What Is an NFT: How It Works and What Does It Do

 

Non-fungible tokens, or NFTs, are topping the latest cryptocurrency news. Understand what NFTs are, how they’re transforming digital art and content into valuable assets, and other use cases for NFTs.

A fungible asset refers to an asset that is interchangeable with any other like unit of that asset. For example, one bitcoin (BTC) is the same as any other bitcoin in circulation – the case is the same with dollars or euros. Fungible assets are also divisible, meaning someone can fractionally break them up into smaller units that share the same properties. Fungible assets are essentially indistinguishable from one other. These traits are key for any asset to be viable as a payment mechanism. 

Non-fungible tokens are crypto tokens that are indivisible and unique. While NFTs are built on smart contracts just like cryptocurrencies, NFT contracts contain specific information that makes each NFT different from the next. In this way, one NFT cannot be interchanged with another NFT, and the whole cannot be broken down into smaller units and used. These traits denote non-fungibility, hence the name NFT.

NFTs appear most often on the Ethereum blockchain. Each token signifies ownership of a digital asset, though they are also marketed as representing portions of real-world assets as well. NFTs are typically built with the ERC-721 token standard. This standard outlines a minimum set of features that each non-fungible token should possess, but it does not limit potential extra attributes of NFTs.

As the latest hype to hit the Internet, NFTs are making some individuals millions of dollars. This phenomenon hit new heights with the recent sale at Christie’s of the digital artist Beeple’s work entitled ‘The First 5000 Days’ for $69 million and brought digital art to the attention of the mainstream. Another example is Twitter co-founder and CEO Jack Dorsey’s first tweet. As an NFT on blockchain, it sold for almost $3 million.

NFTs could one day be used to record anything from ownership of our homes to our birth certificates, and already there are countless examples of eccentric-sounding tokenization attempts (a token of your family tree, anyone?).

Ownership of an NFT, evidenced by an immutable, cryptographically secured record on the blockchain, is taken as proof by others in the crypto sphere (and in the real world?) that you are the owner of that underlying asset, like a digital certificate of title or stamp of authenticity. This record of ownership can be found on the blockchain, while the digital asset itself is stored on a non-cryptographically secured, separate server owned by a host platform.

Rare or Unique Objects. NFTs are provably scarce assets. Each non-fungible token contains computerized code that verifies it is the only asset with its specific digital identity. This all-important characteristic is useful for creating unique digital goods and can even represent rare physical assets, whose provenance (historical record of ownership) can be tracked and cryptographically verified through its underlying blockchain protocol. The possibilities for exclusive and rare items that can be traded – such as digital art, collectibles, or game pieces – are endless. Platforms like Open SeaSuper Rare, and Nifty Gateway bring NFTs to an ever-growing consumer base.

While NFTs still face challenges regarding interoperability and scalability, the technology has shown its utility in proving uniqueness, scarcity, and ownership for both digital and real-world assets. Already a staple in blockchain gaming and collectibles, NFT technology has proved to be a large growth sector of the blockchain industry as use cases expand into digital identity records and representation of scarce real-world assets.

 

“NFTs may make blockchain technology more popular in the eyes of the general public,” said Brian Comiskey, sr. manager of industry intelligence, Consumer Technology Association (CTA)®. “It may underscore a desire to increase more financial transactions (beyond crypto) for consumers and eventually be deployed on the enterprise side for applications like secure cloud storage.”

 

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