What to know about non-fungible tokens (NFTs) — unique digital assets built on blockchain technology

65 14/06/2022

A non-fungible token (NFT) is a unique identifier that can cryptographically assign and prove ownership of digital goods.

As NFTs for digital artwork have sold for millions — sometimes tens of millions — of dollars, to say they're popular could be an undersell. In the first half of 2021, NFT sales hit $2.5 billion.

However, once you understand how NFTs work, you'll see there are additional use cases for this technology.

What is an NFT?

NFT stands for "non-fungible token." At a basic level, an NFT is a digital asset that links ownership to unique physical or digital items, such as works of art, real estate, music, or videos.

NFTs can be considered modern-day collectibles. They're bought and sold online, and represent a digital proof of ownership of any given item. NFTs are securely recorded on a blockchain — the same technology behind cryptocurrencies — which ensures the asset is one-of-a-kind. The technology can also make it difficult to alter or counterfeit NFTs.

To really get a handle on NFTs, it's helpful to get familiar with the economic concept of fungibility.

So why are people shelling out so much money for NFTs? "By creating an NFT, creators are able to verify scarcity and authenticity to just about anything digital," says Solo Ceesay, co-founder and COO of Calaxy. "To compare it to traditional art collecting, there are endless copies of the Mona Lisa in circulation, but there is only one original. NFT technology helps assign the ownership of the original piece."

Selling NFTs has been a lucrative business in the art world. Here are a few examples you may have heard about:

What to know about non-fungible tokens (NFTs) — unique digital assets built on blockchain technology

Other people may be able to make copies of the image, video, or digital item that you own when you buy an NFT. But, similar to buying a unique piece of art or limited-series print, the original could be more valuable.

How NFTs work

Many NFTs are created and stored on the Ethereum network, although other blockchains (such as Flow and Tezos) also support NFTs. Because anyone can review the blockchain, the NFT ownership can be easily verified and traced, while the person or entity that owns the token can remain pseudonymous.

Different types of digital goods can be "tokenized," such as artwork, items in a game, and stills or video from a live broadcast — NBA Top Shots is one of the largest NFT marketplaces. While the NFT that conveys ownership is added to the blockchain, the file size of the digital item doesn't matter because it remains separate from the blockchain.

Depending on the NFT, the copyright or licensing rights might not come with the purchase, but that's not necessarily the case. Similar to how buying a limited-edition print doesn't necessarily grant you exclusive rights to the image.

As the underlying technology and concept advances, NFTs could have many potential applications that go beyond the art world.

For example, a school could issue an NFT to students who have earned a degree and let employers easily verify an applicant's education. Or, a venue could use NFTs to sell and track event tickets, potentially cutting down on resale fraud

What's the difference between NFTs and cryptocurrency?

NFTs and cryptocurrencies rely on the same underlying blockchain technology. NFT marketplaces may also require people to purchase NFTs with a cryptocurrency. However, cryptocurrencies and NFTs are created and used for different purposes.

Cryptocurrencies aim to act as currencies by either storing value or letting you buy or sell goods. Cryptocurrency tokens are fungible tokens, similar to fiat currencies, like a dollar. NFTs create one-of-a-kind tokens that can show ownership and convey rights over digital goods.

How to buy an NFT

You can buy, sell, trade, and create NFTs from online exchanges or marketplaces. The creator or current owner may choose a specific price. Or, there may be an auction, and you'll have to bid on the NFT.

The sign-up process can vary depending on the marketplace. Generally, you'll buy NFTs using a cryptocurrency, such as ether (Ethereum's native cryptocurrency), although the price may also be listed in dollars. Depending on the marketplace, there may be different fees associated with each transaction.

The bottom line

While there may be many practical applications for NFTs in the future, they're primarily used with digital art today.

"For creators, NFTs create a seamless way to sell digital art that might not have much of a market. Additionally, there are ways in which creators can get paid fees for each subsequent sale of the art," says Ceesay. "On the flip side, collectors are able to speculate on digital art as well as have bragging rights on rare collectibles on the chain."

If you're considering purchasing an NFT as an investment, know that there's no guarantee it will increase in value. While some NFTs sell for thousands or millions of dollars, others may remain or become worthless.

Louis DeNicolaLouis DeNicola is the president of LD Money Media LLC and an experienced writer who specializes in consumer credit, personal finance, and small-business finance. He is a Nav-certified credit and lending specialist, a multi-year attendee of an 18-hour advanced credit education seminar, and a volunteer tax preparer through the IRS's VITA program. Louis works with various publishers, credit bureaus, Fortune 500 financial services firms, and FinTech startups. In addition to Insider, you can find his work on Experian, FICO, Credit Karma, FICO, and Lending Tree. You can connect with Louis on LinkedIn or reach out to him directly at ladenicola@gmail.com.
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