What Is NFT? Beginner's Guide to Non-Fungible Tokens (NFTs)

Contents

NFTs were the hot topic of 2021 and even broke into the mainstream. News headlines used to report on hundred-thousand-dollar high-profile sales, but it seems that the craze has calmed down by now. And yet, the NFT space is still here and thriving. Learn everything about NFTs explained in this guide, updated for 2024, from the ChangeHero team.

Key Takeaways

The term NFT stands for non-fungible token: a unique asset on a blockchain that cannot be used interchangeably with other tokens;
The uniqueness of the NFT standards makes them useful in signifying ownership and/or rights to use. This property of non-fungible tokens (NFTs) is finding use in art and distribution, blockchain services, and games;
The most popular NFT platforms and projects these days are collections such as Crypto Punks and Bored Ape Yacht Club, and Web3 games.

What are NFTs?

First of all, let’s sort through the term: what is a non-fungible token? What does non-fungibility mean?

Fungibility is a property of an asset that points to it being interchangeable with any other asset of the same value. Money is normally fungible, meaning for example that any dollar bill is perceived to be worth $1.

On the contrary, non-fungibility is synonymous with uniqueness. Even if two non-fungible tokens have the same value (for example, represent the same in-game item), they are not interchangeable.

NFT stands for “non-fungible token” and refers to a blockchain token type. Blockchain tokens, in turn, are a type of digital asset issued on a blockchain with the help of a smart contract. In the case of NFTs, the smart contract defines the properties of each unique token.

The token is only one part of the digital asset, though. Its value comes from the contents: digital art, virtual real estate, or audio files — there are virtually no limits to what can get attached to an NFT. However, due to the limitations of blockchain technology, the contents rarely get embedded directly instead of being meta-data. Relying on off-chain infrastructure like IPFS to store the content and embedding a link to the token is common.

How can this be useful? Like in the example above, NFTs can represent virtual in-game assets like items, cards, or real-world assets like art pieces. Each token represents a unique unit of value, even if they belong to the same category.

Basically, non-interchangeability is useful to denote ownership of an asset that NFT represents.

What exactly is an NFT in simple terms?

What is an NFT in very simple terms? It is a digital token on a blockchain with properties that make each unit unique. This quality makes them fit to serve as proof of ownership.

How Did NFTs Come to Be?

The first blockchain tokens were developed for the Bitcoin blockchain and were essentially non-fungible. They were called Colored coins and are considered predecessors of all modern blockchain tokens.

Colored coins worked thanks to a protocol that we would today call “layer-two” or L2. Another second-layer network to Bitcoin, Counterparty housed the first tokenized directory for Rare Pepes. Each of the entries in the library is unique and represented by its own Counterparty token.

Then, in 2015 Ethereum introduced smart contracts. Now, everyone can issue and transact with tokens even more easily. The only catch is that back in 2015 there was only one token standard — ERC-20.

Nevertheless, Decentraland, CryptoKitties, CryptoPunks, and EnjinCoin started implementing tokenized assets in games and digital art. It was after the success of these projects that the ERC-721 standard was developed in 2018.

How Do Non-Fungible Tokens (NFTs) Work?

NFTs are not exclusive to Ethereum: among the platforms that support them are Ravencoin, Qtum, EOS, TRON… In essence, though, they are the same.

Each token is assigned a digital hash that distinguishes it from every other NFT of its kind even if they are issued with the same smart contract. Naturally, tokens issued with different smart contracts from the very start bear no equivalence to each other at all.

NFTs cannot be directly exchanged with one another because of their unique nature. Instead, they can be put on sale on special marketplaces for a cryptocurrency of choice. These NFT marketplaces are the core of the market for this type of digital asset.

What are NFTs’ other properties?

Indivisibility: there can be no more than a set number and no less than one of an NFT. Some solutions offer fractional ownership of NFTs these days;
Indestructibility: the data is immutably recorded on the blockchain. Like other types of blockchain tokens and coins, NFTs can be burned but it only means giving up ownership;
Verifiable: like any asset on the blockchain, the entire transaction history of an NFT can be tracked and it can be traced back to its original creator.

NFT Standards: Non-Fungible and Semi-Fungible

Non-fungible tokens adhere to one of the few standards that codify their properties. In the case of Ethereum, there are two standards commonly used to create NFTs.

ERC-721 is strictly non-fungible and unique. ERC-1155 is semi-fungible and allows for class tracking rather than object tracking.

For example, in a game, ERC-1155 tokens can be used to represent consumable items like ammo or potions. This standard is also handy because it saves computing power of the network, and therefore, transaction fees.

What are NFTs Used For?

NFTs became a huge step in the tokenization of various assets on the blockchain. From virtual tickets to digital art NFTs, the use cases for verifiably unique tokens are countless. But how are non-fungible tokens actually used these days? Here are only a few actual examples:

The most common and valuable category of modern NFTs is digital collectibles. Collections that shaped the market like Cryptopunks and Bored Ape Yacht Club are still some of the top ones. However, newer ones like PolyApe and Liberty Cats on Polygon also trade with decent volumes.
Web3 games. For example, Ubisoft’s Champions Tactics: Grimoria Chronicles uses NFTs for exclusive player icons and in-game units called champions. Another example from the Epic Games storefront would be a card battler Parallel, where NFTs represent in-game cards.
Unique asset tokenization. Blockchain conferences such as ETHDenver and TOKEN2049 have issued ticket NFTs for their visitors. A less common example would be Galaxy Digital collateralizing a loan with an NFT of a three-century-old Stradivari violin.
Authenticity check. CryptoKicks are a patented product of Nike. These are tokens that are sold together with the shoes and are used to verify the authenticity of the product;
Ownership. Another use case where NFTs can see a lot of potential is music distribution. It cuts out middlemen such as distributors, who claim large shares of musicians’ profits.
Name services like Unstoppable Domains or ENS (Ethereum Name Service) use the NFT standard to create unique human-readable addresses for ETH.

What are NFTs Criticized For?

The NFT market has received its fair share of criticism for many reasons, valid and overblown alike. Some points still stand while other things have improved over time, as the initial craze died out and builders figured it out.

Lack of Intellectual Property Rights Protection

The most glaring problem is that while NFTs are handy to represent ownership, it does not entitle the owner to copyright. Unless explicitly stated in the process of sale (and that is how large auctions operate), the creator of an artwork retains all rights to use the original artwork.

Moreover, at the peak of the NFT boom, art theft was rampant, when users would mint NFTs of artworks with an original creator not even knowing about it. While NFTs were supposed to let creatives monetize their art without any middlemen, the opposite was happening: middlemen hijacked the art monetization.

Since legally NFTs are worth only as much as the contract implies, the linked content can be taken down. This is far from pleasant to both sides, since creators have to deal with copyright issues and the owner of an NFT ends up with an empty and worthless token.

Market Manipulation

The NFT market inherited both the best and worst practices from its art auction predecessors. Particularly, wash trading which is repeated and coordinated buying and selling to artificially inflate the volume of an asset.

In a study of the Nonfungible.com team, between May 2020 and February 2021, an unnamed marketplace had as much as 28% ($2,252,925.00) volume accounted for by wash trading. 10% more was defined as suspicious.

Independent researchers conclude that it has not gotten better by 2024. By analyzing a larger data set from four popular NFT marketplaces with a special algorithm, they found out that wash trading accounted for up to 22% of the total number of trades and up to 94% in volume on one of them.

How to Create NFTs?

Good news: making an NFT is not rocket science! Anyone can mint and even put up for auction an NFT with any content they rightfully can with little to no coding skill.

To get your hands on an NFT, you can attach something of value to a new unique nonfungible token. Many platforms have generators that streamline the process of creating NFTs. NFT marketplaces (OpenSea, Rarible, SuperRare), DIY minting platforms (NiftyKit), and even blockchain gaming platforms (Enjin, Flow) offer the tools.

Some of the apps that let you make an ERC-721 token are MetaMask, Mintable, and Receiptchain. The best shot for creating an NFT on another blockchain would be through an official dApp or wallet.

Calling a smart contract incurs a network or miner fee, so you need to have the native token of the network you are issuing an NFT on. In other words, unless the fee is covered by the platform, you need ETH to mint NFTs on the Ethereum blockchain. You can buy ETH and other popular digital assets on cryptocurrency exchanges or go an even easier way and use ChangeHero!

Where to Buy and Sell NFTs?

Another option to get an NFT for yourself is to hunt for gems that other people have already created on an NFT marketplace.

As mentioned, NFTs can only be traded on special marketplaces, as they are not directly interchangeable. The most popular platforms to trade NFT projects are OpenSea, Rarible, Super Rare, Axie Infinity and Nifty.

Some NFT projects and collections have their own dedicated marketplaces, such as CryptoPunks and NBA Topshot.

In Conclusion

The NFTs’ merits and prospects cover anything from digital identity to a work of art that can be put on the blockchain, guaranteeing uniqueness and verifiability. This versatility of tangible use cases in the digital art world, music industry, and even physical assets is the reason NFTs gained popularity.

You can read more crypto news and Beginner’s Guides by the ChangeHero team in our blog. If you want to get the updates to it first, follow ChangeHero on social media: X, Facebook, and Telegram.

Frequently Asked Questions

What is an NFT? What are NFTs and how do they work?

NFT stands for “non-fungible token” which is a kind of blockchain asset that is irreplaceable by its analogs. Each NFT associated with a single contract is unique.

How to create an NFT?

NFTs can be minted like regular crypto tokens, with the help of special services or wallets, even without technical expertise. Such services include MetaMask, Mintable, and Receiptchain.

How is NFT used in real life? What are NFTs used for? What is the point of an NFT?

NFTs are finding use in art distribution, certificates of authenticity, digital copyright certificates, and most commonly, collectibles. These tokens can serve as proof of ownership because due to how the NFT technology works each token is verifiably unique.

What is the main purpose of NFT?

Why would anyone buy an NFT? The popularity of NFT collections hints at it being primarily perceived as a speculative asset to be traded on NFT marketplaces. Another common use of NFTs is in Web3 games to represent in-game items and assets.

How does an NFT make money?

From the speculative investment angle, the price of an NFT is decided on an open marketplace. The contents of the token and the perceived value of the NFT collection are some of the factors that play a part in the NFT price formation.

What is an NFT and examples?

Common NFT examples would be randomly generated CryptoPunks or NBA TopShot athlete and club collectibles. A less obvious but very illustrative example would be Unstoppable Domains, which is a human-readable Ethereum address service.

Disclaimer

This article is not a piece of financial or investment advice. When dealing with cryptocurrencies, remember that they are extremely volatile and thus, a high-risk investment. Always make sure to stay informed and be aware of those risks. Consider investing in cryptocurrencies only after careful consideration and analysis of your own research and at your own risk.

Key Takeaways