Non-fungible tokens (NFTs) are assets like a piece of art, digital content, or video that have been tokenized via a blockchain. Tokens are unique identification codes created from metadata via an encryption function. These tokens are then stored on a blockchain, while the assets themselves are stored in other places. The connection between the token and the asset is what makes them unique.
NFTs can be traded and exchanged for money, cryptocurrencies, or other NFTs—it all depends on the value the market and owners have placed on them. For instance, you could draw a smiley face on a banana, take a picture of it (which has metadata attached to it), and tokenize it on a blockchain. Whoever has the private keys to that token owns whatever rights you have assigned to it.
Cryptocurrencies are tokens as well; however, the key difference is that two cryptocurrencies from the same blockchain are interchangeable—they are fungible. Two NFTs from the same blockchain can look identical, but they are not interchangeable.
History of Non-Fungible Tokens (NFTs)
NFTs were created long before they became popular in the mainstream. Reportedly, the first NFT sold was "Quantum," designed and tokenized by Kevin McKoy in 2014 on one blockchain (Namecoin), then minted on Ethereum and sold in 2021.
NFTs are built following the ERC-721 (Ethereum Request for Comment #721) standard, which dictates how ownership is transferred, methods for confirming transactions, and how applications handle safe transfers (among other requirements).
The ERC-1155 standard, approved six months after ERC-721, improves upon ERC-721 by batching multiple non-fungible tokens into a single contract, reducing transaction costs.
How NFTs Work
NFTs are created through a process called minting, in which the asset's information is encrypted and recorded on a blockchain. At a high level, the minting process entails a new block being created, NFT information being validated by a validator, and the block being closed. This minting process often entails incorporating smart contracts that assign ownership and manage NFT transfers.
As tokens are minted, they are assigned a unique identifier directly linked to one blockchain address. Each token has an owner, and the ownership information (i.e., the address in which the minted token resides) is publicly available. Even if 5,000 NFTs of the same exact item are minted (similar to general admission tickets to a movie), each token has a unique identifier and can be distinguished from the others.
Many blockchains can create NFTs, but they might be called something different. For instance, on the Bitcoin blockchain, they are called Ordinals. Like an Ethereum-based NFT, a Bitcoin Ordinal can be bought, sold, and traded. The difference is Ethereum creates tokens for the asset, while Ordinals have serial numbers (called identifiers) assigned to satoshis—the smallest bitcoin denomination.
Examples of NFTs
Perhaps the most famous use case for NFTs is that of cryptokitties. Launched in November 2017, cryptokitties are digital representations of cats with unique identifications on Ethereum’s blockchain. Each kitty is unique and has a different price. They "reproduce" among themselves and create new offspring with other attributes and valuations compared to their "parents."
Within a few short weeks of their launch, cryptokitties racked up a fan base that spent millions in ether to purchase, feed, and nurture them.
Much of the earlier market for NFTs was centered around digital art and collectibles, but it has evolved into much more. For instance, the popular NFT marketplace OpenSea has several NFT categories:
Photography: Photographers can tokenize their work and offer total or partial ownership. For example, OpenSea user erubes1 has an "Ocean Intersection" collection of beautiful ocean and surfing photos with several sales and owners.
Sports: Collections of digital art based on celebrities and sports personalities.
Trading cards: Tokenized digital trading cards. Some are collectibles, while others can be traded in video games.
Utility: NFTs that can represent membership or unlock benefits.
Virtual worlds: Virtual world NFTs grant you ownership of anything from avatar wearables to digital property.
Art: A generalized category of NFTs that includes everything from pixel to abstract art.
Collectibles: Bored Ape Yacht Club, Crypto Punks, and Pudgy Panda are some examples of NFTs in this category.
Domain names: NFTs that represent ownership of domain names for your website(s)
Music: Artists can tokenize their music, granting buyers the rights the artist wants them to have.
Benefits of NFTs
Perhaps the most apparent benefit of NFTs is market efficiency. Tokenizing a physical asset can streamline sales processes and remove intermediaries. NFTs representing digital or physical artwork on a blockchain can eliminate the need for agents and allow sellers to connect directly with their target audiences (assuming the artists know how to host their NFTs securely).
What Is the Concept Behind NFTs?
The idea behind NFTs is to create tokens that represent ownership. The token could represent anything from a digital image to partial ownership of an interstellar spaceship. In theory, because they are created using blockchain technology, they are immutable, secure, and don't require the intervention of third parties.
