FAQ

An NFT (non-fungible token) is a unique digital item stored on a blockchain. NFTs can represent almost anything, and serve as a digital record of ownership.

Fungible vs. non-fungible:
Before we dive into NFTs, it’s important to understand the “non-fungible” part of “non-fungible token.” When an item is fungible, it means it’s interchangeable with another of the same item. A classic example is a $1 dollar bill: you could swap dollars with someone and you’d both still have $1.

Non-fungible, on the other hand, means the item is totally unique, and therefore has its own unique value. For example, two cars of the same make and model might have different values based on how many miles are on the odometer, their accident records, or if it was previously owned by a celebrity.

How do NFTs work?
NFTs operate on blockchain technology. The blockchain is basically a large, digital, public record. The most popular blockchains are distributed across many nodes (read: people’s computers), which is why you’ll hear them described as “decentralized.”

So instead of a central company-owned server, the blockchain is distributed across a peer-to-peer network. Not only does this ensure that the blockchain remains immutable, it also allows the node operators to earn money, instead of a single company. Because the blockchain records and preserves history, it is uniquely positioned to transform provable authenticity and digital ownership.

When someone creates, transfers, buys, sells, or otherwise does something with an NFT, that all gets recorded on the blockchain. This is what enables authentication.

This record serves as a permanent statement of authenticity that can be viewed or accessed by anyone. Today, when you buy a piece of art or a collector's item, it typically comes with a paper certificate of authenticity, which you must then keep track of forever. It is easily forgotten, lost or destroyed, creating a very fragile system for authenticity. Blockchain’s offer a simple and more secure solution to this long standing issue of proving authenticity.
Let’s say you want to buy a piece of artwork from Tyler Hobbs. With NFTs, you can see the entire history of that piece, all the past owners, every sale, all the way back to Hobbs’ original creation of the piece. Without NFTs, you wouldn’t know if you were buying the real piece or just a really good fake.

The impact of NFT technology:
Blockchain technology is revolutionary for digital items. With NFTs, digital items can be provably scarce, openly transferable, and have authenticated ownership. But you might be thinking…so what?

For creators, these new attributes are incredibly powerful. Instead of distributing their artwork, music, or other creations on platforms that are traditionally hard to monetize, they’re able to sell unique and authenticated items on a blockchain-based marketplace. In addition to the initial sales, NFT creators may receive set creator earnings on secondary sales. For example, a developer could make an in-game skin that can be used across a variety of games and has established authenticity and ownership, and that developer may earn money other times that skin is bought or sold.

This technology is revolutionary for collectors, too. Imagine you’re about to buy a concert ticket online— with NFTs, you can trust its authenticity, because of the undisputed blockchain history, instead of relying on the reseller’s word.

What are NFTs used for?

An NFT can represent anything, but let’s explore some of the ways NFTs are being used today, and potential implementations for the future.

An art NFT is a type of NFT that represents a piece of digital art, such as a drawing, painting, or piece of digital artwork. Each art NFT is unique and traceable to the original creator of the NFT, and that connection to the creator may be valuable as well. Art NFTs are a new form of digital art that can be collected and sold, similar to physical artwork. Art NFTs can also have additional utility (for example, owning the NFT may also give you commercial rights to use the underlying artwork).

Artists are creating incredible and novel pieces with NFTs. Damien Hirst used NFTs in his collection “The Currency”, in which he created digital versions of 10,000 unique physical paintings. Collectors had one year to decide if they wanted the digital or the physical version of the painting— whichever version they did not choose would be destroyed.

In simple terms, a crypto wallet helps you buy, sell, and store your cryptocurrency and (in many cases) your NFTs. Going a level deeper, a crypto wallet manages access to your private key, which is needed to control a blockchain wallet address. Your cryptocurrency and NFTs are not stored in/on a crypto wallet; they remain on the blockchain and can be accessed, controlled, and managed through use of a crypto wallet.

Think of your wallet as the key to your address on the blockchain — you use the key to open the safe where your items are stored on the blockchain and use the key to send/receive items to/from your address on the blockchain. Just like any key, security of your wallet and private key (or seed phrase) are critically important. In this article, we’ll walk through the types of crypto wallets and how to set one up.

Types of crypto wallets

Custodial vs. non-custodial

NFTs operate on blockchain technology. The blockchain is basically a large, digital, public record. The most popular blockchains are distributed across many nodes (read: people’s computers), which is why you’ll hear them described as “decentralized.”

There are two main types of crypto wallets: custodial (also called “hosted”) and non-custodial (or "self-custodied") wallets. Custodial wallets are managed by a third-party company, whereas a non-custodial wallet is not. Custodial wallets are akin to keeping the key to your safe at a secure facility operated by a third-party (who will verify your identity in some way before giving you the key), and non-custodial wallets are akin to keeping your key with you or at your home.

Custodial wallets therefore require less responsibility, but are at the mercy of the third party (like, if the third-party’s facility was robbed).

Non-custodial wallets give you full control but also mean you have to be extra careful (like, not losing your key or accidentally throwing it away when you reorganize your closet).

Ethereum calls gas “the fuel that allows [the network] to operate, in the same way that a car needs gasoline to run.”

Gas fees compensate the entities, called node operators or network validators, who validate transactions on the blockchain. Each blockchain supported by Axie NFT Exchange (Ethereum, Polygon, Klaytn, Arbitrum, Optimism, Avalanche and BNB Chain) has different gas fees. These fees differ depending on how each chain validates transactions.

Users often want to know who receives the money from these gas fees, and the answer to that depends on the method each blockchain uses to verify transactions. So let’s step back for a moment to discuss the two primary methods of validation: Proof-of-Stake and Proof-of-Work.

Proof-of-Stake and Proof-of-Work

Blockchains that use the Proof-of-Stake method verify transactions using validators. Validators are users who stake large amounts of that blockchain’s cryptocurrency. These validators check each transaction and monitor all activity on the blockchain to ensure it’s correct. This method has validators vote on the outcome.

Blockchains that use the Proof-of-Work method verify transactions using miners. Miners are tasked with solving complex math equations that verify each transaction. Both of these methods are complex, time-consuming, and ultimately ensure the security of the blockchain, which is why the gas fees are awarded to the operators.

What is The Merge and how does it impact gas fees?

Ethereum has historically used the Proof-of-Work method but recently changed to the Proof-of-Stake method in an event known as “The Merge.” According to the Ethereum Foundation, this will reduce its energy consumption by ~99.95%. The Foundation has stated that “the Merge was a change of consensus mechanism, not an expansion of network capacity, and was never intended to lower gas fees.”

What impacts gas fees and how are they calculated?

Gas fees increase when more people use applications that run on top of a blockchain’s network. Gas fees increase as these users compete for space within the block. Think of it like Uber’s surge pricing model that increases the cost of booking a ride during the busiest commuting times.

Fees (Taxes) are incurred during withdrawals or when data is stored or changed, tokens are transferred, NFTs are minted, sold, or purchased, and so on. Each of these actions involves different changes to the blockchain and therefore requires a different gas fee.

It’s also important to note that gas fees don’t change the price of the NFT you’re buying, but they do change the overall price of the transaction, so buying an NFT during a busy time when other people are also using the network can result in an overall higher cost.d.