What Are NFTs? What They Are and How They Work

Non-fungible tokens (NFTs) are taking the world by storm. Celebrities like Justin Beiber, Lindsay Lohan and LeBron James have all made NFTs. These digital assets, often based on photos, videos, audio files or another digital format, contain a unique digital signature that makes each one unique. NFTs are digital assets. Understanding NFTs can open the door to new investment opportunities and financial growth. 

What Is an NFT?

NFTs have been around for 10 years. What exactly is a fungible token? It's a unique piece. You might have heard the saying, “Money is fungible.” That means a single dollar could replace another without anyone knowing the difference. Each dollar is not unique. 

Non-fungible assets are assets that hold distinct values based on their traits. Automobiles, real estate and art are all non-fungible. Each holds its value based on characteristics like mileage, rarity and desirability. Non-fungible tokens are assets that are verified using blockchain technology and hold a distinct, unique value.

Likewise, a non-fungible token cannot be replaced. Each token is unique. NFTs can be used for art, music, in-game items to purchase, videos, real estate and more. Two NFTs from the same blockchain may look identical, but they are not interchangeable. This non-fungible attribute makes them extremely valuable.

NFTs are often encoded with the same underlying software as cryptocurrencies. The first NFT was minted in 2014 from the Namecoin blockchain. With the adoption of the Ethereum blockchain, NFTs gained a reliable and accessible option for project-building. Ethereum's ability to host NFTs simplifies the creation, storage, programming and trading of these tokens.

In recent years, NFTs have become a popular way to buy and sell digital artwork. NFTs are either one of a kind or, like artwork, one of a very limited run with a unique identifying code. They create digital scarcity, thus allowing them to become assets that increase in value. This, of course, assumes that there is demand. 

The NFT market is growing. While the NFT market hit $1.6 billion in 2023, it is expected to reach $3.2 billion by 2027.

How Do NFTs Work?

Each NFT has a unique digital signature. While early applications centered on avatars or video games, NFTs have become an increasingly convenient way to buy and sell physical assets. NFTs allow investors to tokenize a physical asset like artwork or real estate. NFTs serve as an option to streamline the sale of assets and remove intermediaries. 

Like cryptocurrency, NFTs use blockchain technology, but they differ in their application. Cryptocurrency is a decentralized, encrypted form of digital currency that uses blockchain technology to verify transactions so it doesn't depend on financial institutions. Cryptocurrencies secure their transactions and control the creation of new units with the blockchain.

NFTs are one-of-a-kind digital assets stored on a blockchain. NFTs cannot be duplicated or cloned. NFTs are not based on or backed by any currency. While NFTs are commonly bought with cryptocurrency, they are not tied to any specific currency. 

NFTs are created through "minting," during which the asset's information is encrypted and recorded on a blockchain. After encrypting and recording, NFT information is validated by a validator, and the block is closed. 

The minting process records the assignment of ownership and manages NFT transfers. Tokens are assigned a unique identifier directly linked to one blockchain address. NFT ownership information, such as the address in which the token was minted is publicly available. 

NFTs are typically built using Ethereum but sometimes use other smart contract blockchains like Solana or Binance Smart Chain. The use of Ethereum for some NFTs proved so popular that it has congested the network, leading to higher transaction fees. Other blockchains with much cheaper fees can be used for NFTs, making them better options for low-value non-fungible tokens.

What Exactly Are NFTs Used For?

NFTs can represent digital or real-world items like artwork and real estate. When you "tokenize" a real-world asset, it facilitates the process of buying, selling or trading while reducing the likelihood of fraud. 

NFTs also give artists more control over their assets and allow them to set sale prices. Some NFTs are also set up so that the original creator gets a portion of each sale of the digital asset, creating a perpetual stream of royalty payments.

You can use NFTs to:

• Buy, sell or trade real-world assets while reducing fraud
• Create unique customer rewards 
• Transfer ownership of rare digital collectibles
• Create personalized digital experiences

The use of NFTs across industries includes:

Art and Collectibles

NFTs change the art industry by enabling artists to tokenize their work, which establishes scarcity and authenticity. Collectors have the ability to buy, sell, and trade digital art safely on blockchain platforms.

Gaming

In the gaming industry, NFTs serve as in-game assets that enable players to genuinely own, trade, or sell their items. This incorporation improves the gaming experience and provides real-world value to virtual items.

Music Industry

Musicians have the option to share their work as NFTs, which allows fans to access exclusive content such as unreleased tracks, concert tickets, or limited edition merchandise, leading to new sources of income and increased interaction with fans.

Fashion

Fashion brands utilize NFTs to confirm and validate ownership of limited-edition products, provide virtual apparel or accessories for avatars in the metaverse, and strengthen brand loyalty by promoting exclusivity.

Real Estate

NFTs can show ownership of physical assets or fractional ownership in real estate investments, making transactions easier and improving transparency in property ownership records.

Sports

Sports teams and leagues are utilizing NFTs to create distinctive digital collectibles such as trading cards and highlight reels, giving fans an innovative way to connect with their favorite teams and players.

Entertainment

The film industry can use NFTs to offer digital collectibles, exclusive behind-the-scenes content, or unique experience packages, which can improve fan engagement and loyalty.

Education

Schools can create NFTs as digital diplomas or certificates, offering a secure and reliable method for graduates to display their accomplishments to potential employers.

Charity and Fundraising

Nonprofits are using NFTs for fundraising by auctioning unique digital art or experiences. They are using the funds raised to support their missions and attract a tech-savvy group of donors.

Virtual Real Estate and the Metaverse

In virtual reality, NFTs facilitate the buying, selling, and trading of virtual land and spaces, enabling users to create and profit from their own virtual experiences.

Benefits of NFTs

The benefits of an NFT range from increased transparency, security and control to the possibility of protecting assets and investments. The reasons to buy NFTs are as diverse as the users. Some might choose NFTs for their collectible value while others may purchase NFTs as investments. Why would anyone buy an NFT? Usually for:

Security

Non-fungible tokens are also useful to protect valuable assets and to secure authenticity. They can also be used in identity security to protect personal information. The information encrypted in an NFT cannot be used or accessed without the keys.

Investments

You could use NFTs to streamline investing. You could purchase NFTs for fine wine, art, property or real estate. NFTs can protect provenance. NFTs can also represent ownership in a business

Property

Land or real estate could be parceled into sections with unique characteristics.

Fun

Dabbling in NFTs, from collectibles to artwork or even virtual property, is a unique virtual world. From trading cards in video games to low-cost investments, exploring NFTs can be a way to familiarize yourself with NFTs that could increase in value in the future. 

How to Buy NFTs

Some NFTs can be purchased and exchanged on their own trading platforms. Many NFTs are offered for sale as drops or limited-time sales for those lucky enough to be at the right place at the right time to take advantage of the sale.

NFT marketplaces like OpenSea offer a way for investors and fans of NFTs to buy digital assets from individuals. OpenSea has hosted works from musician Shawn Mendes, Twitch Co-Founder Justin Kan and digital artist Beeple. To use OpenSea, you'll need to transfer Ethereum to an Ethereum wallet and connect the wallet to OpenSea's website. Some exchanges that let you buy and send Ethereum are eToro, Uphold and Coinbase.

With crypto taking over the digital art world, NFTs are making their way to popular auction houses like Christie’s. Christie's has hosted NFT auctions for projects like CryptoPunks and Bored Ape Yacht Club, and the auction house received bids in the millions of dollars for the most sought-after items.

You can purchase NFTs through major cryptocurrency exchanges. You'll need a digital wallet to store the NFT and often crypto to purchase the NFT. The steps to purchase NFTs are:

1. Research NFTs to understand what you'd like to invest in.
2. Get a digital wallet, if you don't already have one.
3. If you don't already have cryptocurrency, purchase cryptocurrency on a major exchange like Kraken or Coinbase.
4. Use the cryptocurrency to purchase the NFT on an NFT marketplace like OpenSea, Rarible or SuperRare. 
5. Transfer the NFT to a digital wallet for long-term storage. 

Top NFT Marketplaces

NFT marketplaces, as the name implies, are dedicated marketplaces to buy and sell NFTs. A few popular NFT marketplaces include: 

Rarible

Rarible lets you buy and sell art, collectibles, video game assets and NFTs using Ethereum, Polygon, Tezos and Immutable X. It partners with Adobe to verify and protect the metadata for digital content like NFTs.

OpenSea.io

OpenSea has been around since 2017. It has hosted many popular NFTs, including art, music, photography, trading cards and virtual worlds. You can use Ethereum, Solana, Polygon, Avalanche and BNB to purchase NFTs on OpenSea.io.  OpenSea charges a fee equal to 2.5% of every transaction. 

Foundation

Of great interest to art investors, Foundation is an NFT marketplace built specifically for digital art enthusiasts. It has a huge collection of art NFTs. It protects creators and makes sure they get royalties with each sale.

How to Store NFTs Safely

Once you purchase an NFT, it's essential to store the digital asset safely. NFTs can be stored safely in a physical wallet. Ledger is one of the most reliable, highly-trusted wallets for both cryptocurrencies and NFTs. 

Should You Buy NFTs?

If you're interested in the digital revolution, NFTs can be a smart investment to diversify any portfolio. Like any other investment, it's essential to carefully research individual NFTs before making a purchase. Considering the dramatic rise of NFTs in the past five years and mainstream adoption, using the advantages of NFTs to protect your portfolio can make sense for many investors. 

Frequently Asked Questions