What Exactly Are Non-Fungible Tokens (NFTs)?

Have you heard of NFTs but found it really difficult to comprehend what they are? Although these digital assets are quite popular right now, they can be somewhat puzzling at first. You know how limited edition prints of art or collectibles charge a premium since there are only a certain number available? NFTs operate in the same manner as they do but in the digital world.

Visualize an intriguing work of art that once captured your interest 99.99% of the time. It may be a sculpture, painting, or even a rare collectible object. That one work is extremely expensive and unique because the artist only made that one. Now consider being able to purchase a digital copy of that piece of art.

"But can't I just screenshot or copy that digital item?" is probably what's on your mind right now. Yes, you could attempt to replicate it, but that would be like trying to replicate Mike Tyson or the Mona Lisa; it wouldn't be the same as having the original. It is hard to duplicate or counterfeit an NFT since it is a distinct digital certificate of ownership that is validated on the blockchain.

Key Takeaway

• NFTs use blockchain to track ownership of unique digital items through cryptographic tokens
• They allow for new ownership models of virtual assets and real-world goods 
• Ethereum is the most established blockchain for NFTs but others are growing  
• Artists, developers and brands are monetizing IP through NFT releases
• Understanding NFT basics is important for engaging in this emerging digital economy

What is a NFT and What Makes it Unique?

A non-fungible token, often referred to as an NFT, is a unique digital asset that represents ownership of a unique item or piece of content, such as art, music, videos, or even tweets. NFTs are stored on a blockchain, which is a decentralized, distributed ledger that records transactions across a network of computers. So in essence, NFTs allow people to assert ownership over digital files through the use of blockchain. 

There are a few key things that make NFTs unique. Firstly, unlike cryptocurrencies which are fungible (interchangeable), no two NFTs are exactly the same. Even NFTs representing identical digital files can be distinguished from one another. This is because each NFT is associated with a unique cryptographic token that is encoded directly onto the blockchain. 

Another key difference between NFTs and cryptocurrencies is that while cryptocurrencies are fungible (each token is equal), NFTs are non-fungible and unique. This allows NFTs to represent real-world scarce digital goods while cryptocurrencies are more suited for use as a currency or medium of exchange.

History of Non-Fungible Tokens (NFTs)

While the recent mainstream popularity of NFTs is new, the concept of non-fungible tokens on blockchain has been around since 2014. That year saw the creation of the first known NFT called "Quantum" by Kevin McCoy, which was minted on the Namecoin blockchain. However, it wasn't until 2021 that this NFT was resold for a significant price, demonstrating early interest. 

Most NFTs today leverage one of two Ethereum technical standards - ERC-721 or ERC-1155. ERC-721 was created in 2018 and laid out the first formal specifications for how NFTs could be represented on Ethereum. It covered aspects like ownership transfer protocols and interfaces for wallets to handle NFTs. Then in 2019, the ERC-1155 standard was introduced as an improvement, allowing for more efficient "batch" minting and transfer of multiple NFTs in one transaction.

A major catalyst that drove the mainstream popularity of NFTs was the March 2021 sale of a digital artwork by the artist Beeple for $69 million at Christie's auction house. As one of the most expensive pieces of digital art ever sold, this record-breaking auction helped propel NFTs into the public consciousness. In the following months, countless new NFT projects were launched across domains like art, collectibles, virtual worlds and more.

How NFTs Work

The process of creating an NFT, known as "minting", involves a few key technical steps. First, the digital asset such as an image, video, etc. is uploaded to IPFS (InterPlanetary File System) which assigns it a unique hash-based IPFS address. This IPFS address is then included in the smart contract metadata along with details about things like the asset name, description, and properties.

Next, the smart contract is deployed to the blockchain, usually Ethereum, through a wallet. This "mints" the NFT by generating the unique cryptographic token on the blockchain. The token contains a link to the IPFS hash pointing to the file's location and is assigned to the wallet address that deployed the contract. From there, ownership of the NFT can be transferred by selling the token to another wallet.

Interestingly, different blockchains may refer to NFTs by different terminology. For example, on the Bitcoin blockchain they are called "Ordinals" which represent the serial numbers assigned to Satoshis (the smallest unit of Bitcoin). However, the core concepts remain the same - a unique digital asset is associated with a non-fungible cryptographic token on a blockchain, allowing ownership to be tracked and transferred.

Technical Details of NFTs

The inner workings of NFTs rely on two key technological advancements: blockchain technology and smart contracts. Here's a breakdown of how they function together:

Blockchain Technology

Imagine a giant, public ledger where every transaction is permanently recorded and visible to everyone. That's essentially what a blockchain is. Each record, or "block," contains data and is cryptographically linked to the blocks before and after it. This creates an immutable chain of information, making it nearly impossible to tamper with or alter any data.

In the case of NFTs, the blockchain acts as the secure and transparent record of ownership for each NFT. Every time an NFT is created (minted), transferred, or sold, this information is added to the blockchain ledger. This allows anyone to verify the ownership history and authenticity of an NFT.

Smart Contracts

Smart contracts are like a self-executing agreement written in code. These reside on the blockchain and automatically execute when certain predefined conditions are met.

For NFTs, smart contracts are used for several purposes:

• Minting NFTs: The minting process involves creating a unique identifier for the NFT on the blockchain. Smart contracts automate this process, ensuring only one NFT exists with that specific identifier.
• Transferring Ownership: When an NFT is sold, the smart contract facilitates the transfer of ownership from the seller's wallet to the buyer's wallet. This happens automatically upon successful completion of the transaction.
• Enforcing Royalties: Smart contracts can be programmed to automatically pay the original creator a percentage of any future sales of the NFT. This provides creators with a continuous stream of income from their work.

Proof-of-Work vs. Proof-of-Stake

It's important to note that different blockchains use different mechanisms to validate transactions and secure the network. The most common method is Proof-of-Work (PoW), which requires significant computational power and can be energy-intensive. This is a major criticism surrounding NFTs, as some blockchains using PoW have a large carbon footprint.

An alternative method gaining traction is Proof-of-Stake (PoS). This approach requires validators to hold a certain amount of the cryptocurrency to participate in securing the network. It's generally considered to be more energy-efficient than PoW.

How it all Works Together

When you create an NFT, you essentially interact with a smart contract deployed on a specific blockchain. The smart contract stores the NFT's metadata (information about the asset) and mints a unique token on the blockchain. This token represents ownership of the digital asset. Ownership is then transferred between wallets through further smart contract interactions.

• When an NFT is created ( minted ), its details and ownership information are encoded into a smart contract.
• This smart contract is then deployed onto a chosen blockchain.
• The minting process often involves paying a transaction fee, which helps secure the network (depending on the blockchain's validation system).
• Once minted, the NFT becomes a unique token on the blockchain, permanently linked to its smart contract.
• Ownership of the NFT is transferred by updating the ownership information within the smart contract on the blockchain ledger.

Blockchain and Fungibility

One of the key distinguishing factors between NFTs and cryptocurrencies relates to the concept of fungibility. Cryptocurrencies like Bitcoin are fungible, meaning each token is equal in value and interchangeable. For example, one Bitcoin is always worth the same as another Bitcoin. This fungibility makes crypto well-suited as a medium of exchange.

In contrast, NFTs are by definition non-fungible. Even if two NFTs represent the same exact digital file, each token has its own unique identifier and cannot be directly replaced by the other. This allows NFTs to represent scarce digital goods where provenance matters, like one-of-a-kind artwork. 

Additionally, some NFTs can be "bred" by combining attributes from other existing NFTs to create an entirely new token. For example, with Cryptokitties each cat has unique genetic traits that get passed on and mixed when cats are bred to create new offspring. This "extensibility" is another differentiating factor between the fixed supply models of cryptocurrencies versus the variable possibilities with NFTs.

10 Major Types of NFTs

Non-Fungible Tokens (NFTs) have exploded in popularity in recent years, with a wide variety of use cases and applications. Here are 10 of the major types of NFTs:

Digital Art NFTs

These are perhaps the most well-known type of NFT, allowing digital artists to create and sell unique pieces of art that are authenticated and stored on the blockchain. CryptoKitties, Bored Ape Yacht Club, and CryptoPunks are some of the most famous examples and have sold for millions of dollars.

Virtual Real Estate NFTs

Virtual real estate NFTs represent ownership of digital properties in virtual worlds or metaverses. These can include land parcels, buildings, or other structures within these digital environments. Owners of virtual real estate NFTs can use, develop, rent out, or sell their properties. Decentraland and The Sandbox are two leading platforms for virtual real estate NFTs.

Virtual Fashion/Wearables NFTs

These NFTs represent unique digital fashion items, such as clothing, accessories, or skins, that can be worn by avatars in virtual worlds or metaverses. Fashion brands are increasingly launching virtual clothing lines as NFTs, allowing users to customize their digital personas. Virtual wearables NFTs can also be used in gaming or social media applications.

Gaming NFTs

Gaming NFTs are blockchain-based assets used within video games, such as in-game items, characters, weapons, or land. These NFTs are scarce, verifiable, and can be traded outside the game on NFT marketplaces. Axie Infinity and Gods Unchained are prominent examples.

Sports and Collectibles NFTs

Sports and collectibles NFTs represent unique digital assets related to sports teams, athletes, or popular culture. These can include digital trading cards, video highlights, or other collectible items. NFTs allow for the digitization and scarcity of these types of collectibles, which can then be bought, sold, and traded by fans and collectors.

Music & Entertainment NFTs

Musicians, actors, and other content creators are experimenting with NFTs to sell unique digital content, experiences, and memorabilia to fans. Kings of Leon released an album as an NFT, while platforms like Audius are built around music-based NFTs.

Social Media NFTs

Some platforms are exploring the use of NFTs to represent membership, status, or engagement within online communities. Examples include profile pictures, badges, and other digital items that signify one's involvement or achievements.

Domain Name NFTs

Domain name NFTs are blockchain-based representations of unique website domain names. These allow users to own and trade these domain names as digital assets, potentially earning value from them. Domain name NFTs can be used to create decentralized websites or applications.

Utility NFTs

Utility NFTs are NFTs that provide their owners with specific functionalities or access, beyond just being a digital collectible. These can include access passes, membership tokens, or other real-world or digital benefits. Utility NFTs aim to provide practical use cases for the technology.

Fractional NFTs

Fractional NFTs are NFTs that are divided into smaller, tradable units. This allows multiple people to own a share of a valuable NFT, making high-priced digital assets more accessible to a broader range of investors. Fractional NFTs can be traded on specialized marketplaces.

Examples of NFTs

One of the earliest and most well-known examples of NFTs are Cryptokitties, which launched on the Ethereum blockchain in 2017. These were collectible virtual cats with various genetic traits like color, fur pattern, etc. represented by corresponding ERC-721 tokens. Owners could breed their kitties to create new offspring, some of which became quite valuable based on their rare attributes. 

Today, the first and largest NFT marketplace OpenSea hosts a variety of different categories. The art section includes profiles for digital artists, photos, animations and more. Virtual worlds contain profile pictures and accessories for games/metaverses. Trading cards span profiles from sports, entertainment and gaming. And collectibles encompass profile pictures and virtual collectibles and toys. 

High-profile NFT collections that have sold for millions include CryptoPunks (pixel art profile pictures), Bored Ape Yacht Club (cartoon monkey JPEGs), and Auto Glyphs (unique algorithmically generated portraits). And various established brands are now launching NFT collections, from Coca Cola to Gucci. The range of use cases continues expanding across domains like event tickets, domain names, digital clothing for avatars, and more.

Setting Up Your NFT Journey

Before getting started with NFTs, you'll need to set up a few essential tools.

1. Digital Wallet

A digital wallet is a software program that stores your cryptocurrencies and allows you to interact with the blockchain. There are many digital wallets available, but for NFTs, you'll want one that supports Ethereum (ETH) and ERC-721 tokens (the standard for NFTs).

How to set up a digital wallet:

MetaMask: A popular choice for NFT enthusiasts, MetaMask is a browser extension and mobile app that allows you to store ETH and interact with the Ethereum blockchain.

•  Download and install MetaMask from the Chrome Web Store or Mozilla Add-ons.
•  Create a new wallet by clicking "Create a Wallet" and following the prompts.
•  Set a strong password and store your seed phrase securely.

Trust Wallet: A mobile-only wallet that supports a wide range of cryptocurrencies, including ETH.

•  Download Trust Wallet from the App Store (iOS) or Google Play Store (Android).
•  Create a new wallet by tapping "Create a New Wallet" and following the prompts.
•  Set a strong password and store your seed phrase securely.

Ledger Live: A desktop application that connects to your Ledger hardware wallet.

•  Download and install Ledger Live from the official website.
•  Create a new wallet by clicking "Create a New Wallet" and following the prompts.
•  Connect your Ledger hardware wallet to your computer and follow the instructions.

2. Cryptocurrency

To buy and sell NFTs, you'll need a cryptocurrency like Ethereum (ETH). You can purchase ETH on various exchanges, such as:

How to buy ETH

UEEx: UEEx is a global cryptocurrency trading platform that offers a variety of trading services, including for cryptocurrencies like Ethereum (ETH). Here's a step-by-step guide on how to buy ETH on UEEx:

Create an Account:

• Go to the UEEx website 
• Click on "Sign Up" and enter your details to create a new account.
• Verify your email address to complete the registration.

Complete Verification:

• Log in to your newly created account.
• Navigate to the "Account" section and complete the required Know Your Customer (KYC) process to verify your identity.

Deposit Funds:

• Go to the "Deposit" section of the platform.
• Choose your preferred method for depositing funds (options may include bank transfer, credit/debit card, or cryptocurrencies).
• Follow the instructions to deposit funds into your UEEx account.

Buy ETH:

• Once your account is funded, head to the "Markets" section.
• Search for the ETH trading pair that matches your deposit currency (e.g., ETH/USD or ETH/BTC).
• Select the trading pair and enter the amount of ETH you want to purchase.
• Review the transaction details and confirm your purchase.

For more details, you can refer to their Beginner's Guide to Cryptocurrency for additional insights and tips.

3. NFT Marketplace Account

Choose a reputable NFT marketplace to buy and sell NFTs. Popular options include:

How to create an NFT marketplace account:

OpenSea: The largest NFT marketplace, offering a wide range of digital assets.

•  Go to OpenSea.io and click "Sign Up."
•  Enter your email address, username, and password.
•  Verify your email address by clicking the confirmation link sent by OpenSea.

Rarible: A community-driven NFT marketplace with a focus on digital art and collectibles.

•  Go to Rarible.com and click "Sign Up."
•  Enter your email address, username, and password.
•  Verify your email address by clicking the confirmation link sent by Rarible.

SuperRare: A digital art marketplace that focuses on unique, limited-edition artworks.

•  Go to SuperRare.co and click "Sign Up."
•  Enter your email address, username, and password.
•  Verify your email address by clicking the confirmation link sent by SuperRare.

4. Buying NFTs

Now that you have a digital wallet, cryptocurrency, and an NFT marketplace account, you're ready to start buying NFTs!

How to buy an NFT:

• Browse the marketplace: Explore the NFT marketplace, filtering by categories, such as art, collectibles, or music.
• Choose an NFT: Select the NFT you're interested in purchasing. Read the description, check the price, and review the creator's information.
• Check the price: Ensure you have enough ETH in your wallet to cover the purchase price.
• Place a bid or buy now: If the NFT is listed as an auction, you can place a bid. If it's a fixed price, you can buy it immediately.
• Confirm the transaction: Review the transaction details, including the price, gas fees, and NFT details. Confirm the transaction to complete the purchase.

5. Selling NFTs

If you're a creator or want to sell an NFT you already own, follow these steps:

How to sell an NFT:

• Create an NFT: If you're a creator, create your digital artwork, music, or collectible. If you already own an NFT, skip to the next step.
• Choose a marketplace: Select a reputable NFT marketplace to list your NFT. Ensure you have an account on the marketplace and follow their guidelines.
• Set a price: Determine the price for your NFT. You can set a fixed price or choose to auction it.
• Create a listing: Upload your NFT to the marketplace, adding a title, description, and price.
• Add metadata: Add relevant metadata, such as the NFT's name, description, and keywords.
• Set royalties: Determine the royalties you want to receive for future sales of your NFT.
• Publish the listing: Review and confirm the listing details, then publish your NFT for sale.
• Promote your NFT: Share your NFT on social media, online forums, and with collectors to attract potential buyers.

6 Benefits of Non-Fungible Tokens (NFTs)

It’s true some concerns surround this technology, the potential benefits of NFTs are however vast and transformative across various sectors. Here's a closer look at the exciting possibilities NFTs unlock:

1. Enhanced Digital Ownership and Scarcity

NFTs introduce a mechanism for establishing verifiable ownership of digital assets on a blockchain. This provides creators and collectors with a secure and transparent way to prove ownership and authenticity. 

By creating a scarce digital good represented by a unique NFT, artists can imbue digital creations with a sense of rarity and value that was previously difficult to achieve. This fosters a new paradigm for collecting digital art and collectibles.

2. Empowering Creators and New Revenue Streams

NFTs empower creators to monetize their work directly, bypassing traditional gatekeepers like galleries or auction houses. Through NFT marketplaces, artists can sell their creations directly to collectors, potentially capturing a larger share of the profits. 

Additionally, NFTs can be programmed with royalty structures that automatically pay the original creator a percentage of any future sales. This empowers creators to benefit financially from the ongoing appreciation of their work.

3. Enhanced Security and Fraud Prevention

NFTs leverage blockchain technology to create a more secure and trustworthy digital ownership landscape. Transactions are recorded permanently on a public ledger, making ownership history tamper-proof. 

Each NFT is a unique cryptographic token, making it nearly impossible to counterfeit. This reduces the risk of digital piracy as owning the NFT grants specific rights, not just a copy of the file. Smart contracts automate tasks and potentially restrict actions, further enhancing security.

4. New Investment Opportunities and Fractional Ownership

NFTs introduce new avenues for investment and asset diversification. NFTs can represent ownership of real-world assets like property or even fractional ownership of high-value digital collectibles or artwork. This opens doors to a wider range of investors and allows for more democratic participation in previously inaccessible asset classes.

5. Community Building and Engagement

NFTs can foster a strong sense of community around shared interests. NFT ownership can grant access to exclusive communities, events, or experiences. This fosters deeper connections between creators and collectors, creating a more vibrant and engaged ecosystem.

6. Unlocking New Use Cases Beyond Art

The application of NFTs extends beyond digital art and collectibles. NFTs are being explored for a variety of purposes, including ticketing for events, representing virtual assets within metaverse environments, and even streamlining supply chain management through verifiable tracking of physical goods. As the technology matures, we can expect even more innovative use cases to emerge.

“Some of the criticisms of NFTs include their environmental impact, volatility, and lack of regulation”

5 Downsides and Criticisms of NFTs

Even though NFTs offer exciting possibilities, they're not without their critics. Here are some of the potential downsides and criticisms to consider:

1. Environmental Impact

One of the biggest criticisms of NFTs is their environmental impact. The process of minting and trading NFTs often relies on blockchains that use a proof-of-work validation system, which can require vast amounts of energy. This has raised concerns about the environmental sustainability of NFTs, particularly when compared to traditional forms of ownership or digital assets.

2. Volatility and Speculation

The NFT market is still young and highly volatile. Prices can fluctuate wildly, and there's a risk of a bubble forming. This volatility can be risky for both buyers and sellers. Some critics argue that the current market is driven more by speculation than by underlying value.

3. Lack of Regulation

The NFT market is currently largely unregulated. This can lead to uncertainty and a lack of consumer protection. There are concerns about insider trading, market manipulation, and the potential for money laundering. Regulation in this space is still evolving.

4. Accessibility and Inequality

Creating and participating in the NFT market often requires cryptocurrency and a digital wallet. This can create a barrier to entry for those who are not familiar with these technologies or who lack the financial resources.

5. Artifice and Ownership in the Digital Age

Some critics argue that NFTs don't fundamentally change ownership of digital assets. After all, anyone can still copy a digital file, even if an NFT exists for it. The value of an NFT may lie more in the social currency and community associated with it, rather than any exclusive rights to the underlying digital asset.

Tips and Best Practices

• Research, research, research: Understand the NFT market, prices, and trends before buying or selling.
• Verify authenticity: Ensure the NFT is genuine and comes from a trusted source.
• Understand gas fees: Gas fees can add up quickly. Consider the costs when buying or selling NFTs.
• Store your NFTs safely: Use a secure digital wallet to store your NFTs, and keep your private keys safe.
• Stay up to date: Follow NFT marketplaces, creators, and collectors to stay informed about the latest trends and opportunities.
• Be cautious of scams: Be wary of suspicious activity, such as phishing scams or fake NFTs.
• Keep your software up to date: Ensure your digital wallet and browser are updated to prevent potential security vulnerabilities.

Conclusion

This article has provided an in-depth overview of NFT technology from the basic concepts to the intricate processes involved in creation, listing, and management. The growth of use cases extending beyond art into domains such as virtual assets, collectibles and event ticketing demonstrates the far-reaching impact that NFTs will continue having. 

While still early in its development, the non-fungible token model has immense potential to reshape industries by streamlining transactions, enabling new investment structures, and bringing unprecedented scarcity to digital goods. 

The opportunities for creativity as well as profit are vast. For both artists and entrepreneurs, venturing into this burgeoning space could well prove prescient.