Social media is plastered with a meme of Nyan Cat, a video of a flying Pop-Tart cat propelled by a rainbow. Originally uploaded to YouTube in 2011, a version of the Nyan Cat video was recently sold as a nonfungible token, or “NFT” for short, for nearly $600,000.
The value of some nonfungible tokens reaches millions of dollars. For example, “Everydays — The First 5000 Days,” a digital work of art by the digital artist Beeple, sold for $69 million at a recent Christie’s auction. Then CryptoPunks, an early nonfungible token project, sold for $16.9 million.
You may ask: What is a nonfungible token? This guide describes NFTs and how they work, and explains why they have become so popular and lucrative.
What is a nonfungible token?
A nonfungible token is a digital token — a unit of value built on top of an existing blockchain network. A digital token contains specific information that makes it different from other NFTs or assets and proves ownership of the digital asset — image, sound file, text, etc.
An NFT is built and hosted on a blockchain, which is essentially a digital ledger of transactions. The blockchain is also the underlying technology used for cryptocurrency.
When an asset is described as nonfungible, that means it cannot be replicated. It means the following:
- Each NFT is different from the next, so one NFT cannot replace another.
- As a digital asset, NFTs can be copied, downloaded, and shared, but the original NFT and proof of its ownership lives on the blockchain. Nowhere else can an identical version of an NFT be found.
- NFTs are verifiable, which means that historical data stored on the blockchain authenticates an NFT’s original creator and owner.
The “nonfungible” component of NFTs is what gives them their value. Consider Vincent van Gogh’s “The Starry Night.” Anyone can buy a print at a gift shop, but only the Museum of Modern Art owns the painting Van Gogh created, and no other asset can entirely replicate the original canvas. That also defines an NFT: a one-of-a-kind asset.
Examples of top-selling NFTs
In addition to works by Beeple and the CryptoPunks series, these are some other high-priced pieces:
- “The EverLasting Beautiful,” FEWOCiOUS | $550,000
- “Genesis,” Trevor Jones and Jose Delbo | $111,377
- “Finite,” Pak | $847,467
- “Heir to the Throne: An NFT in Celebration of Jay-Z’s Reasonable Doubt 25th Anniversary by Derrick Adams” | $139,000
How are NFTs different from cryptocurrency
Cryptocurrencies are digital or virtual currencies used for transactions. Cryptocurrencies are secured by cryptography. In recent news, cryptocurrencies are beginning to gain wide acceptance with a growing number of businesses accepting it as a form of payment for products or services from customers. Many see it as an eventual replacement for today’s fiat currencies to buy things, but this is not the case yet.
NFTs are more like collectibles, and they can rise in value. They are also secured by cryptography, but they are not used as currency. A primary similarity between NFTs and cryptocurrencies is that they both live on a blockchain. They are also often used in the same circles and traded on the same exchanges.
But a fundamental difference exists between the two:
- NFTs are “nonfungible,” making them exchangeable but irreplaceable.
- Cryptocurrencies are both exchangeable and replaceable.
Cryptocurrencies are essentially fungible tokens, which means that they are identical to each other. For example, one bitcoin, a type of cryptocurrency, is equivalent to another bitcoin. This makes bitcoins ideal for commercial transactions. In another example, the price of alternative coins is divisible into others. Take one Stellar Lumens (XLM), priced at $0.259 at the time of this writing, and an Ethereum (ETH) coin priced at $2,244.651. Based on these values, the exchange rate for these two coins is one XLM per 0.000116 ETH.
Cryptocurrency can also be purchased in smaller denominations. For example, on a cryptocurrency exchange like Coinbase, an investor can pay for a percentage of a bitcoin. At the time of this writing, one bitcoin is worth $34,080.18. An individual can buy half a bitcoin for half the cost: $17,040.09. NFTs, however, exist exclusively as whole items and are not divisible.
Resources: Differences between NFTs and cryptocurrency
Take a deep dive into the differences between NFTs and cryptocurrency. Resources include the following:
- CoinDesk, “What Are NFTs and How Do They Work?” — Collectible sports cards, virtual real estate, digital sneakers — this resource provides examples of different types of NFTs and takes a deep dive into how NFTs work.
- Forbes Advisor, “What You Need to Know About Non-fungible Tokens (NFTs)” — Here is a description of how NFTs differ from cryptocurrency, how they work, and more.
- Hedera Hashgraph, “What Is a Non-fungible Token (NFT)?” — What is fungibility? What is nonfungibility? Learn more about the differences and the unique attributes of NFTs.
How do NFTs work?
The primary characteristic of an NFT is that it is exchangeable but irreplaceable. This means that it cannot be traded at equivalency with another NFT, because each is unique, thanks to its identification codes and metadata. For example, a buyer may be willing to pay thousands of dollars for two NFTs from the same artist. The value of each NFT is different and may increase or decrease based on a wide range of factors.
How does an NFT work? Consider music as an example. Anyone can purchase their favorite song and download it to their smartphone or laptop to listen to at any time, but they don’t own the song — the record label or the artist who produced the song is the owner. The act of buying music on a platform such as iTunes equates to purchasing a license to play that music. With NFTs, the purchaser takes full ownership of the asset.
Since NFTs made their debut, they primarily have been created and held on the Ethereum blockchain. The Ethereum blockchain is a platform for both NFT and cryptocurrency creation and minting. It establishes a permanent, irrefutable digital ledger of all transactions that take place on the blockchain.
For example, it records information about the creator of an NFT. Creators can retain ownership rights to their NFTs and choose to create copies of them as many times as they want. However, each copy will be less valuable than the original, similar to the replication of physical collectibles such as paintings.
An NFT can be purely digital. It can be an image, GIF, video, or audio recording. NFTs can also represent physical objects in the real world, such as trading cards or sneakers. For these NFTs, buyers can purchase only the digital original, or both the physical and digital versions.
Some NFTs include smart contracts that mean an NFT’s creator receives a royalty each time their creation is sold. This creates opportunities for digital artists to get paid for their work in perpetuity. In the traditional art world, the original artist of a piece does not benefit from royalty fees.
Resources: Types of NFTs
A wide range of NFTs are available, from digital artworks and videos to newspapers. These resources offer further information.
- Creative Bloq, “Confused About NFTs? Here’s All You Need to Know” — Who’s been creating and using NFTs? According to this resource, artists, gamers, and brands across the spectrum of culture.
- The Balance, “What Are Non-fungible Tokens (NFTs)?” — Discover examples of different types of NFTs, how they work, and more.
- The Verge, “NFTs, Explained” — This humorous resource offers a foundational perspective of the world of NFTs, covering all types of uses.
What is the future of NFTs?
Like cryptocurrency, individuals interested in purchasing NFTs can buy them on online marketplaces. Users can buy NFTs using cryptocurrency or fiat (for example, U.S. dollars).
In defining what NFTs are, it is important to note that they are speculative assets, which means they can rise and decline in value over time based on the market. If an NFT’s value increases, it can be sold for a profit. To keep them safe from would-be thieves, NFT owners can store their assets in digital wallets, typically used for cryptocurrency.
Digital wallets can include electronic devices, online exchanges, or software programs. Digital wallets are often password-protected with two-factor authentication. Users of hardware wallets typically use a 12-word phrase to recover and use a private key to access their cryptocurrency and NFT assets.
According to Dr. Dustin York, associate professor of communication at Maryville University, the market for NFTs is hot. But like with the dot-com bubble of the 1990s, it is following a process known as the hype cycle, in which every major bubble is expected to implode. “There will be a major fallout within the next 18 months, and skeptics will loudly say ‘Told you so!’” York tells Authority Magazine. “But in a few years, NFTs will reach the plateau of productivity and be part of our everyday lives.” Understanding this cycle is key to understanding the future of NFTs, according to York.