It’s June 2017. CryptoPunks — digital art pieces from what will become one of the most revered and valuable NFT collections that have just been launched and are being claimed for free by Ethereum users.
Fast forward to 2022 and CryptoPunk #5822, a light blue alien punk with a bandana tied onto its head, is sold for $23.7M.
It would be a dream come true for most people to travel back in time to ’17 and claim one of those Punks for free. Claiming potentially valuable NFTs for free is a widespread online practice, but is it all it’s cracked up to be?
Can you actually get free NFTs that may gain value?
Let’s explore four good ways to get one online.
Get Free NFTs Via Play-To-Earn Games:
NFT gaming revolves around players earning NFTs that have actual value while having fun. Play-To-Earn (P2E) games help encourage people to buy and trade blockchain assets. Many P2E games run on the WAX blockchain and projects give users free NFTs to promote activity.
If you’re not opposed to a bit of competition, you can earn free NFTs by playing games like Splinterlands and The Sandbox. These games allow players to win in-game items that can be sold for cryptocurrency by participating in daily quests or tournaments.
Most NFT games have a booming marketplace where other players buy or trade in-game items. A game NFT may not be the next CryptoPunk, but it could grow to be of actual worth.
There are several great NFT games to choose from, so it should be reasonably easy to find an NFT game that interests you. Besides free NFTs, NFT gamers can also earn cryptocurrency.
Several NFT projects use giveaways to boost engagement or awareness for their project or express gratitude for their community’s support. These giveaways are most common on Twitter and Discord servers.
Following a project or an NFT influencer on Twitter is a good idea if you want to be aware of giveaways. You may be asked to retweet a post, share your ETH address, or follow specific accounts to win a giveaway. The winners are often chosen using a Twitter picker tool at random.
The downside to Twitter giveaways is that you may come across giveaway scams, where the Twitter user or project is using their giveaway post to gain followers without actually intending to gift an NFT. Do proper research on the user or project, so you don’t waste time and effort on these scam tweets.
Another great way to get free NFTs is through giveaways in Discord communities. Projects trying to support their community may gift an NFT to a lucky member or have a process through which members can gain an NFT. To have access to these sorts of giveaways, you’ll have to be a member of the project’s Discord server.
Just like on Twitter, some giveaways on Discord groups choose winners randomly. Projects may also make their Discord giveaways exclusive to members who already own their NFTs.
Fractal, a popular NFT project based on Solana, recently airdropped 100,000 NFTs to members who registered. Several other projects are airdropping free NFTs, as airdrops are a common way projects raise awareness of their coin or NFT.
All you have to do after finding an NFT airdrop is follow the process to register for the drop. Once it occurs, you’ll receive a token in your wallet. Enjin, a popular blockchain platform, sends free NFT airdrops randomly for users to claim. Free to Mint
NFT projects also create free to mint tokens or free mints to boost interest in their projects.
Free mints are NFTs you can claim without paying a minting fee to get the NFT. You’d still have to pay gas fees, which may be cheap or expensive depending on the project’s network. For example, Ethereum gas fees are costly compared to Near or Solana gas fees.
NFT airdrops, P2E games, giveaways, or free mints are all great ways to get a free NFT that may gain in value, but you should stay aware of possible scam projects or phishing attacks.
Projects with free mints sometimes get hacked right before mint and there have been situations where user’s wallets were drained of funds after connecting their wallets to malicious links. If you’re interested in getting free NFTs, you should:
- Always do your research.
- Avoid clicking on any link sent by a stranger to your DMs on Discord.
- Do not rush to connect your wallets to mint an NFT until after a reasonable time. Some free mints last for hours or days, so you can usually wait to ensure other collectors are claiming their free mints successfully.
- Keep in mind that no project admin would DM you to participate in a giveaway or free mint .
- Never give your seed phrase to anyone.
- Be part of an Alpha community. Alpha communities are the perfect place to get information on upcoming NFT Projects.
Final Thoughts: Getting NFTs That May Gain In Value
Free NFTs are not hard to come by, but what sort of NFT you claim matters. If you want to get a free NFT that may gain exponentially in value, you need to do your research.
You can learn about an NFT project from its whitepaper, Discord community and social posts. Most projects also publish updates on their timeline, growth or plans on a blog. It’s a good sign when a project offering giveaways or airdrops has:
- A strong team. You should be able to find the person or people who are building the NFT project.
- A clear vision or roadmap.
- A growing community.
Non-fungible tokens (NFTs) gained immense popularity and developed their own subculture in 2021. There’s a good chance you have heard about them unless you’ve not been paying attention.
From Paris Hilton and Nike to LeBron James and the NBA, celebrities and major brands are launching their own exclusive ‘drops’ and splurging millions on NFTs. As of 2022, artists and designers continue to flood the NFT space in huge swathes.
Why? NFTs can be quite lucrative. Creators like Trevor Jones and Beeple (Mike Winkelmann) make millions from NFT sales. For instance, Beeple’s Everydays: The First 5000 Days recently sold for $69 million at Christie’s. The sale placed him “among the top three most valuable living artists.”
So yeah, no judgment if you’re solely investing in NFTs towards financial freedom. Regardless, NFTs are so much more than speculation.
It’s unsurprising if all the noise around NFTs makes you wonder, “Something must be working, right?” Or is it just a well-oiled machination of good PR, hype, and buzz?
Either way, this article will take you into the world of NFTs from a creator’s viewpoint. I’ve created a step-by-step guide on minting your first NFT as a complete newbie.
Read on to learn how to turn your awesome art into NFTs and sell them in minutes.
But first —
Step 0: “I Don’t Know What an NFT Is.”
You’re reading this article, so I assume you know what NFTs are already, right?
Say you didn’t; here’s a quick intro to NFTs and what they entail. Of course, feel free to skip this step if you do.
NFTs are digital collectibles stored on the blockchain. Usually, real-world collectibles like artworks and antique items are auctioned along with a certificate of authenticity. Well, NFTs work almost the same way, only they exist in digital formats.
NFTs allow you to ensure digital files (think pictures, videos, GIFs, and audio) exist as a sole unique copy. With NFTs, you can verify ownership for digital content, a laudable feat in itself.
NFTs themselves are rarely stored on the blockchain. Instead, the blockchain mints a unique token representing the file ownership and stores a reference to the actual file. “Minting” occurs when you turn your art into an NFT; you’re essentially creating a unique token on the blockchain that represents the art.
And with that out of the way, let’s move on to the next step: choosing a platform.
Step 1: Choose a Platform to Sell Your NFT on
NFT platforms and marketplaces are steadily growing in number, each with different features and fee models.
Instead of running through a long list of marketplaces (which would be exhaustive), we’ll list some beginner-friendly ones that will allow you to mint your first NFT easily.
Some of the biggest NFT marketplaces include OpenSea, Rarible, SuperRare, Mintable, NFT ShowRoom, Foundation, NBA Top Shot Marketplace, Axie Marketplace, and Nifty Gateway.
You can research each marketplace to decide which one is right for you. However, for this guide, we’ll be focusing on OpenSea since it’s a pretty good place to start for beginners — and Rarible, too.
OpenSea is a popular, beginner-friendly platform for buying and selling NFTs. There are no restrictions on who can be a creator, and you can mint NFTs without coding knowledge. OpenSea was one of the earliest marketplaces featuring all kinds of NFTs, from digital art to in-game items.
What’s better? OpenSea introduced “lazy minting.” This feature helps you avoid high transaction fees on the Ethereum blockchain (Rarible supports this too). You can upload your art, mint your NFT, and put it up for sale without paying expensive ‘gas’ fees.
OpenSea bundles gas fees with the bid price when a collector buys your art. That way, you can avoid paying to mint an NFT no one eventually picks up.
(Just looking out for you. Okay, I’ll see myself out now.)
Now, let’s try to set up a wallet for your NFT adventures.
Step 2: Set Up a Crypto Wallet (and Buy Some Crypto)
The NFT market exists within the larger crypto space. You’ll need a compatible crypto wallet to buy, sell, and create NFTs, and interact with marketplaces. You’ll also need a wallet to pay listing fees on the marketplace and get paid in crypto when someone buys your art.
Thankfully, tons of crypto wallets are available for you to buy and store NFTs. Some popular wallets like MetaMask, Rainbow, and Coinbase Wallet are compatible with most marketplaces.
MetaMask is an excellent option for beginners, with over a million users worldwide. The wallet is available as a browser (Chrome and Firefox) extension and iOS/Android app. MetaMask connects easily with most NFT marketplaces, plus it has a straightforward setup process.
Again, feel free to skip ahead to step three if you’ve set up one of the recommended wallets.
Visit the MetaMask download page and download the browser extension or mobile app to get started. Once MetaMask is installed, click/tap the Create New Wallet button. You’ll receive a prompt to set a password (ensure it’s secure and easy to remember).
Finally, MetaMask will generate 12 random words; a “seed phrase.” I wouldn’t worry too much about its meaning — just remember it’s essential to keep it safe. You’ll need the phrase if you’re locked out of your account or need to recover your wallet on a new device.
After you back up the recovery phrase, you’ll receive a prompt to re-enter it in the same order. Then, simply accept the terms, and your wallet is up and running. Once you’ve set up your wallet, you may want to consider buying crypto. You can grab some Ethereum (ETH) — just enough to cover gas fees.
Now that you’ve set up a compatible wallet (and bought some crypto), it’s time to upload your digital file on the marketplace.
Step 3: Create Your NFT
As I mentioned earlier, there are several marketplaces where you can sell your NFT. Again, we’ll go with OpenSea for illustrative purposes, but the entire process is relatively straightforward for other marketplaces.
To get started, visit the OpenSea website and click/tap the Create button in the navigation. You’ll receive a prompt to connect your wallet using the available wallet providers.
Select the MetaMask option and approve the signature request in your wallet. Something to keep in mind: you’ll have to reconnect after 24 hours to keep your wallet safe.
Voila! The Create New Item screen.
You’ll need to upload the digital file and fill in information about your NFT. OpenSea accepts JPG, PNG, GIF, SVG, MP4, WEBM, MP3, WAV, OGG, GLB, and GLTF formats, up to 100 MB maximum.
Now would be a good time to let the creative juices flow. Pick a nice name and provide a detailed description of your item. You can also add an external link so users can learn more about the NFT.
You can ignore the Properties, Levels, and Stats fields for now. They make up the NFT metadata, but you often don’t need them unless you’re selling something like in-game items or characters.
Toggling Unlockable Content will allow you to include an access code or link that only the NFT owner can reveal. Go ahead and toggle Explicit & Sensitive Content if you plan to upload some steamy pictures on OpenSea. By doing this, you’ll mark your item as NSFW and remove it from safe search results.
Select Ethereum in the Blockchain dropdown and set your supply to 1 since you’re minting a one-of-one NFT. Note that you won’t be able to modify the blockchain once you’ve created the NFT.
You can also sell your NFT on OpenSea with the Polygon network. Of course, you can avoid paying fees outright if you do this, but there’s a catch. Collectors won’t be able to buy your NFT using the Ethereum network, and they’ll need to migrate their crypto over to Polygon.
Bottom line: extra gas fees and stress — you decide if it’s worth it.
Review the information and click Create to continue. You’ll see a yay! popup once you’ve created your NFT.
But it doesn’t end there. You probably guessed that, right?
You’ve just created your NFT, but OpenSea hasn’t listed it — at least not yet. Close the screen, and you can get to work on selling your NFT.
Click the blue Sell button on the item’s page (you can also go to your account and select your NFT in the Created tab). You have two listing options with NFTs created on Ethereum; a fixed price listing and a timed auction (Polygon only has the first option).
The fixed price option is self-explanatory; you set an exact price for the NFT in ETH. Also, you’ll have to specify for how long the listing will remain available. The default duration is a day, three days, or a week, but you can set a custom duration in the calendar popup.
Your item becomes available for sale immediately you list it. So, what if you already have a deal with a buyer? You can lock in the NFT for them by pasting their address into the Reserve for specific buyer field.
Okay, let’s move on to auctions.
The timed auction is more complex, but it can be an exciting way to sell your NFT. OpenSea has two auction types: an English auction and a Dutch auction.
The English auction allows you to sell to the highest bidder. You can complete the sale yourself if the highest bid is below 1 ETH, but you don’t have to. However, OpenSea automatically completes the sale and pays the gas fees if the final bid is above 1 ETH.
With a Dutch auction, like a fixed price listing, you set a starting price and an ending price. The price falls towards the ending price over the duration you set.
Unlike fixed-price listings, buyers bid with Wrapped ETH (WETH) in timed auctions. You can choose to accept bids at any time or even cancel the auction (you’ll pay a gas fee to do that, though).
Finally, click the Complete Listing button to put your NFT up for sale. You’ll have to sign a transaction with your wallet, either using the browser extension or the app, leading us to a nifty little problem. You’ve not sold an NFT on OpenSea before (most likely), so you’ll need to initialize your wallet by paying a one-time gas fee.
Remember that crypto you bought earlier? Well, it might come in handy now.
Once you click on Complete Listing, a “Register Proxy” transaction will appear in MetaMask. The gas fee fluctuates depending on the current network conditions. (Pro tip: You can monitor Ethereum gas fees and save money with Etherscan’s gas tracker.) You’ll see a signature request to approve the listing in your wallet, and after that, you’ll be able to finalize the sale.
If you completed the necessary steps, the NFT will now appear in your OpenSea profile. Your entire NFT trading history is publicly available on the blockchain forever, so you can easily track the price movement. No doubt, creating an NFT can be a complicated process, but you might be motivated by the profit potential.
I’ve covered the basics points you need to note while creating NFTs. Now it’s up to you to bring your imagination to life, create beautiful art, and market your NFT to the crypto community.
Few predicted NFTs would suddenly become the talk of the town in 2021 when they were first introduced in 2014. Reports show that NFT trading volume was around $10 million in Q3 2021, a massive 704% increase from the previous quarter. This was just the start.
To many, NFTs add a visually appealing and creative element to the crypto world often perceived as excessively techy and complicated.
Afterimage, audio, and video NFTs too hold, with NFT shards on their way, crypto investors are scrambling to jump on the fast-moving NFT bandwagon in time.
If you wish to become an NFT investor, this article will explain the steps of how to buy an NFT and where to buy them, introducing you to the most popular marketplaces.
Where to Buy NFTs
There are different marketplaces to buy different types of NFTs and each levy a specific fee for transacting on their platform, so you should aim to choose a cost-effective platform for buying your NFTs.
OpenSea, established in 2017 by Alex Atallah and Devin Finzer, is the biggest marketplace to buy, sell, and trade different types of NFTs across marketplaces and Blockchains. The company is based in North America and has its headquarters in New York City.
The platform hosts around 30 million NFTs on Ethereum, Polygon, and Klaytn blockchains. Apart from providing a platform to trade in NFTs, Open Sea aims to provide an integrated marketplace where developers can build and launch their NFTs. It supports Ether and around 150 other crypto tokens.
So you can use the OpenSea marketplace for buying a range of NFTs such as art, game NFTs, sports and music NFTs, utility NFTs such as keys to own gaming collectibles or gaming DAOs, enter particular Discord communities, and so on.
Binance is a crypto exchange as well as a popular NFT marketplace. It was established as a crypto exchange in 2017 by Changpeng Zhao and was based in China. Later, the company headquarters moved to the Cayman Islands.
People can buy, mint, and trade NFTs with the Binance NFT marketplace. It hosts some top NFT creators such as X-Metaverse, Big Time Studios, NFT_Pride, NFKings, and Seek Tiger. You can access different NFT collections such as Mafia Land NFTs, DinoX World Avatars, GiiiO role NFT, X-Metaverse Box, and Atlantis Metaverse Genesis NFT. Binance NFT also hosts features such as the mystery box feature from time to time where players get a chance to win rare and unique NFTs.
Aside from Gaming NFTs, the platform also offers NFTs from categories like Art, Sports, Entertainment, Collectibles, E-sports, and Premium NFTs.
The Foundation marketplace brings creators and collectors together on a platform to build and trade NFTs. It was established in February 2021 and is owned by Kayvon Tehranian hailing from San Francisco, California. Through Foundation, collectors can mint our buy images, video, and 3D artwork. A creator can create an art NFT on Foundation only through an invitation received by another creator, unlike other NFT platforms.
Rarible was founded by Moscow-based Alexei Falin and Alex Salnikov in 2019. It is headquartered in Delaware, United States. It hosts NFTs on Ethereum, Polygon, Tezos, and Flow blockchain and features a massive NFT collection ranging from art, photography, games, metaverse, music, domains, DeFi, Memes, Punks, NSFW, etc.
The software-giant Adobe partnered with Rarible in Dec 2021 to display content credentials of the listed NFTs to make it easy to protect and verify digital content.
This NFT marketplace was launched in 2018, where NFT lovers can collect and trade mainly art-oriented NFTs.
The platform introduced its token in 2021 when the artists and collectors in the community formed their DAO. Some of the prominent investors at SuperRare include Mark Cuban, Ashton Kutcher, and Samsung Next. The company is owned by John Crain, Johnathan Perkins, and Charles Crain and is based in the United States.
Project Specific Marketplaces
You can also buy specific NFT assets from their respective marketplaces. For example, NBA Top Shot is the marketplace to purchase official GIFs from the National Basketball Association. There is also an NFL All Day market for limited-edition NFL moments. Music lovers can visit the Musician Marketplace to buy NFTs of music compositions and platforms like Async Art, explicitly meant for programmable art.
There are dedicated marketplaces for particular NFT-based game items, such as Axie Marketplace for items used in the popular ‘Axie Infinity’ game. It also has its own token, and the users should have these tokens to buy things from the Axie Marketplace. Mintable is another platform for unique music, art, games, animation, and media collectibles.
SolSea, another marketplace on Solana, lets creators mint NFTs with embedded licenses and display the Rarity Rank of the NFTs listed.
Other NFT marketplaces include Nifty Gateway, Thetadrop, etc. NFTs on the Rarible and SuperRare marketplace is also available on OpenSea.
Let us now move on to the steps to buy an NFT.
How to Buy NFTs
- Buy Crypto Tokens from a CeFi or DeFi Exchange and Add Funds in the Crypto Wallet
First, you need to have the crypto tokens to possess your desired collectibles. You should buy the tokens supported in the NFT marketplace from where you wish to buy NFTs. Some marketplaces have their own tokens to transact. You can purchase these tokens from any DeFi exchange such as Coinbase, Binance, Gemini, etc.
Once purchased, you should send the tokens to your wallet, like the Metamask wallet, to be able to use them for the purchase. You can check here if you want to learn how to set up the metamask wallet. Remember to have sufficient units of the crypto token in your wallet to pay for the NFT and the Gas fees involved in the transaction; the Gas fee is the transaction charge for the computation effort involved in facilitating transactions on the Ethereum Blockchain. Gas fees vary according to the traffic on the network.
- Open the Marketplace
You can now open your chosen NFT marketplace and register on it. You will then scroll through the different types of NFTs offered. You can filter through the various collections offered to hunt for the NFT you wish to possess.
- Place Your Bid
You will find items under ‘Auction,’ where you can bid the price you wish to pay, or you can buy the item directly. NFT sellers auctioning items provide the Auction time, the previous selling price, and the cryptocurrency they are accepting from the buyers on the marketplace.
Link your wallet to the marketplace using the ‘Connect Wallet’ button to proceed with the purchase. Once the transaction is successful, you will see the amount deducted and find the NFT stored in your wallet. You can also store your NFTs on offline hardware wallets such as Trezor or Ledger.
The NFT value is generally determined by markets, with floor prices naturally setting the bottom-end range. Other factors could be the uniqueness and the artist’s reputation.
Final Thoughts: Keep Your NFTs Safe!
This should be about everything that you need to know for you to be able to buy an NFT. One last word of advice: if you are an NFT enthusiast and wish to mint and trade NFTs, you should be careful of NFT scams that can make you lose your crypto funds and NFTs through phishing attacks on your crypto wallets.
Keep in mind NFTs and cryptocurrency is very new and they can be volatile– you should never invest more than you can afford to lose in a volatile market such as NFTs.
Losing an NFT is more than just losing a screenshot– it could be millions or multiple millions of losses.
With a higher number of individual wallets suddenly becoming worth millions due to price increases, the rise of NFT theft is inevitable.
A quick refresher: as unique digital assets that live on a blockchain, NFTs represent anything from game assets or characters, songs, articles, digital art, and even tweets. The tokens themselves are valuable because they are unique and cannot be faked since they are blockchain assets– and markets respond accordingly to the provable scarcity. The actual trade value of an NFT depends on how well-known its creators are, its previous purchase value, ownership history.
Now that we know what NFTs are and why they are valuable let’s talk about some times NFTs were stolen by hackers and how.
OpenSea’s User Side Hacks
OpenSea is one of the world’s largest NFT marketplaces. So when, in February 2022, several OpenSea users reported that their accounts had been compromised, it spread like wildfire.
First, it was thought that the hack had led to NFT thefts worth about $200 million.
Then, a Twitter thread posted by blockchain security analysis firm PeckShield was retweeted by the CEO of OpenSea. The thread shared a technical analysis of the hack, revealing that only about $1.7M worth of NFTs had been stolen, and that there were 17 users affected.
Whereas readers had initially believed that OpenSea itself was compromised, it came out that the hack occurred through a phishing attack.
While it looks like only 17 users were affected by the attack, others are concerned that they may have been compromised as well, although these complaints have yet to be addressed by OpenSea.
Even more, OpenSea faces legal action by one of the victims who lost a Bored Ape NFT worth millions.
Besides the legal suit and the phishing attack, Fortune reports that OpenSea paid about $1.8 million to some of its users after a bug on its website allowed bad actors to purchase NFTs for less than what they were worth.
The MetaMask Hack
Metamask is a secure wallet app and web browser known for storing Ethereum tokens and NFTs.
In December 2021, a phishing attack impersonating Metamask Support invited users to seek help by filling out a Google Docs form. The form requested the user’s secret recovery phrase. A secret recovery phrase would allow a malicious actor to respawn a user’s wallet and steal its content.
Seeing as Metamask is an ETH wallet, this would majorly affect a user’s NFTs.
Fortunately, the attack was discovered early and the phishing bot was flagged by Metamask.
Sleepminting: The Beeple NFT Theft
Beeple’s Everydays – The First 5000 Days is one of the most valuable NFTs in existence. Sold for a whopping $69M, this NFT rocked the blockchain universe.
So when it was hacked by someone called “Mr. Nobody,” (aka Monsieur Personne), it was pretty alarming.
Sleepminting, first introduced by Personne, is a process that allows a hacker to “mint” an NFT under the name of someone without their knowledge or consent.
In April 2021, Personne, a self-acclaimed “white-hat” hacker, went on a mission to show the world how vulnerable the technology of NFTs are by attacking the most well-known NFT transaction. Personne sleepminted a second copy of Beeple’s Everydays – The First 5000 Days in Beeple’s name and then gifted the original, unapproved copy to someone named Arsene Lupin.
Lupin listed the NFT on Rarible and OpenSea, starting at a 0.01WETH, a despicable price compared to its value. Rarible and OpenSea eventually canceled the listing.
When contacted, Personne wrote, “The goal I want to achieve with this is to take the most expensive and historic NFT and show that if it is not protected, how can we guarantee that any NFT is safe from intentional malice, fraud, forgeries, theft, etc.?”
Final Thoughts: NFT Theft
NFTs have the potential to revolutionize hundreds of industries all over the world. As the technology advances, we’ll, unfortunately, most likely see some more thefts, and accompanying security improvements.
As an NFT owner, keeping your assets secure is vital.
- Use secure wallets to protect your addresses from attack
- Never give out your seed phrase
- Only use complex passwords that include phrases, numbers, and symbols
- Store all your passwords and phrases in physical form, locked away safely (not on your computer)
Don’t make it easy!
Bitcoin did the heavy lifting of creating a peer-to-peer decentralized and tokenized financial network. One person can send another person halfway around the world $1,000,000 in BTC for a paltry $20, sometimes even as low as a dollar and change.
The problem is that microtransactions, such as sending a friend $4 for a cup of coffee, cost the same.
Similarly, Ethereum created an entire galaxy of possibilities for DeFi, NFTs, and other decentralized applications. However, the breadth of its value has also been one of its detractions– as network gas fees skyrocket in times of extremely high traffic, making using the network ludicrously expensive for users and developers alike.
CryptoKitties, an early sensational NFT game, nearly ground Ethereum’s network activity to a halt in 2018 due to the throng of transactions. Even today, gas fees can be hundreds or thousands of dollars to mint a new Ethereum-based NFT.
However, problems are usually followed by problem solvers. Hundreds of developers have dedicated their professional lives of late to either building decentralized apps to help scale projects like Bitcoin or Ethereum or creating more scalable networks from the ground up.
Layer-1: The underlying blockchain architecture. For example, Bitcoin and Ethereum.
Layer-2: A network that sits on top of Layer-1, which facilities network activity. For example, the Lightning Network and Raiden Network.
The following Layer-1 vs. Layer-2 blockchain guide explores both approaches and how they contrast.
Layer-1 vs. Layer-2 Blockchains: The Basics
Layer-1 updates usually involve consensus protocol changes or sharding.
As you may know, Bitcoin and Ethereum use a gawky but effective consensus protocol called Proof-of-Work (PoW). It’s good at what it does because it works. However, as network activity grows, its limitations become unbearable for many.
PoW requires miners to solve cryptographically-difficult equations via computational power– hence Bitcoin mining facilities that are just warehouses with specifically designed computers running 24/7/365
At times, transactions can take way too long for convenience’s sake and become very expensive. Bitcoin can manage about seven transactions per second, whereas Ethereum can do 15-20.
Proof-of-Stake (PoS) is a relatively newer protocol; rather than computation power, it relies on people (validators) staking a certain quantity of holdings to validate transactions.
Changing consensus algorithms can be a divisive ordeal, and switching from PoW to PoS on a network as large as that of Bitcoin or Ethereum would require achieving agreement among the majority of participants, which can be extremely difficult.
Sharding is another Layer-1 scaling strategy. Sharding breaks transaction sets into smaller chunks called shards, which the network can process at a much faster rate. Think of cutting a PBJ sandwich into small pieces (shards) versus eating it bite by bite. Each small piece you eat is a finalized transaction, whereas the latter approach would require the whole sandwich to be eaten before the transactions are final.
Attempting to implement scalability measures on a Layer-1 blockchain would require a full or partial network update, which is a slow and contentious process; if things go sideways, the entire network could face enormous damages.
Many projects have been launched to provide users the scalability that the more legacy cryptocurrency projects have struggled to do.
For example, chains like Solana, Cosmos, and Cardano (yet to launch anything) have emerged in attempts to unseat Ethereum as the most popular blockchain network for dApps, primarily targeting its scalability issues and low-hanging fruit.
The user experience tends to be much faster and cheaper on the newer Layer-1s– transactions on Osmosis, a decentralized exchange built on Cosmos, cost around a penny. In contrast, the Ethereum DEX UniSwap can cost dozens or hundreds of dollars.
However, the opportunity to scale the world’s most popular Layer-1s instead of launch new ones from the ground up is an admirable and lucrative challenge accepted by many.
They do so through Layer-2 blockchain innovation.
Layer-2: Attempts at Scalability
Layer-2s are essentially sandboxes for creativity with minimal or zero disruption to the underlying network.
There are two types of Layer-2 blockchains: state channels and nested blockchains.
A state channel allows for two participants who would otherwise interact on the blockchain to interact off the blockchain, limiting the congestion of the network.
Imagine Bitcoin’s or Ethereum’s blockchain as a 10-lane superhighway with bumper-to-bumper traffic. A state channel would be the back-road approach you could take to avoid driving into a slow, expensive network and get to your end destination at a fraction of the time and cost.
Here’s how state channels work:
- A blockchain segment is sealed off through a smart contract or multi-signature means, where all participants agree on the conditions. Lightning Network and Raiden Network used Hashed Timelock Contracts (HTLCs) for their state channels.
- The transaction participants can then directly interact without needing to submit their request to the miners on the Layer-1.
- When all the transaction sets on the state channel are complete, the final state is added to the blockchain.
So, while a transaction is technically not “final” until added to the blockchain, state channel projects like Bitcoin’s Lightning Network and Ethereum’s Raiden Network effectively carry out the role of policing and verifying transactions.
The idea is that these “batched” transaction blocks can effectively internally settle; when they do, the entire batch is added to the blockchain. As such, Lightning Network enables fast microtransactions (low fees, fast settlement), and Raiden does the same thing for Ethereum’s broader functionality.
However, state channels have some limitations.
Nested blockchains aim to increase scalability exponentially, whereas state channels are more linear.
Ethereum is a popular breeding ground for decentralized apps to solve scalability issues. OmiseGO, for example, is experimenting with a nested blockchain scaling solution called Plasma.
In Plasma, multiple levels of specific-use blockchains sit on top of the leading blockchains in parent-child connections. The parent chain then dedicates specific work to child chains, such as a social network or decentralized exchange.
The root chain still calls all the shots and sets the ground rules, but nested blockchains relieve some load.
Final Thoughts: What You Should Know About Blockchain Scalability
While the differences between Layer-1 and Layer-2 solutions might seem exclusively technical, it’s worth considering that by collecting NFTs, holding tokens, and using dApps, you’re the direct stakeholder in the whole ordeal.
While Ethereum enjoys a considerable first-mover advantage for NFTs (and DeFi), boasting multi-billion-dollar dApps like OpenSea, competitors are gaining on its tail.
As an NFT investor or creator, being aware of broader industry trends like scalability is an excellent way to keep your ear to the ground, whether that be for the purpose of finding the next BAYC (on another chain) or creating the next homerun NFT brand for a diehard layer-1 alternative.