What is an NFT and how do they work?

Non-fungible tokens (NFTs) have exploded in the past two years, with the rising digital market showing no signs of slowing down. From art to music, collectables to property, the value of and interest in NFTs has thrown the industry into the spotlight.

What is an NFT and how do they work? In this, we explore what a non-fungible token is defined as, how they work, and what they can be used for.

What is an NFT?

First things first – let’s look at what an NFT actually is.

An NFT is a digital asset that lives on the blockchain that represents something online or in the real world, such as digital art, music, gaming assets, and documents.

As a non-fungible asset, each NFT has a different value. With fungible assets, like Bitcoin or fiat currency, each unit counts for exactly the same as other units. For example, one Bitcoin is equalled to another Bitcoin and one dollar is valued as the same as another dollar. With an NFT, each asset has unique properties and a unique value ascribed to it. One NFT, even in the same collection, is not necessarily equal to the next NFT.

Frequently, an NFT works hand-in-hand with cryptocurrencies as they are generally minted on platforms that operate with blockchain technology and have the same underlying software as cryptos.

The way an NFT is created and represented on the blockchain makes them not only unique from one another but also verifies that they are one of a kind asset. While digital creations can be copied (such as copying/pasting or taking a screenshot of an image online), it is easy to increase the supply. With verifiable limited supply, the NFT’s value is not diminished by oversupply. Moreover, the creator and owner of the NFT has creditable claim to the genuine asset. It’s similar to a certificate of authenticity signed by an artist that creates an art piece. The owner has full proof on the blockchain, which is transparent and immutable, that they do indeed own the original asset. This gives collectors ownership rights in a brand new way online.

How does an NFT work?

Based on the blockchain, an NFT is minted with all records of creation, exchange, trading, selling, buying, and (in some cases) destroying recorded permanently on a distributed public ledger. An NFT is minted – either directly by the artist who codes a smart contract or through an NFT marketplace – to represent both real-world and online items. This might be art, collectables, virtual avatar assets, video game skins, designer online clothing, music, and property. Typically NFTs are based on Ethereum’s blockchain, but there are other application and function blockchain networks that support NFTs.

An NFT is like a collector item, but a digital version. The owner gets exclusive ownership rights, with the data-based blockchain making it easy to verify any information related to NFT ownership.

What are NFTs being used for?

Currently, NFTs are used to represent digital art. However, as the industry expands, there are growing use-cases for NFTs and more brands are onboarding digital assets to their offerings. Common examples of use-cases for NFTs are:

• Digital in-game assets. Games, especially blockchain-based open-world games, are using NFTs to represent items such as weapons, powerups, and avatar wearables.
• Collectables. CryptoKitties is one of the original NFT projects. Collectors buy the NFTs to add to their digital collections, with more rare NFTs being in shorter supply, in higher demand, and being valued more. Sport’s trading cards online are popular as NFTs.
• Property ownership. In Metaverse platforms such as The Sandbox and Decentraland, NFTs are used to represent plots of land in different online regions in the game. Owners of the land plots can built on them, sell them, lease them out or monetise them by using them for advertising.
• Art and music. As stated, NFTs are commonly used to represent individual art works that have been tokenised on the blockchain and are represented by unique tokens. Ownership is represented on the blockchain and value is typically ascribed by how much people and collectors are willing to pay for the art (not unlike art value in the traditional scope).