight.
So, how do these auctions typically operate?
How To Buy in an NFT Auction
Auctions are one of the most popular ways to sell NFTs. Each marketplace has its unique way of conducting that business, even under the “auction umbrella.”
Types of Auctions
When you hear the word auction, you likely think of something like the Christie’s auction house, which allows persons in “real life” to bid on anything from traditional art pieces, to entire estate lots. Bidders, either in person, through a representative, or via the telephone or Internet, place bids on an item.
Typically, these auctions start with a starting price (or the minimum price the seller is willing to accept), and bidders increase their offerings, attempting to best the last, highest bidder, to “win” the piece.
The Traditional Auction
The aforementioned auction style is the most popular among NFTs sold today. Whether in person, by the actual Christie’s even (yes, Beeple’s work such as “Everydays the First 5000” sold for $69 million thanks to the famed auction house).
In this case, the seller or creator must determine the reserve price (or baseline, the minimum price they are willing to accept). If you aim to sell your NFTs, consider there may be auction fees or expenses, which should be considered before deciding upon a reserve price.
Most major auction houses online will have such fees, and even the most famous artists are forced to pay them to sell NFTs.
The No-Reserve Auction
Alternatively, sellers have another NFT auction-style to choose from by not setting a reserve price at all. In other words, some creators want to place a piece up there and see what the public thinks it is worth.
This style of auction is more popular among popular artists, who are already well established. They have a sense that their crypto art will go for a decent price, and they aren’t worried about being low-balled in the NFT auctions space.
New artists, however, may be leery to enter a sale of this style. These types of auctions, while the bidding is still involved, may allow for a project to be sold for a far lower purchase price. Depending on the money you are aiming to obtain as a collector, it is important to consider the risks of this style.
The Decreasing Price Auction
Sometimes called the Dutch Auction, there is another style that allows the artist to set a higher price to start with, beginning the auction by posting the highest price tag the entire auction will see. From there, the price will slowly decline, ticking down at predetermined and preset quantities until a bidder’s amount is met.
In this case, the seller sets nearly the opposite of a reserve price, deciding what sale amount is the likely highest amount an NFT will be auctioned off for.
In short, this is a style that typically is held over several days. The price will continue to lower until the moment the artist is paid for the collection. While buyers may offer similar sale prices in this style, history shows that the amount is often lower than in a traditional, English auction.
How to Bid and Buy
The precise process for buying will vary slightly from platform to platform. How the site is selling, from Christie’s to eBay, will impact the collectors (buyers or sellers) in their process.
Typically, the process will resemble the following steps:
- Sign up for the marketplace you wish to buy on, such as OpenSea.
- Connect your crypto wallet to the platform.
- Review the auction house rules (such as lowest bid, timing, etc.).
- Locate an NFT you wish to bid on.
- Place your bid.
- A winner is notified at the close of the auction.
- The platform handles the transaction of tokens (between seller and buyer).
While the precise steps required may slightly vary, the general concept is the same. Auctions can end in one of two ways: when a predetermined time of ending hits or when bids stop coming in.
Occasionally, predetermined limits may have to be hit before the close (such as a reserve price, though typically bidders would not place a bid lower than that amount in the first place).
Popular NFT Auction Platforms
Like so many steps in the process, from the crypto you choose to invest in, to the wallet you decide to “store” it in, you also will have a selection process to decide where you will be operating your auctions.
Whether as a buyer or seller, there are plenty of sites out there offering an auction style of sale. Some of the biggest names in the business currently include:
- OpenSea.
- Rarible.
- SuperRare.
- Foundation.
- AtomicMarket.
- Myth Market.
- BakerySwap.
- KnownOrigin.
A Bright Future
The world of NFTs is still in its early stages of development, and processes are changing every day. From the rules and regulations to the methods of doing business, there can be a lot to keep track of in the world of NFTs.
There is always risk involved, and the best advice is always to stay informed, not only of processes on how to buy, how auctions work, or what precisely to purchase but also about the changes in the marketplace.
From Beeple (aka Mike Winkelmann) at Christie’s to the newest user selling his first collection, users across the industry can benefit from informative research, such as the resources you will find on FLOLiO!
