What Is a Nonfungible Token (NFT): Explained

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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.

A symbol of a NFT coin next to a keyboard and money.

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:

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:

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.

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.

Resources: Where to Buy NFTs

Interested in buying NFTs? Here are some exchanges that deal with the selling and trading of NFTs.

  • OpenSea — The world’s first and largest NFT marketplace to create, buy, and sell NFTs.
  • Mintable — Find NFT art, collectibles, game items, videos, music, and more here.
  • Rarible — This is a marketplace to turn products or services into publicly tradable items.
  • SuperRare — This digital art marketplace focuses on selling NFTs from artists all over the world.
  • Nifty Gateway — This platform teams up with artists and brands to create collections of limited edition, high-quality NFTs known as Nifties.
  • NBA Top Shot — Sports enthusiasts and collectors can buy, sell, and collect officially licensed NBA NFTs.

NFTs: A Building Block to a Blockchain Career

NFTs are providing a new medium for artists, art enthusiasts, collectors, and fans. They are also playing a central role in the fast adoption of blockchain technologies. As a result, they are helping to expand opportunities for blockchain developers, blockchain engineers, smart contracts technologists, blockchain platform integration engineers, and more.

Already, an increasing number of companies are investing in blockchain initiatives. According to “Deloitte’s 2019 Global Blockchain Survey,” 53% of companies see blockchain as a vital strategic business priority, while 83% see a compelling case for adopting blockchain technologies.

Blockchain is best known as the underlying technology powering digital currencies, but the technology’s uses are expanding. One example is smart contracts, which facilitate financial transactions on a blockchain. Smart contracts’ ability to automatically self-execute and self-enforce agreements without human intervention can make some aspects of contract law faster to perform and more affordable.

As the NFT industry evolves, the demand for digital currency expands, and new uses for blockchain technology are discovered, the need for engineering and technical professionals with knowledge of blockchain technologies to build the advances of the future will grow.