Non-fungible tokens, commonly referred to as NFTs, are unique cryptographic tokens that exist on a blockchain and cannot be replicated. This sets them apart from cryptocurrencies like Bitcoin and Ethereum that are fungible (interchangeable).
NFTs can represent digital files like art, audio, videos, and other forms of creative work. The data is stored on a blockchain, a distributed public ledger that records transactions. While the digital file itself is not stored on the blockchain, it can be linked through the use of NFTs. This allows digital art and other collectibles to be tokenized and sold as singular assets.
Each NFT has a unique identification code and metadata that distinguishes it from other NFTs, even if it is part of an edition or a series. This makes each NFT one-of-a-kind and gives it inherent scarcity and value as a collector’s item. The creator can assign scarcity and attach specific ownership rights when minting (creating) the NFT.
How do NFTs work?
NFTs work because blockchains like Ethereum record transactions and allow users to prove ownership. Here are the key aspects of how NFTs function:
- Minting: NFTs come into existence through a process called minting. This involves using a smart contract to assign ownership to a unique token ID on the blockchain. The creator of the digital asset starts the process by minting the token.
- Metadata: During minting, metadata like property attributes is encoded into the NFT. This includes information like the creator’s identity, a title and description, date of creation, etc. The metadata helps to distinguish the NFT and identify who owns it.
- Ownership records: Details about all transactions like ownership transfers, sales, etc are maintained on the blockchain. These immutable records allow collectors and creators to establish provenance for the NFT.
- Transferring ownership: NFTs ownership can be transferred from one wallet address to another by initiating a blockchain transaction. The public ledger permanently records the new owner. This enables NFTs to be resold or traded on secondary markets.
- Displaying NFTs: NFTs are displayed in wallets and on NFT marketplaces. While they contain metadata and ownership data, the underlying digital file has to be stored and hosted elsewhere. NFT galleries like on OpenSea allow collectors to showcase their NFT art collections.
NFT Standards
There are several technical standards used to create NFTs, which determine their metadata structure, transferability, and other functions. Here are some major NFT standards:
- ERC-721: The ERC-721 standard introduced by the Ethereum blockchain is the most common standard used for NFTs. It handles the core functionality of NFTs like proof of ownership, transfers, and enumeration.
- ERC-1155: This standard allows both fungible and non-fungible tokens to be managed in a single contract. It supports minting multiple NFTs in a batch, which reduces transaction fees.
- ERC-998: ERC-998 allows “composable” NFTs where an NFT can own other NFTs. This standard can be used to bundle different digital assets into a single NFT collection.
- DID: Decentralized Identifiers or DIDs allow people and organizations to control their digital identity on blockchains. It can be used alongside NFTs to authenticate an NFT’s creator.
- EIP-2309: This standard introduced the ability to “rent” an NFT for a specified period before returning ownership back to the original owner. It enabled new use cases like NFT subscriptions.
How are NFTs Created?
NFTs are minted through smart contracts, small programs that run automatically on blockchains like Ethereum. Here is a simplified process:
- A creator makes a digital artwork or any creative content.
- They write an NFT smart contract and connect it to their wallet. The smart contract defines the NFT’s properties, like name, description, and number of copies.
- Once deployed on the blockchain, the contract mints an NFT when the creator initiates the transaction.
- A unique ID is assigned to track the NFT’s ownership and the creator’s address is recorded as the owner.
- Metadata like the artwork file is uploaded and linked to the token.
- The minted NFT token is sent to the creator’s wallet, allowing them to sell or trade ownership.
NFT platforms like OpenSea, Rarible, etc make this process easier through their minting tools and interfaces. They handle deploying the contracts, which creators can customize with properties and licensing rights.
Where are NFTs Stored?
NFTs themselves are entries on a blockchain ledger. But the digital assets they represent—like artwork, music, videos, etc—are not stored directly on the blockchain. These underlying files are too large and complex for blockchains like Ethereum.
Here is how it works:
- The main NFT metadata and ownership data gets recorded into smart contracts on the blockchain.
- The digital asset files are uploaded and hosted on decentralized file storage systems like IPFS (InterPlanetary File System) or traditional centralized servers.
- The NFT metadata contains a link to the asset file’s location. When users access the NFT, this link allows the file to be retrieved from IPFS or the server.
Storing the bulk of NFT data off-chain while keeping key records on the blockchain allows them to function efficiently. This decentralized storage still maintains verifiable scarcity and ownership for the linked digital assets.
How are NFTs Being Used?
Here are some major use cases and applications of NFTs:
Digital art & collectibles
- NFTs allow artists to sell singular original works and collectors to own them. NFT art, sports memorabilia, virtual avatars, digital trading cards, and more are popular.
- Rare artwork NFTs like Beeple’s $69 million “Everydays” at Christie’s auction house attracted mainstream attention. Iconic brands like the NBA have also launched collectibles.
- NFTs provide proof of authenticity and scarcity for digitally native collections and assets that can otherwise be easily duplicated.
Gaming assets
- NFTs enable new ownership models for in-game assets like character skins, weapons, virtual land parcels, etc.
- Players can buy, sell or trade rare and exclusive in-game NFT items through marketplaces. This provides them actual digital property rights.
- Blockchain games like Axie Infinity have incorporated NFTs into core gameplay mechanics. Players can earn NFTs that hold real value.
Music & entertainment
- Artists can release limited edition NFT albums and tracks, attaching perks like exclusive content.
- Bands like Kings of Leon have experimented with NFT music as an additional revenue stream.
- NFTs also offer royalties—creators earn a percentage when their NFTs are resold. This provides ongoing passive income.
Domain names
- NFT domain names like
.nft,.coin,.wallethave gained popularity as Web3 and crypto sites proliferate. - These domains are managed through NFT ownership rather than a centralized authority. Holders can buy/sell these blockchain-based domains or use them to create decentralized websites.
Physical asset ownership
- NFTs can represent ownership of physical assets like real estate, artwork, luxury goods, etc.
- Tokenizing physical assets provides liquidity for high-value items that are otherwise illiquid and difficult to subdivide.
- Brands like Nike and Gucci are exploring NFTs to authenticate luxury and collectible physical goods. NFTs provide proof of authenticity by linking to a specific asset.
Identity & credentials
- NFTs can represent decentralized identity documents like digital passports, qualifications, licenses, etc.
- This allows identity data to be owned and controlled fully by users.
- Verifiable credentials can be issued as NFTs by governments, educational institutions, employers, and more.
Patents & intellectual property
- NFTs provide a public proof of ownership and timestamp for patents, creative IP, and academic research.
- The immutable records on blockchains can be used to establish inventorship and priority over innovation and ideas.
- Startups are building NFT solutions for domains like scientific research and patent registration.
Benefits of Using NFTs
Here are some of the key advantages of non-fungible tokens:
- Scarcity & uniqueness: NFTs are provably rare and one of a kind. Unlike MP3s or JPGs, each token is completely unique and not interchangeable.
- Authenticity: The digital certificates of authenticity NFTs provide are tamper-proof and indestructible, overcoming reproductions.
- Ownership: NFTs convey permanent and transferrable ownership of an underlying asset to collectors and creators.
- Programmability: NFTs are programmable, allowing custom properties, transfer restrictions, royalties, etc to be built in.
- Interoperability: NFTs can interact and be exchanged across different platforms and blockchains.
- Fractionalization: Where allowed, NFTs can be fractionally owned by multiple parties, increasing their liquidity.
- Immutable records: The data of NFT transactions, ownership, etc is permanently recorded on blockchains and transparently viewable.
Limitations & Challenges
NFTs also come with some limitations and challenges:
- Environmental impact: High energy use of some blockchains like Ethereum has raised concerns about the ecological footprint of minting and trading NFTs.
- Copyright issues: There are concerns around copyright & IP infringement through NFTs when tokenizing existing works without permission. Plagiarism also dilutes their value.
- Fraud risks: Some projects have turned out to be outright frauds & scams, relying on hype and speculation. Lack of regulation in the space contributes to such risks.
- Value volatility: NFT prices can be highly volatile, susceptible to speculative trends and crashes. Their long-term value remains uncertain.
- Interoperability issues: Technical standards are still evolving so some NFTs may not be supported across different platforms and wallets.
- Storage reliability: Centralized storage of linked asset files carries risks like data loss and lack of permanency compared to on-chain storage.
The Future of NFTs
NFTs represent an important blockchain use case that leverages the key advantages of digital scarcity, provable authenticity, and decentralized ownership. Here are some possibilities for the future of this space:
- Mainstream adoption crossing over from niche to mass-market appeal. More individuals and brands entering the NFT space.
- Gaming, entertainment & social media driving new formats of digital interaction and virtual economies built around NFTs.
- The Internet of Things (IoT) leading to NFTs assigned to connected devices, wearables, etc. Decentralized autonomous organizations (DAOs) using NFTs for governance & ownership.
- NFT tickets replacing paper tickets; NFT records verifying qualifications, licenses, and certifications.
- NFT domains becoming widely used as blockchain-based websites gain adoption.
- Increased regulation providing more structure and security for NFT investing, along with growth in supporting infrastructure.
While still considered an emerging technology, NFTs have shown promising potential across a diverse range of applications. As blockchain interoperability and the user experience continue maturing, wider adoption is on the horizon. NFTs could become an integral part of digital ecosystems and online identity.
Frequently Asked Questions about NFTs
What files can be turned into NFTs?
Almost any digital file like images, videos, music, documents can be minted as NFTs. Even tweets have been famously converted to NFTs and sold. Physical items can also be represented and linked through NFTs.
Do NFTs grant copyright?
No, NFTs themselves do not confer legal copyright or intellectual property rights over the underlying digital assets. The buyer/owner of the NFT does not normally gain IP rights, unless specifically assigned by the creator.
Where are NFTs stored?
The NFT metadata and ownership details are stored on the blockchain, while the digital asset files are stored off-chain on IPFS or centralized servers. The NFT directs to the location of the asset file.
How environmentally friendly are NFTs?
The bulk of computing energy goes into maintaining and recording transactions on blockchains like Ethereum. This has raised environmental concerns due to the large carbon footprint. However, new blockchains and protocols focused on sustainability are emerging to address these issues.
Are NFTs only artwork and collectibles?
No. While artwork and collectibles dominate currently, NFT use cases can include tangible assets, real estate, identity documents, credentials, licenses, supply chain tracking, and much more. Their programmability makes them highly versatile.
How do you create or mint NFTs?
The technical process involves writing smart contracts, uploading digital files to IPFS, and running the contract to mint tokens on a blockchain. Marketplaces like OpenSea offer user-friendly tools to simplify minting without needing to code smart contracts.
How do you buy NFTs?
To buy NFTs, you need a crypto wallet like Metamask that connects you to marketplaces like OpenSea. You can search, bid on or buy at fixed prices using cryptocurrency like Ether. Ownership transfers to your wallet address once the transaction completes on the blockchain.
Can you sell an NFT after purchasing it?
Yes, the new owner of an NFT can resell it on secondary marketplaces. Ownership transfer takes place just like the original purchase transaction. Many limited edition art NFTs gain value rapidly and are resold for profit.
What platforms are used to create and trade NFTs?
Some major NFT marketplaces and platforms include OpenSea, Rarible, NBA Top Shot, Axie Infinity, Decentraland, SuperRare, Foundation, AtomicMarket, Nifty Gateway, and Sorare. These allow creators to mint and buyers to trade NFTs.
How much do NFTs cost?
NFT prices can range from a few dollars to millions of dollars. For example, individual CryptoPunk NFTs have sold for over $10 million. Average prices for popular NFTs like Bored Ape Yacht Club are around $200,000. But many are affordable for regular crypto buyers.
Can NFTs be faked or copied?
No, NFTs cannot be faked or duplicated thanks to the blockchain ledger which records transactions and ownership. The digital assets can be copied, but NFT ownership provides the original verifiable authentic version. Copies do not diminish the legitimacy or value of the real underlying NFT.
What are the risks of buying NFTs?
Like any unregulated market, there are risks of fakes, frauds, price volatility, and scams when buying NFTs. Only platforms with strong reputation and community trust should be used. Conducting due diligence is highly recommended before purchasing high-value NFTs.
What are minting fees for creating NFTs?
Minting fees go towards executing the smart contract on Ethereum or other blockchains. This can range from $50-$200 on average. Lower minting fees are charged by NFT marketplaces compared to doing it directly on-chain. Prices fluctuate based on network congestion.
Conclusion
NFTs represent an exciting new paradigm of digital ownership and blockchain-based scarcity. Beyond the hype and speculation, NFT technology has opened up promising possibilities for creators, collectors, gamers, and enterprises. With the growth of the Metaverse and Web 3.0, NFT applications can potentially expand further into diverse domains. While challenges around volatility, environmental impact, and scalability exist, NFTs have firmly established themselves as a novel application of blockchain. Their full disruptive potential is still being uncovered across industries and use cases.
