What is an NFT? A Beginner’s Guide
By: Ofir Beigel | Last updated: 1/1/22
Non-fungible tokens, or NFTs, are unique tokens which are often used to prove ownership of a certain digital file or other asset. In this post, I’ll explain in detail what an NFT is, and what you may want to know before getting involved.
What is an NFT Summary
NFT stands for non-fungible token. Unlike regular, fungible tokens, NFTs are unique tokens that are not interchangeable with any other token – they’re most often a one-of-a-kind. NFTs are most often tied to another asset, representing a digital certificate of its ownership.
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That’s NFTs in a nutshell. If you want a more detailed review, keep on reading. Here’s what I’ll cover:
- Fungibility Explained
- What are NFTs?
- How are NFTs Created?
- NFT Characteristics
- Buying NFTs
- NFT Uses
NFT stands for Non Fungible Token, but what exactly is “Fungible”?
Well, you can think of something that is fungible as interchangeable or as having no unique properties. For example, if I have a one dollar bill and ask you to trade it with me for a different one dollar bill you probably won’t have any issue with that, since they are basically two of the same thing – meaning both dollar bills are fungible.
However, if by chance, you happen to have a rare dollar bill with unique markings or a unique serial number like, say, 12345678 or a true binary serial number (where all of the digits are either 0 or 1), you probably won’t be so inclined to trade it. These one dollar bills are extremely rare and can be traded for up to 5000 dollars and more. In other words, these bills are non fungible, they are unique and have specific attributes that distinguish them from the rest of the bills.
So a non fungible token is like a unique dollar bill. It’s a digital coin that has unique attributes attached to it.
Fun fact, Bitcoin and many other cryptocurrencies are considered non fungible in the sense that you can attach a certain history to a coin. So , for example, if a certain Bitcoin was used for illegal activity it may be worth less than a newly minted Bitcoin with no history.
NFTs are used to prove ownership of a certain digital file, or a digital certificate of authenticity. Confused? Don’t worry, let’s break it down.
When we look at a piece of art – a painting for example – the original painting is always much more valuable than its copies. There are also specific methods you can use to validate the authenticity of that painting. For example, receiving a certificate of authenticity.
But when it comes to a digital file, how do you know what is the original and what is a copy? And does it even matter?
Well apparently it does. In the same way that people collect physical art, digital goods are becoming very popular. For example, I can write an ebook and sell the first copy of it as an NFT. Whoever buys it from me will have the right to say that they own the first ever copy of my book.
But here is where it gets tricky: It’s not that I gave the buyer any rights to my book or anything tangible for that matter, I only gave the buyer the right to brag that he or she owns the first copy. So, unlike buying a painting in real life and taking it home for example, with an NFT you don’t have any power over the goods that you’re buying.
That’s why it’s questionable as to how valuable NFTs actually are. An NFT is worth only as much as the next guy is willing to pay for it. The fact that it doesn’t even exist in the physical world might be a hard concept to grasp for some people.
To create an NFT, a creator first creates a digital good. This could be an image, a video, a tweet, a website or anything else that lives in the online world. The creator then creates a coin, or more accurately a token, on a blockchain that supports smart contracts like Ethereum, Cardano or Solana.
This token holds within it information about the digital goods that are being sold. This information includes the token name, the token symbol and a unique hash that proves the authenticity of the NFT.
Keep in mind that the digital goods themselves aren’t stored inside the token, only attributes relating to them. So while the NFT may point to where the file can be found online, anyone can use that link and it’s not unique in any way.
Once the token is created the creator can sell it to someone else, and that someone will be the new owner of that digital good.
To sum it up, an NFT is a token on a blockchain that acts as a digital certificate of authenticity. It can be verified instantly and also show the history of its previous owners.
Aside from being non fungible or unique, NFTs are also indivisible, easily transferable, fraud proof and programmable. This means that NFT creators can decide that royalties will be paid to them each time an NFT changes hands.
Some examples of popular NFTs include cryptopunks – a collection of 10,000 8-bit style pixel art images of…well…punks, that are sold as NFTs and their price has already surpassed several millions of dollars.
Another example is NBA Top Shot – a marketplace where fans can trade NFTs of NBA moments. These moments are video clips packaged as an NFT, a bit like the trading cards we used to have back in the day. Using NFTs for sports highlights is another way players can make money by getting royalties when a Top Shot moment that they are highlighted in gets sold as an NFT.
Additional popular examples include Jack Dorsey, the founder of Twitter, selling his first ever Tweet as an NFT and the artist Beeple selling an NFT of his work for 69 million dollars.
In general there are two types of NFT marketplaces – centralized and decentralized:
The centralized marketplaces allow you to sign up and fund your account using a credit card or other form of payment. For example, Nifty Gateway is a centralized NFT marketplace owned by the exchange Gemini. There, you can buy NFTs using your Gemini balance.
On the other hand, if you want to make NFT purchases through a decentralized marketplace you’ll need a wallet that’s compatible with the blockchain your NFT was created on.
For example, in Ethereum’s case, MetaMask is the most popular option. It’s a wallet that was built as a browser extension and you can use it to log into decentralized NFT marketplaces such as OpenSEA, Rarible or SuperRare.
Once you fund your account or wallet, you can just buy or bid on different NFTs in the marketplace. In the end, an NFT is just a coin, or token to be more precise, that is stored on your cryptocurrency wallet just like any other cryptocurrency.
Keep in mind that unless you’re an avid collector you’ll also need to sell the NFT at some point, and NFTs aren’t very liquid. In other words, they don’t always have a market of people who want to buy them. Just like it might be hard to find someone who’ll pay thousands of dollars for a rare baseball or Pokemon card.
As you can imagine, this market is very hype-driven. This could lead to a situation where a person buys an NFT for millions of dollars only to find out that he can’t sell it later on since the interest in that specific NFT is no longer there.
For one, being the owner of an NFT provides you with “bragging rights” of the digital asset the NFT is associated with, and there are several creative ways to show it off. For example, some NFTs are displayed digitally across art galleries. Another creative idea that’s been getting quite popular is to use a digital frame that can display the NFT and hang it up in your house.
Alternatively you can use a physical print of the NFT with a QR code next to it pointing to your proof of ownership on the blockchain. There are also online galleries inside virtual worlds that are used for displaying NFTs. As you can see, the opportunities for displaying your latest digital artwork are abundant.
However, NFTs aren’t used only for art; Anything that is unique or needs a proof of ownership can be created as an NFT. In simple terms, an NFT is a term used for tagging something in the digital world as your own. So anything that requires such tagging can benefit from the NFT technology.
For example, Decentraland is a virtual world where users can buy digital land that can later be sold or used for advertising. Online games can use NFTs to prove ownership of rare digital items that players can then start trading amongst themselves. Unstoppable domains, which we’ve covered in the past, uses NFTs to establish ownership of domain names.
NFTs can also be used as collateral in DeFi instead of cryptocurrencies. It’s the equivalent of pawning something you own in order to get a loan in the real world. NFTfi is one example of a marketplace for NFT-collateralized loans.
These are just a few examples of what can NFTs be used for, as I’m sure in time additional uses will surface.
It’s hard to say whether NFTs are the next big thing, or just a craze like the 2017 ICO mania. On the one hand, it seems like everybody’s talking about NFTs and all the big companies are moving into this space. On the other hand, it’s hard to wrap your head around the concept of people paying millions of dollars for a digital proof of ownership without any claim in the real world.
I guess only time will tell what the future holds for NFTs. Hopefully, by now you know what NFTs are – cryptocurrency tokens that provide proof of ownership for a digital item. You may still have some questions or comments on NFTs – If so, just leave them in the comment section below.