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What Is A Non-Fungible Token (NFT)?

Definition

NFTs (or “non-fungible tokens”) are a special kind of cryptoasset in which each token is unique — as opposed to “fungible” assets like Bitcoin and dollar bills, which are all worth exactly the same amount. Because every NFT is unique, they can be used to authenticate ownership of digital assets like artworks, recordings, and virtual real estate or pets.

Non-Fungible Tokens: An Explanation

Non-Fungible Tokens (NFT) are in a way the future of collectibles. They can represent just about anything, and one of the primary reasons why they are sought after by both individual traders, gamers, up to millionaires and celebrities is due to their scarcity as well as popularity. None of these tokens are the same, and each of them holds as much value as we give them. Some are rarer than others in terms of features, and this is what makes them more desirable. But what exactly are they and how do they work?

  • Non-Fungible Tokens are unique blockchain-based tokens that can represent anything.
  • They can bring a new dimension to digital interaction.
  • They are transferable and sold on special marketplaces.
  • Their value depends on their uniqueness.

Why are NFTs important?

You can think of NFTs as being kind of like certificates of authenticity for digital artifacts. They’re currently being used to sell a huge range of virtual collectibles, including:

  • NBA virtual trading cards
  • Music and video clips from EDM stars like Deadmau5
  • Video art by Grimes
  • The original “nyan cat” meme
  • A tweet by Dallas Mavericks owner and entrepreneur Mark Cuban
  • Virtual real estate in a place called Decentraland

As as Bitcoin and other crypto has boomed in popularity over the last year, NFTs have also soared — growing to an estimated $338 million in 2020. Each NFT is stored on an open blockchain (often Ethereum’s) and anyone interested can track them as they’re created, sold, and resold. Because they use smart contract technology, NFTs can be set up so that the original artist continues to earn a percentage of all subsequent sales.

Along the way, NFTs have raised fascinating philosophical questions about the nature of ownership. Wondering why digital artifacts that can be endlessly copied and pasted have any value at all? Proponents would point out that most kinds of collecting isn’t based on inherent value. Old comic books were produced for pennies’ worth of ink and paper. Rare sneakers are often made out of the same materials as worthless ones. Some paintings hang in the Louvre, others end up in thrift shops.

As the collector who sold the $6.6 million Beeple piece noted, you can take a nice picture of the Mona Lisa, but it’s not the Mona Lisa. “It doesn’t have any value because it doesn’t have the provenance or the history of the work,” said the Beeple fan. “The reality here is that this is very, very valuable because of who is behind it.”

What does “non-fungible” mean?

Every Bitcoin is worth as much as every other Bitcoin. NFTs, on the other hand, are all unique. “Fungibility” refers to goods or assets that are all the same and can be swapped interchangeably. A dollar bill is another perfect example — each is worth exactly one dollar.

Concert tickets, by contrast, are non-fungible. Even if every Radiohead ticket is the same price, they aren’t directly exchangeable. Each represents a specific seat and a specific date — no other ticket will have those exact characteristics.

Where do you buy or sell NFTs?

Digital-artwork NFTs are mostly sold on specialized marketplaces like Rarible and  Opensea. If you’re more interested in games and sports collectibles, developers like Dapper Labs have created experiences including NBA Top Shot (virtual trading cards) and Cryptokitties (a Pokemon-ish digital-cat collecting app that actually was the first NFT hit in late-2017). Online games including Gods Unchained are starting to use NFTs to sell in-game assets like weapons or cosmetic upgrades. Real estate in new virtual worlds is sold via markets including Decentraland and The Sandbox.

You can also buy or sell some NFTs directly via a compatible crypto wallet.

How do NFTs work?

If you’re interested in DeFi, you might have heard of the ERC-20 standard, which allows anyone to create a token compatible with the Ethereum blockchain. Those are “fungible” tokens. Most non-fungible tokens are built using the ERC-721 and ERC-1155 standards, which allow creators to issue unique cryptoassets via smart contract. Because each NFT is stored on a blockchain, there is an immutable record starting with the token’s creation and including every sale. (Some NFT-focused developers have also built their own alternative blockchains, including Dapper Lab’s Flow.)

NFTs have some special properties:

  • Each token minted has a unique identifier.
  • They’re not directly interchangeable with other tokens 1:1. For example 1 ETH is exactly the same as another ETH. This isn’t the case with NFTs.
  • Each token has an owner and this information is easily verifiable.
  • They live on Ethereum and can be bought and sold on any Ethereum-based NFT market.

In other words, if you own an NFT:

  • You can easily prove you own it.
  • No one can manipulate it in any way.
  • You can sell it, and in some cases this will earn the original creator resale royalties.
  • Or, you can hold it forever, resting comfortably knowing your asset is secured by your wallet on Ethereum.

And if you create an NFT:

  • You can easily prove you’re the creator.
  • You determine the scarcity.
  • You can earn royalties every time it’s sold.
  • You can sell it on any NFT market or peer-to-peer. You’re not locked in to any platform and you don’t need anyone to intermediate.

Scarcity

The creator of an NFT gets to decide the scarcity of their asset.

For example, consider a ticket to a sporting event. Just as an organizer of an event can choose how many tickets to sell, the creator of an NFT can decide how many replicas exist. Sometimes these are exact replicas, such as 5000 General Admission tickets. Sometimes several are minted that are very similar, but each slightly different, such as a ticket with an assigned seat. In another case, the creator may want to create an NFT where only one is minted as a special rare collectible.

In these cases, each NFT would still have a unique identifier (like a bar code on a traditional “ticket”), with only one owner. The intended scarcity of the NFT matters, and is up to the creator. A creator may intend to make each NFT completely unique to create scarcity, or have reasons to produce several thousand replicas. Remember, this information is all public.

Royalties

Some NFTs will automatically pay out royalties to their creators when they’re sold. This is still a developing concept but it’s one of the most powerful. Original owners of EulerBeats Originals earn an 8% royalty every time the NFT is sold on. And some platforms, like Foundation and Zora, support royalties for their artists.

This is completely automatic so creators can just sit back and earn royalties as their work is sold from person to person. At the moment, figuring out royalties is very manual and lacks accuracy – a lot of creators don’t get paid what they deserve. If your NFT has a royalty programmed into it, you’ll never miss out.

What can you do with NFTs once you buy them?

Good question! Some people display their digital artworks on large monitors. Some buy virtual real estate (via NFT, of course) in which they’re able to build virtual galleries or museums. You can also roam virtual worlds like Decentraland and check out other people’s collections. For some fans, the appeal is in the buying and selling — much like any other asset class. (The collector who sold the $6.9 million Beeple paid less than $70,000 for it in October 2020).

More and more mainstream artists have also gotten involved in the space — especially from the world of music. In early March, Nashville band Kings of Leon announced their next album would arrive in the form of multiple NFTs. Depending on which a fan buys, various perks will be unlocked — like alternate cover art, limited-edition vinyl, and even a “golden ticket” to a VIP concert experience.

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