What Are NFTs?

NFT stands for "non-fungible token." Non-fungible means anything unique that cannot be exchanged for anything else.

Fungibility is a characteristic of a commodity where each unit is interchangeable with another. You can exchange fungible items because their value isn't based on any unique set of properties.

For example, if you have a $1 note, you can easily exchange it for another $1 note or two half-dollar coins. Bitcoin is also a fungible item, as you can exchange one Bitcoin for another.

Conversely, a non-fungible token is a unique digital asset that cannot be exchanged for another NFT. This simply means that an NFT is a one-of-a-kind item and can only be bought with fiat or cryptocurrency.

Every NFT is a digital asset that can be transferred from one owner to another using blockchain technology to verify real ownership, making them unique. Because of this uniqueness, NFTs are valuable, just like collectibles.

NFTs are used to represent real-world objects like land, artwork, videos, and in-game items such as unique avatars. They are bought and sold online and encoded with the same underlying technology as cryptos.

Summary of Important Points

  • NFT stands for “non-fungible token,” which means unique.
  • Non-fungible objects cannot be exchanged with each other.
  • NFTs are unique digital assets on a blockchain and can be bought with crypto or fiat.
  • NFTs represent real-world objects and are valuable, just like collectibles.

How Do NFTs Work?

To create an NFT, a creator has to mint the digital asset on the blockchain. Minting refers to the process of creating an NFT with smart contracts. Many NFTs are generated and stored on the Ethereum blockchain, but you can also mint an NFT on other blockchains like Flow, Solana, and Tezos.

Like cryptocurrencies, NFTs can be traded and sold on marketplaces because they have value. Every non-fungible token is essentially a certificate of ownership of a digitalized asset form on the blockchain. The value comes from the collectibility of the asset and the potential sale value. Thus, like real art or any collectible, an NFT's worth is subject to the market and demand.

Many NFTs are on the Ethereum network, so users can only purchase them with Ether. To buy an NFT, the first step is to get some ETH. You can then purchase your desired NFT on NFT marketplaces such as OpenSea, Foundation, Rarible, and many others.

Features of NFTs

  • Indivisible Unlike cryptocurrencies, NFTs cannot be split into smaller denominations.
  • Fraud-proof NFTs are easily transferable and fraud-proof.
  • Uniqueness No two NFTs are the same due to the unique property ID stored in its metadata.
  • Authenticity NFTs are stored on blockchains. Hence the certificate of ownership is available for all to see, making the ownership authentic.

Benefits of NFTs

Security

Traditional art collectors run a lot of risks while transacting artwork. Before making a purchase, they have to take security measures to ensure smooth transactions.

In contrast, NFTs are traded most securely and transparently. Moreover, NFTs of massive value can be securely moved globally in full public view.

Composability

One exciting benefit of NFTs is that they can be built to interact with one another.

This means that a creator can launch their NFTs and leverage on the success of other collections. So, for example, a creator releases an NFT collection of 1,500 pixelated men, another creator can launch their collection, such as accessories for the previous collection.

Another usage-case enabled by composability is hidden NFT-exclusive content that is unlockable via the ownership of another NFT.

Revenue and Royalties

In the music and art industry, creator royalties are managed and collected by guilds, unions, and agencies. These bodies always take a share of the royalties, reducing creators' revenue streams.

With NFT technology, royalties can be coded into the NFT itself. Then, each time an NFT is sold or resold, a percentage of the proceeds is automatically sent to the creator.

Risks of NFTs

Trading NFTs involves a technical process that can confuse the average newbie crypto user. Additionally, thousands of users might rush to pay gas for a much-coveted NFT project as it's minted, and they end up walking away empty-handed. This risk is highly prominent as some buyers use bots to ensure they get certain tokens, making the market less accessible for newbie investors.