What is an NFT? How non-fungible tokens work
- A non-fungible token (NFT) is a unique digital asset that represents ownership of real-world items such as artwork, music videos, music, etc.
- NFTs use the same blockchain technology that powers cryptocurrencies, but they are not currencies.
- Although NFTs have sold for millions, they are highly speculative assets that are not for everyone.
A non-fungible token (NFT) is a unique identifier that can cryptographically assign and prove ownership of digital assets.
As NFTs for digital artwork have sold for millions – sometimes tens of millions – of dollars, to say they’re popular might be underselling. From June 2021 to June 2022, NFT sales hit $29 billion.
However, once you understand how NFTs work, you will see that there are other use cases for this technology.
What does NFT mean?
NFT stands for “non-fungible token”. At its most basic, an NFT is a digital asset that ties ownership to unique physical or digital items, such as artwork, real estate, music, or video.
NFTs can be considered modern collectibles. They are bought and sold online and represent digital proof of ownership of a given item. NFTs are securely stored on a blockchain – the same technology behind cryptocurrencies – which ensures that the asset is one of a kind. Technology can also make it difficult to alter or counterfeit NFTs.
To really master NFTs, it helps to be familiar with the economic concept of fungibility.
- fungible items can be easily traded with each other as their value is not tied to their uniqueness. For example, you can exchange a $1 note for another $1 note, and you will still have $1 even if your new note has a different serial number.
- Non-fungible items are not interchangeable. With NFTs, each token has unique properties and is not worth the same amount as other similar tokens.
So why are people shelling out so much money for NFTs? “By creating an NFT, creators are able to verify the rarity and authenticity of almost anything digital,” says Solo Ceesay, co-founder and COO of Calaxia. “To compare it to the traditional art collection, there are infinite copies of the Mona Lisa in circulation, but there is only one original. NFT technology helps assign ownership of the original piece. “
Selling NFTs has been a lucrative business in the art world. Here are some examples you may have heard of:
- Digital artist Beeple has sold ‘Everydays – the First 5000 Days’ for $69.3 million via a Christie’s auction.
- A 20-second music video of LeBron James “Cosmic Dunk #29” has been sold for $208,000.
- A CryptoPunk NFT sold for $1.8 million on Sotheby’s first NFT sale organized.
- Twitter CEO Jack Dorsey is auctioning off an NFT of his first tweet, which sells for $2.9 million.
Other people may be able to make copies of the image, video or digital item you own when you purchase an NFT. But, like buying a unique piece of art or a limited-edition print, the original might be worth more.
How NFTs work
Many NFTs are created and stored on the Ethereum network, although other blockchains (such as Flow and Tezos) also support NFTs. Because anyone can view the blockchain, NFT ownership can be easily verified and traced, while the person or entity that owns the token can remain pseudonymous.
Different types of digital goods can be “tokenized”, such as artwork, elements of a game, and still or video images of a live stream – NBA best shots is one of the largest NFT marketplaces. While the NFT that passes ownership is added to the blockchain, the file size of the digital item does not matter as it remains separate from the blockchain.
According to the NFT, copyright or license rights may not come with the purchase, but that is not necessarily the case. Similarly, purchasing a limited edition print does not necessarily grant you exclusive rights to the image.
As the underlying technology and concept advances, NFTs could have many potential applications that go beyond the art world.
For example, a school could issue an NFT to students who have graduated and allow employers to easily verify an applicant’s education. Or, a venue could use NFTs to sell and track event tickets, potentially reducing resale fraud
What does it mean to hit an NFT?
Simply put, minting an NFT means that you turn a digital file (like a JPEG, GIF, or PNG) into a digital asset or collectible crypto on the blockchain. When your unique token is published on the blockchain, you can sell it. You will need to pay a small amount of cryptocurrency to mint an NFT.
You can create a collectibe as a single image or as multiple images. Depending on the marketplace you use to host your NFT, you may be able to add a name, description, and other metadata to your token. You can also set royalty amounts on your NFT, which are percentages you will make from each subsequent sale in the secondary market.
What is the difference between NFTs and cryptocurrency?
NFTs and cryptocurrencies are based on the same underlying blockchain technology. NFT markets may also require people to buy NFTs with cryptocurrency. However, cryptocurrencies and NFTs are created and used for different purposes.
Cryptocurrencies aim to act like currencies by storing value or allowing you to buy or sell goods. Cryptocurrency tokens are fungible tokens, similar to fiat currencies, like a dollar. NFTs create unique tokens that can show ownership and convey rights to digital goods.
How to buy an NFT
You can buy, sell, trade and create NFTs from online exchanges or marketplaces. The creator or current owner can choose a specific price. Or, there may be an auction and you will have to bid on the NFT.
- Foundation: A community-curated marketplace that requires creators to be invited by other creators who are already part of the platform.
- Clever Gateway: An art-driven marketplace that works with major brands, athletes and designers.
- OpenSea: One of the first and largest marketplaces where you can find NFTs for a wide range of collectibles.
- Rare: Offers a range of NFTs with an emphasis on art. Uses its own RARI token to reward members.
- super rare: A market that focuses on the preservation and supply of digital art.
The registration process may vary depending on the market. Typically, you’ll buy NFTs using a cryptocurrency, such as Ether (Ethereum’s native cryptocurrency), although the price may also be quoted in dollars. Depending on the market, there may be different fees associated with each transaction.
The bottom line
Although there may be many practical applications for NFTs in the future, they are primarily used with digital art today.
“For creators, NFTs create a transparent way to sell digital art that may not have much of a market. Additionally, there are ways in which creators can collect a fee for each subsequent sale of art,” says Ceesay. “On the other hand, collectors can speculate on digital art and have bragging rights about the channel’s rare collectibles.”
If you are considering buying an NFT as an investment, be aware that there is no guarantee that its value will increase. While some NFTs sell for thousands or millions of dollars, others may remain or become worthless.