The Basics of NFTs: What Are They And How Do They Work

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You’ve probably heard the term NFT circulating the internet recently and maybe that’s got you wondering:

What are they and how do they work?

Although non-fungible tokens have been around since 2014, it’s only recently that they found a surge in popularity as a way to buy and sell digital assets such as art, games, music, and videos.

If you’re curious to learn more about the basics of NFTs, you’ve come to the right place to get informed!

Read on to find out if NFTs are worth the hype and if these tokens are here to stay for good.

What are NFTs?

Non-Fungible Tokens (NFTs) are basically valuable digital assets that users collect, much like a person would collect classic art. These assets are stored on a blockchain digital ledger and are often built using one of two Ethereum token standards: ERC-1155 and ERC-721.

If you haven’t heard of blockchain technology, it is the best expense management solution currently available — better even than the most secure banks in the world. All transactions conducted via the blockchain network are secure and untouchable, which makes it a very powerful tool in storing valuable assets like NFTs.

On the surface, NFTs can be considered cryptocurrency (e.g., Bitcoin and Ethereum). However, unlike most cryptocurrencies (which you can exchange like-for-like) NFTs are non-interchangeable i.e., non-fungible.

You can make almost any piece of digital product into an NFT, from tweets and memes to art, music, and photography. As long as they hold value, they can be turned into an NFT. (Consider value is a subjective concept, almost anything can be turned into an NFT, really.)

NFTs contain unique distinguishing codes that can’t be copied, removed, or destroyed — so you can say that NFTs work as a sort of “certificate of ownership” for digital products.

How do NFTs work?

As mentioned before, NFTs essentially function like certificates of ownership granted to a buyer of a certain digital product. However, they can also symbolize ownership for physical assets, such as:

  • Tickets to real-world events
  • Deeds to cars and real estate
  • Legal documents
  • Signatures
  • Tokenized invoices

NFTs can only be used by one owner at a time. This is ensured by the uniqueID and metadata stored within the NFT.

When NFTs are minted, the information stored in the NFT is added to the blockchain where the product is currently being managed. Typically, this would be the Ethereum blockchain; however, recently other blockchains including FLOW and Bitcoin Cash now also support NFTs.

This is typically how the minting process works:

  • A new block is created to store the NFT
  • Information is validated
  • Upon completion of the validation process, NFT data is then stored in the blockchain

Note: Copyright ownership is often not transferred to a buyer upon purchase of an NFT. Unless outwardly specified, the original creator of an NFT is still allowed to reproduce a certain piece without the permission of the current NFT owner.

What can NFTs be used for?

While there are certainly not as many records of NFT use in the markets, there are several potential uses for NFTs that have emerged over the past couple of years. Here are a couple of examples:

  • Digital content
  • Gaming items
  • Collectables
  • Event tickets

Let’s take a closer look at each of these.

Digital content

NFTs offer digital content creators the opportunity to monetize their work without all the extra trouble you’d typically face working with a third-party platform. Artists no longer have to deal with or rely on museums or art galleries that only low-ball their work. Instead, they can sell their pieces directly to target audiences in the form of NFTs.

Gaming items

It’s typical for gamers to be stuck with expensive items that they’ve only ever used once to get out of a certain game level. Traditionally, gamers weren’t able to resell these items to other users who could find a better use for them, because that’s just not how they were designed.

For NFT sports and gaming items, however, gamers can easily make up for costs by selling items once they’re done using them.

Furthermore, NFTs allow developers to receive royalties every time a certain item is resold to another user.

Collectibles/physical items

While the tokenization of physical items isn’t as mature as that of digital items, there are a number of projects that are working towards the tokenization of collectibles, rare fashion items and jewelry pieces, as well as real estate.

In other words, you could buy a piece of jewelry and receive the deed or authentication certificate as an NFT.

Event tickets

Afraid someone might sell counterfeit copies of your event tickets? Because NFTs create and store records of all transactions on the blockchain, there is evidence that can prove when an event ticket is real or not. Therefore, you can easily verify the authenticity of every single ticket during your event, preventing counterfeits.

Final thoughts

Now we can see that NFTs truly have a ton of potential in terms of how products can be bought and exchanged on the internet. But are they here to stay? Well, that’s something only the future can tell. Currently, the use of NFTs in the market is in its infancy stages. We’ll have to wait a little bit longer to find out if there is sustainability in this system.