What is NFT?
The term NFT became a mainstream concept in 2021 and continues to attract attention. This article explains what an NFT is, how it works, and what NFTs are commonly used for.
As one of the most searched terms on Google last year, NFT generated significant activity in crypto markets—Chainalysis reported about $26 billion in NFT-related revenue for 2021. But what exactly is an NFT?
What is NFT?
NFT is an abbreviation for "Non-Fungible Token," which denotes a non-fungible digital asset.
They act as digital certificates of authenticity, representing ownership of a unique digital item such as an image, video, drawing, song, or tweet.
Ownership and provenance can be tracked on a public blockchain using standards commonly implemented on Ethereum. NFTs are therefore closely associated with cryptocurrencies because they use the same underlying blockchain technology.
They are non-fungible because each token is unique and cannot be exchanged for another token of equal value in a one-to-one manner.
How does NFT work?
The concept can be illustrated simply. An artist creates a digital work and mints it as an NFT at a price they set. If a buyer purchases it, the blockchain records the transaction and the new owner.
Why pay for a digital image that can be copied? A downloaded copy may look identical, but it is not the original token recorded on the blockchain. NFTs are designed to represent verifiable ownership of the original item. In many implementations, creators can also set royalties so they receive a percentage of future resales.
Characteristics of NFTs
Unique: Each NFT represents a distinct original and a certified owner; other instances are copies.
Non-interoperable: NFTs are unique and cannot be exchanged as identical units for assets of equal value.
Indestructible and verifiable: Token metadata and ownership are recorded on a blockchain contract, enabling a verifiable history from creator to current owner.
Full ownership: Purchasing an NFT transfers ownership of that token; the rights attached depend on the contract and any license terms specified by the creator.
Use cases
The idea of NFTs dates back to 2014, but popularity surged in 2021. A high-profile example is Beeple (Mike Winkelmann), whose digital collage "Everydays: The First 5,000 Days" sold for $69.3 million at Christie's.
Another notable case was Jack Dorsey selling the first tweet as an NFT for $2.9 million. Selling unique, transferable digital items with provable scarcity has enabled new creative and commercial models across art, collectibles, music, sports, and gaming.
Standards such as ERC-721 and ERC-1155 on Ethereum are commonly used to certify token properties. If you want to create an NFT, platforms like OpenSea or Mintable let creators upload files and associate them with a smart contract; buyers typically need an Ethereum account to transact.
What is an NFT for?
NFTs make it possible to verify originality and ownership of digital works via blockchain. In gaming, NFTs can represent unique in-game items that players can buy, sell, or trade, allowing secondary markets for virtual goods.
Beyond art and gaming, NFTs are being explored for collectibles, music, film, sports memorabilia, and fashion, offering a way to register and transfer digital property rights.
Disadvantages
Critics view NFTs as potentially speculative and concentrated among a small number of owners: Chainalysis reported that 9% of NFT owners hold 80% of market value. Risks include fraud, scams, unclear regulation and tax treatment, and the environmental impact associated with certain blockchain transaction models.
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