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What are NFTs? Non-Fungible Tokens Explained

What are NFTs? Non-Fungible Tokens Explained

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Non-fungible tokens, or NFTs, are the latest trend in the crypto community, taking the world’s digital collectibles by storm. NFTs captured the world’s attention as they came to reshape the future of digital work. But are NFTs worth all this hype? Similar to cryptocurrencies, some experts see NFTs as a bubble that will pop sooner or later. While others believe they are here to stay and change investing forever. 

What is a Non-Fungible Token (NFT)? 

NFTs are digital assets that cryptographically represent the ownership of real items like art, music, collectibles and even real estate. They are modern collectibles that can be bought and sold online like any property, mainly using cryptocurrencies, but with no tangible form of their own. NFTs exist on a blockchain, the database that underpins cryptocurrencies. 

They were created to identify things in a unique way and can be perfectly used on platforms of collectible items. 

For better understanding of what NFTs are, it’s useful to get familiar with the fungibility concept first. 

  • Fungible Assets: are exchangeable assets that can be easily interchanged with one another. Their value is not defined by their uniqueness. For example, Bitcoin and USD are exchangeable for one another, you can exchange 1 BTC for $1 USD, so both are fungible assets. 
  • Non-Fungible Assets: are not interchangeable. Each one has its unique properties and worth and is never equal in value or similar to another.   For NFTs, for example, the value of each token is defined by its unique properties. 

Non-fungible tokens have been around since 2014, but have boomed recently as they are becoming an increasingly popular channel to buy and sell digital artwork, even among celebrities and public figures. 

NFTs were developed on the Ethereum blockchain, the first to support NFTs. Other blockchains have supported or plan to support NFTs due to their growing popularity. Non-fungible tokens were developed on the ERC-721 standard, which defined the security and metadata of the tokens. 

NFTs became popular with the success of CryotoKitties Project in 2017. It was an online game to adopt and trade virtual cats with unique identifications on the Ethereum’s blockchain. Each kitty is one-of-a-kind and has a value priced in ether. Soon after, the game went viral and raised $12.5 million worth of investments. Some kitties were being traded for $100,000 each. 

How are NFTs Different from Cryptocurrencies?

What are NFTs? Non-Fungible Tokens Explained
BTC

Cryptocurrencies are fungible assets that can be traded or exchanged for another. Units or tokens of a cryptocurrency are equal to one another in value. The fungibility of cryptocurrencies allows for higher credibility when it comes to conducting transactions on the blockchain. 

On the other hand, Each NFT has its own digital signature which makes it possible to be exchanged for one another. 

Unlike cryptocurrencies, non-fungible tokens lack the interchangeability feature. Each token is unique and irreplaceable, no two NFT tokens are the same. NFTs are one-of-a-kind assets that represent digital proof of ownership securely recorded on a blockchain

How Do NFTs Work? 

NFTs exist on a blockchain, a distributed public ledger that records transactions. They are typically created on the Ethereum blockchain. The NFT is minted from digital works that include art, GIFs, collectibles, videos or music. Also, they can be a representation of non-digital assets or real-world items like tickets, legal documents, signatures and tokenized invoices. 

The are specific properties that identify NFTs including: 

  • You can easily prove your ownership of an NFT. 
  • They are immutable and can’t be manipulated. 
  • It is an asset which you can sell. In some cases, the original creator will earn resale royalty.
  • As a creator, you can determine the scarcity of an NFT. 
  • NFTs can be sold and bought on any NFT market or peer-to-peer. NFT marketplace connects original creators with buyers. 
What are NFTs? Non-Fungible Tokens Explained
NFT

Characteristics of The Non-Fungible Token (NFT)

  • Scarcity: NFTs derive their value from being scarce and unique. Every NFT is special with an unalterable record making it authentic and unequaled.
  • Transparency: Non-fungible tokens are stored on a distributed ledger, a decentralized and secured database where records of token issuance, transfers and activities can be publicly verified. 
  • Interoperability and Indivisibility: NFTs can be sold and purchased across distributed ledgers. They are indivisible and can’t be utilized partially. 
  • Ownership: The ownership of NFTs is managed through unique ID and metadata, neither can be replicated. An NFT can only have one owner at a time. Smart contracts assign ownership of NFTs and manage their transferability. 

Standards for Non-Fungible Tokens (NFTs)

Non-Fungible Tokens (NFTs) can be created and issued on multiple frameworks on different networks. They can be interoperated and stored across different DLTs. Most NFTs are built using the ERC-721 consistent standard. 

What are NFTs? Non-Fungible Tokens Explained
Ethereum

The ERC-721 introduces a standard for unique NFTs, where each token has its own value depending on its rarity, age and type. It is a NFT Standard that implements an API for tokens within smart contracts.

Another standard for non-fungible tokens is the ERC-1155 standard. This standard allows for semi-fungible tokens which is particularly useful for gaming.

Recently, Ethereum added the EIP-2309 standard to make the process of minting NFTs more efficient. This standard allows users to mint as many NFTs as they like in one transaction.

How to Buy and Sell an NFT? 

Typically, any digital art can be purchased as an NFT.  Few things to consider when purchasing one is choosing the marketplace, deciding what type of digital wallet required to store the NFT and which cryptocurrency you will have to pay in order to complete the purchase. There are multiple niche marketplaces for specific types of NFTs. One important thing to be aware of is the gas fee, which is typically a fee collected to conduct the transaction on the blockchain. 

You can sell NFTs on marketplaces where you upload your content to a marketplace and follow the instructions to turn it into an NFT. The process may vary from one platform to another. Basically, you will have to include a description of your content and suggest a price. Usually, NFTs are purchased using Ethereum or ERC-20 tokens. 

Popular NFT Marketplaces

What are NFTs? Non-Fungible Tokens Explained

Here are the largest and most popular NFT marketplaces: 

  1. Opensea: A peer-to-peer NFT platform that declares itself as the world’s first and largest digital marketplace for crypto collectibles and non-fungible tokens (NFTs). Any user can simply create an account and browse NFT collections. 
  2. Rarible: An open NFT marketplace where artists and NFT creators sell their work. 

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