What is an NFT and How it Works – Everything you need to know!

With headlines about record-breaking NFT sales flooding the internet, it seems non-fungible tokens, or NFTs, are everywhere. But what exactly are NFTs and why are people suddenly so interested in them?

NFTs (non-fungible tokens) are one of the hottest trends in the crypto world. These digital assets are selling for millions of dollars, leaving many wondering – what exactly is an NFT, and why are people paying so much for them?

This beginner’s guide breaks down what you need to know about NFTs in plain language, from their basics to how to buy and sell them.

Key NFT Statistics and Growth

Sources: NonFungible.com ↗, Chainalysis ↗

What is an NFT?

NFT is an abbreviation for Non-Fungible Token. It is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and, therefore, not interchangeable. NFTs can represent items such as photos, videos, audio, and other types of digital files.

In simple terms, NFTs are cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other. They can be bought and sold like any other property but have no tangible form. Each NFT is unique and not interchangeable with others of the same type. Their ownership is tracked and transferable on digital ledgers.

Using blockchain technology allows creators, artists, collectors, and others to assert ownership over distinctive digital creations like photos, videos, or almost any digital file. While the digital file itself can be freely reproduced, the NFT is the unique identifier proving ownership and authenticity of the original.

So, in essence, an NFT encapsulates a unique ID on the blockchain that acts as a certificate of authenticity for digital possessions like crypto collectables, art, videos, audio, and other virtual assets. It represents a scarce good in the digital realm that enables proof of ownership over a specific digital item. The NFT has significant value as each comes with proof of its authenticity and scarcity.

How do NFTs work on blockchain?

The key ingredient that makes NFTs possible is blockchain technology. A blockchain is a distributed digital ledger that maintains a continuously growing list of records called blocks. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.

This makes blockchain difficult or impossible to modify, preventing manipulation and double-spending. NFT transactions are facilitated by specialized blockchain networks called “NFT marketplaces” that maintain the NFT registry and ownership details.

Some commonly used blockchains for NFTs include Ethereum, Tezos, Flow, Wax and Solana. Ethereum is currently the most popular, with most NFTs being issued as ERC-721 or ERC-1155 tokens on its blockchain.

When an NFT is created/minted, details like a unique identifier, metadata and ownership details are recorded on the blockchain in code and pinned to a specific digital asset. This asset could be anything digital, like photos, videos or audio tracks.

Ownership is transferred by transferring the unique cryptographic tokens from the seller’s crypto wallet to the buyer’s wallet. The transaction is permanently recorded on the NFT blockchain. Now the new owner has the proof of authenticity and scarcity granted by the NFT blockchain entry.

So in summary, blockchain enables the creation of unique digital assets represented by NFT tokens, facilitates ownership transfer through crypto wallets, and maintains an immutable record of transactions. This makes it possible to have true digital scarcity, proof of ownership and control over virtual assets.

Types of NFTs

There are different kinds of non-fungible tokens based on their application and use case:

• Art NFTs – This represents the original work of digital artists, which could be photos, sketches, animations or other forms of creative work. Significant examples include Beeple’s artwork and CryptoPunks collection.
• Collectables NFTs include unique, limited edition tokens collected for their scarcity value. Famous examples are NBA Top Shot clips, CryptoKitties, and Sorare fantasy football NFT cards.
• Gaming NFTs – In-game items, skins, weapons, lands etc., that players can purchase, trade or use within decentralized virtual worlds, metaverses and blockchain-based games.
• Metadata NFTs – Tokens linked/pinned to additional metadata stored elsewhere. This metadata includes authentication/ownership documents, additional digital artwork files, etc.
• Utility NFTs – Function-focused tokens that provide access/governance rights, staking rewards or other real-world utilities to holders. Examples include NFT event tickets or digital assets with actual cash-flow-producing abilities.
• Metaverse Land/Property NFTs – Digital real estate, lands and buildings in metaverses and virtual worlds that players can build upon. Examples include Decentraland and The Sandbox LAND parcels.
• Domain Name NFTs – .NFT versions of domain names integrated with NFT features for ownership verification and transactions.
• Media/IP NFTs – Digital copies of movies, music, books, and other creative works sold as NFTs, including future royalties.

So in summary, an NFT can represent almost any type of unique digital item including art, collectables, in-game assets, virtual land/property, metaverse items, media, domain names or certificates/documents. The applications are vast.

Real-World Use Cases of NFTs

NFT technology enables the representation of scarce digital assets and proof of ownership in many innovative ways. Here are some major use cases driving adoption:

• Digital Art Ownership Certification – NFTs allow artists to sell unique pieces of digital artwork to collectors and earn royalties on future sales. This was not possible earlier due to a lack of property rights.
• Collectibles & Trading Cards – Physical trading cards become collector items worth thousands, so their digital versions as unique NFT collections are also highly coveted and tradeable.
• Virtual Gaming Assets – Games where players can genuinely own in-game assets like weapons, lands or avatars as NFTs enable ownership, liquidity and interoperability across games.
• Digital Identity & Profiles – Self-sovereign identities, verification certificates, educational records, and achievements maintained as NFT profiles.
• Event Ticketing – NFT-based blockchain tickets sold directly from artists/organizers to fans remove scalpers and secure fungible resales.
• Fan Tokens & Membership Passes – Exclusive access, perks, and voting rights in DAOs or clubs represented through ERC-721/1155 standard NFT passes.
• Virtual Real Estate – Online worlds like Decentraland or Sandbox, where players can purchase lands/properties as NFTs to construct venues/attractions.
• Supply Chain & Provenance – Tracking luxury goods, diamonds, artworks, etc., using NFTs to verify authenticity and ownership details.
• Domain Names – .NFT versions for websites that can be freely bought/sold like other crypto collectables.
• Blockchain of Things (BoT) – Connecting physical assets to their digital avatars on the blockchain using NFT standards enables interoperable ownership transfers, tracking and payments.

So, in summary, NFT applications span art, collectables, gaming, entertainment, supply chain, identity management, event ticketing, real estate and more – transforming ownership across both physical and digital worlds. Their potential is only limited by creativity.

Here are some additional details about the NFT creation and sales process:

Prepare Metadata: Create a JSON file with details like name, description, images/video of the asset, properties, series etc. This “metadata” gets stored on the blockchain.

• Choose a Blockchain: Most NFTs are issued on Ethereum as ERC-721/1155 tokens. Other options are Flow, Tezos, Wax, etc.
• Set Up a Crypto Wallet: You’ll need an Ethereum wallet like Metamask to hold your NFTs and interact with the blockchain. Fund it with ETH for transaction fees.
• Mint the NFT: Use a platform like OpenSea, Rarible or Mintable to connect your wallet and upload the asset file and metadata to issue a unique NFT on the blockchain.
• Listing Your NFT: After minting, you can list it for auction or a fixed-price sale on marketplaces. Ensure high-quality images/video and descriptions.
• Market Your NFT: Promote it across social media, crypto communities and platforms to attract buyers. Consider giveaways/contests.
• Sell Your NFT: Once someone buys it paying in crypto like ETH directly to your wallet, the ownership gets transferred to the blockchain.
• Earn Royalties: Most platforms enable setting royalty percentages that you earn on reselling the NFT by future buyers forever.
• Store Your NFTs: The private keys of your wallet secure the NFTs. Consider hardware wallets for high-value assets or collections.
• Trade & Resell NFTs: Holders can freely trade NFTs they own to others directly or via marketplaces anytime later.

FAQs About NFTs

Do NFTs give copyright ownership?

No, NFTs confer ownership of the token itself – not necessarily the copyright or intellectual property rights. Original creators retain those rights unless specified otherwise.

What determines the value of an NFT?

NFT values depend on demand, scarcity, the creator’s reputation and other factors – similar to physical artworks. Provenance and significance also boost value.

Can an NFT be replicated or duplicated?

Are NFTs only digital art?

While the digital asset may be copied, the NFT blockchain token is unique to the original owner. The blockchain verifies authenticity and ownership rights.

No – NFTs represent digital collectables, including art, gaming items, tweets, audio files, avatars, virtual real estate, and more. They prove ownership of the original digital property.

But it also gives you the benefit of direct interaction with the NFT creator.

Conclusion

NFTs are an exciting new technology that allows users to own games’ virtual items. They’re similar to collectables, such as Pokémon cards, but they can be traded between players instead of being used to play a game. This means that NFTs are a form of cryptocurrency, allowing them to be exchanged for other cryptocurrencies.