Introduction
Digital assets have received much attention as an investment in recent years. The mind goes straight to cryptocurrencies when we talk about digital assets, but that’s not all. Non-fungible Tokens, or NFTs, have created a billion-dollar industry worth investing in. If you want to earn an income from NFTs, this article will enormously help you make an informed decision. We will help you understand the underpinnings of the NFT market that enables you to make money out of your investment.
Understanding NFTs
The digital world is a great masterpiece in its own right. Nonetheless, there used to be little or no place for the fine arts in this massive world. NFTs created a new horizon in blockchain technology that welcomed artists into the digital world. With the advent of NFTs, artists could design a one-of-a-kind token associated with their creation and sell it for profit. The excellent point of NFTs in this regard was that artist could protect their ownership rights and confer them to the buyer. But what exactly is an NFT?
A non-fungible token is one that does not have any other equivalents. Each NFT represents a unique piece of art with a certain value. This is what distinguishes cryptocurrencies and NFTs. To illustrate, the maximum number of Bitcoins that will ever exist is 21 million coins, and each coin will be identical to the others. However, each NFT is unique, and no two NFTs will ever be the same. On the other hand, the common ground between cryptocurrencies and NFTs is that they use blockchain as their medium of operation.
The Best Blockchain for Creating NFTs
NFTs’ home blockchain is the crypto giant Ethereum. This is because the first official NFT project, CryptoKitties, used Ethereum as its host. Of course, other blockchains, such as Solana and Polygon, also support NFTs. However, since other blockchains are more recent, they may not provide the functionality available on Ethereum. You may also consider the following before purchasing NFTs:
- Transaction fee: transactions on blockchains developed based on the PoW consensus are slow and expensive. But on the bright side, they have a well-featured ecosystem. On the other hand, PoS-based blockchains like Solana are far faster and cheaper but are not as rich as Ethereum. Therefore, a PoW-based NFT is more expensive than one created on PoS blockchains.
- Compatibility: NFTs developed based on Ethereum are compatible with particular wallets and marketplaces. MetaMask supports Ethereum-based dApps, and the respective NFTs are available on OpenSea. NFTs created on the Solana blockchain are compatible with the Phantom wallet, and you can trade them at Solanart and SolSea. Thus, you should consider the size of the market in which you want to trade your NFTs and how conveniently you can transfer the assets to your wallet.
The Significance of Smart Contracts in NFTs
Blockchain is the basis of NFTs development, but what controls the tokens are the smart contracts. How the NFTs operate and interact with other tokens is the work of the codes embedded in the smart contracts. In other words, smart contracts store data such as the NFT’s resale history, value, and whether it is a place of art or a place of fashion. Traders can use the EtherScan platform to read a smart contract and understand how it works. Therefore, users need to know smart contracts to understand the worth of the NFT they purchase.
The Appearance of NFTs
If the blockchain and smart contracts are the bones of NFTs, the metadata is their flesh. The metadata is the piece of art that the NFT is associated with. It can be anything from digital audio, image, painting, video clip, etc. Blockchain technology is designed to execute transactions on the network, and storage of large files linked with the NFTs on the blockchain is highly costly and merely impractical. Hence, the metadata are stored off-chain, and only the representing tokens are kept on-chain as ERC-721 tokens. The tokens maintain their connection to the respective media through the Universal Resource Identifier (URI). The URI contains the address where the media is stored off-chain.
The important thing to remember here is that if you use centralized servers to store your media, you deprive yourself of blockchain-level security. By way of explanation, when you use centralized servers, you are relying on third parties, and if they choose to erase your media, the URI is no longer valid. Instead, InterPlanetary File System (IPFS) platforms provide a viable alternative to centralized storage. Users can rely on IPFS systems to secure their media and avoid risks such as censorship, downtime, and attacks which are typical of centralized servers. Therefore, knowing the storage address of the media associated with your NFT goes a long way in ensuring the safety of your assets.
NFT Wallets
Online (hot wallets) are susceptible to hacker attacks and put the safety of your assets at stake. On the other hand, offline (cold) wallets keep the private keys off-chain on hardware equipment and considerably enhance the security of your assets.
Commercial Rights for NFTs
Another point worth noticing before buying NFTs is the ownership rights of the assets. Whether you retain the full rights of an NFT or only part of it depends on the artwork’s creator, as it is their intellectual property. The commercial rights of NFTs have three categories:
Rights reserved to the creator:
When the rights are reserved for the creator, only the original artist has the commercial rights of the asset.
Rights reserved to holders:
The holder of the NFT can use only its image for commercial purposes.
No rights reserved:
It means that the artwork is available to the public, and anyone can use the commercial rights of the token.
The commercial rights of the asset determine how freely you can use the NFT. Thus, before purchasing an NFT, you should keep in mind that if it has its rights reserved, you are merely a token holder and cannot use it for commercial purposes.
Ways of Earning an Income from NFTs
NFTs are not as widespread as cryptocurrencies; consequently, their market cap is nothing close to the crypto market. Therefore, earning an income from NFTs is not as easy as benefiting from cryptocurrencies. On the other hand, this is a sign that the NFT market has great potential, and those who invest in NFTs might be similar to those who appreciated the crypto market before it blossomed. For those who see potential in the NFT market, we have collected several methods that can yield substantial gains.
Design NFTs and Sell them on the market
The most direct way of making capital from NFTs is by creating them yourself. What you need is a creative mind with attractive ideas that capture the viewer’s eyes. The good news is that you do not need coding or programming skills to generate NFTs. Platforms like Appy Pie do the coding for you, and you can design your NFT in a graphical environment. Your creation can be anything like a piece of music or a drawing in a digital format. After finalizing your masterpiece, you can place it on NFT markets like OpenSea or Rarible by paying a small fee and wait for the buyer.
Trade NFTs
Trading NFTs demands more analytic skills than artistic ideas. You do not need to create the token. Instead, you have to know which one to buy in order to sell it later at a higher price. To purchase the right token, you must consider the factors we explained under Understanding NFTs. Other strategies like holding and flipping also fall under this category. In the holding strategy, you are making a long-term investment, and in flipping, you try to buy low and sell high. There is a great overlap between trading, holding, and flipping. Overall, in order to succeed in trading NFTs, you need to be vigilant and analytical and choose the best time to make a sale.
Play Games to Earn an Income from NFTs
Play to Earn, or P2E, is one of the latest trends in the NFT markets. Some DeFi games provide rewards in the form of NFTs. Players can either sell or trade the tokens or use them as an in-game asset to boost their character or equipment in the gameplay. The advantage of NFTs in gaming compared to trading cards is that NFTs are more flexible and interactive in this domain.
Rent to Earn an Income from NFTs
As mentioned earlier, smart contracts control NFTs and how they behave. NFT owners can use smart contracts to lend their tokens for a specific time and fee. reNFT is one of the platforms that facilitates the lending and borrowing of NFTs. Currently, the NFT lease fee is something between 0.002 and 2 wrapped Ethereum (WETH) per day. Of course, the rent period and fee are up to the creator of the NFT. The benefit of renting NFTs is that players (in a card trading game, for example) can temporarily use them to increase their chances of winning and gaining rewards. The NFTs can be in the form of a character skin, a weapon, or a feature that accelerates the pace of the game’s progress.
NFT Royalties
Royalty in NFTs refers to the profits that creators can gain from secondary resales of the asset. The creators set the royalty percentage when minting the token, which is about 6% on average. The royalties are unlimited, and each time the current owner sells the NFT, 6 to 10% of the profit goes to the creator. Luckily, smart contracts handle the process involved in royalty payments, and creators do not need to manually program the process.
NFT Staking
Token holders can lock their assets into a DeFi protocol to earn rewards. The reward percentage depends on the blockchain and the duration of staking. While some platforms are compatible with a diversity of NFTs, some only host the native NFTs of the same platform. Some platforms that provide NFT staking services include Kira Network, NFTX, Splinterlands and Only1. These platforms calculate the rarity of the NFT and generate an appropriate Annual Percentage Yield (APY). The rarer the NFT, the higher the APY and the staking reward.
NFT Startups
NFTs have a long way ahead in the realization of their full potential. Also, the public interest in NFTs has proved that the market is here to stay. Therefore, early investment in an NFT startup can yield considerable gains in the future. Furthermore, since you are not directly involved in minting or trading the tokens, it is less risky, given that the startup has a feasible roadmap.
Make NFTs out of Collectibles
Another way to earn an income from NFTs is by turning physical collectibles such as old stamps, an autographed poster, a football player’s T-shirt, etc., into NFTs. You can store your collectible’s representative token on the blockchain and sell it for a reasonable price. Right now, sports cards are the popular licensed NFT collectibles. NBA, for instance, has introduced a collection of NFT cards in the market.
Provide Liquidity with NFTs
Thanks to the fusion of NFTs and DeFi, token holders can provide liquidity for the liquidity pools and receive NFTs in return. For example, Uniswap gives LP-NFTs to its liquidity providers, representing their share in the liquidity pools, the pool address, and the token pair. LP-NFT owners can sell their tokens in a secondary market at will to monetize the share in the respective liquidity pool. On top of that, the owners can stake the LP-NFTs to earn additional yields.
Final Words
The NFT market is still in its formational stages and has not yet attained its rightful place in the digital financial markets. However, they have been around long enough to prove they do not represent a temporary market. Moreover, they can provide an alternative approach to earning an income. However, you should know the related concepts and how NFTs behave before investing.
Disclaimer
We have written this article for educational purposes, and it is not financial advice. Please note that the markets of digital assets are highly volatile. Also, you need to consider different aspects of investing; otherwise, you will likely lose your capital.
