If you pay attention to new trends in technology, you’re probably familiar with terms like blockchain, cryptocurrency, and NFTs. But what is an NFT and why are so many people talking about it? In this post we’ll take a look at the basics of blockchain, why cryptocurrencies exist, and why NFTs are an important building block for the future of many new forms of technology.
Understanding the Basics: Blockchain and Cryptocurrencies
Blockchain is a technological innovation that allows computers to exchange information and maintain a joint record of all transactions. For example, if Sarah in New York sends $15 to someone in London, the whole network needs to be updated so that Sarah can’t send the same $15 to someone in Mexico City.
Normally, a central business like a bank manages these transactions. But what if you don’t trust the bank? Blockchain uses protocols, or rules, so all the computers can work together. Money transfers are sent in a “block” to all network computers for verification, so that everyone knows the information in the block is correct. Each new block contains a “password” from the previous one, linking them into a chain–a blockchain.
Since blocks are connected in a chain, it’s impossible to change one block without changing ALL of the blocks. This makes blockchain very secure. And since all of the computers share information, there is just one list of all of the transactions that occur, called a ledger. Blockchain is amazing because it creates a system where computers in a network can trust each other, instead of relying on a central person or organization to hold them accountable.
A cryptocurrency is a new set of tokens that are managed on a blockchain. For example, the first blockchain currency was Bitcoin. Bitcoin are tokens that are governed by the Bitcoin blockchain. All Bitcoin transactions can be seen on the Bitcoin ledger. Each time a Bitcoin is sent, the transaction is processed through a data “block” on the blockchain, validated by network participants known as “miners” in a complex computational process.
Aside from Bitcoin, there are many other cryptocurrencies. Each cryptocurrency can have different attributes, such as the total number of tokens, how the tokens are distributed, how people earn tokens, and the actual value of a token. The value of a cryptocurrency is typically driven by supply and demand dynamics. Like other forms of money, crypto currencies gain value when there is high demand for the tokens. A critical characteristic of most cryptocurrencies is their fungibility, where each token within a specific cryptocurrency is interchangeable, since they are identically equal in value.
Now that you understand the basics of blockchain and cryptocurrencies, we can dive deeper into the specifics of NFTs, or Non-fungible tokens. So what is an NFT?
Defining NFTs: What is an NFT?
What is an NFT?
An NFT, or Non-Fungible Token, is a type of digital asset that utilizes blockchain technology for verification. The term “non-fungible” means that they are unique and not interchangeable with others of the same kind. This sets them apart from standard digital assets like MP3s or PDFs, which can be duplicated perfectly without any loss of fidelity.
NFTs are comparable to tangible, unique assets such as artwork or real estate. For example, while two Picasso paintings could each be valued at $500,000, they are not interchangeable due to their unique, identifiable attributes.
The beauty of NFTs is that they can consist of any form of digital data: photos, videos, music, documents, and even lines of code. When these types of data are “tokenized” on a blockchain, they inherit new benefits from the blockchain.
One of the key advantages is security. Blockchain tokens exist in a decentralized network of computers, reducing the risk of manipulation and offering protection against data loss or fraud. Another benefit is that the blockchain ledger allows us to verify ownership and provenance of any asset on the blockchain. This combination of security and provenance verification makes NFTs a transformational technology for digital assets.
Examples of NFTs Types
Art & Collectibles
The earliest and most common use case for NFTs is digital collectibles, like art. NFTs work well for art because you can save digital art as a .jpg image and “mint” it as a token on a blockchain. Although another person could copy that .jpg file (and potentially mint it on a blockchain), the original token can always be verified along with its owner. Some of the more famous art NFT examples include:
- Beeple – an artist who sold a year’s worth of his digital art as NFTs for over $60 million
- CryptoPunks – retro-style pixel art that is one of the earliest collections of 10,000 generative profile avatars
- Bored Ape Yacht Club – illustrated apes with various human accessories; the most successful NFT collection of all time in terms of trading value
NFTs fit naturally into the world of video games, especially given that in-game digital assets are already a massive industry. In many video games, players work hard over time to purchase or earn digital goods that have real monetary value, but unfortunately players have no means of transferring or selling those digital assets outside of the game. Many blockchain fans have suggested that NFTs will allow video gamers to have more control over their in-game digital goods. Some examples of games that use NFTs include:
- CryptoKitties – One of the first NFT collections that introduced bright, cute cartoon kittens that you could collect, breed, buy, and sell
- Axie Infinity – A popular mobile game where players can “breed” their NFT cartoon characters and battle with other players
Music is another industry that has significant potential for NFTs. Digital music has changed frequently beginning with an emphasis on digital ownership of mp3 files and shifting over time to subscription streaming platforms that retain possession of the actual digital assets. Many NFT music companies have launched with the goal of giving more revenue and royalties to musicians and simultaneously allowing true digital ownership to fans. For example:
- Royal – a music marketplace that allows fans to invest in music and earn royalties alongside musicians
- Sound.xyz – A blockchain music company that focuses on helping musicians build communities around their fans using NFTs
Although NFTs are digital assets, many people see NFTs as an opportunity to connect them with the physical world. In some cases, physical products have been launched with a corresponding “digital twin” NFT – if you own the NFT, you also own the physical product. These real-world assets, or RWAs, can be single items, like a designer handbag, or represent partial ownership of a larger item, like a house. Here are just a few examples of NFTs being used with real-world assets:
- The luxury handbag company Louis Vuitton launched a project call Via, which connects NFTs to their real-world merchandise handbags
- RealT is a company that acquires real estate, then sells fractional shares of that real estate via tokens on the blockchain
How NFTs Work: Getting into the Weeds
How to Mint an NFT (Non-Fungible Token)
As discussed earlier, NFTs are tokens on a particular blockchain. There are many different blockchains including Bitcoin, Ethereum, Polygon, Solana, and hundreds of others – but those four have the most NFT traction and activity. Each blockchain has a different technical standard for the process of minting an NFT; typically there are one or two standard formats that are adopted for NFTs on that blockchain.
In order to mint an NFT, you need to submit a contract, or request to the blockchain, using the NFT standard for that blockchain. The NFT standard usually requires certain metadata, which are pieces of information that will always be associated with that NFT. Examples of metadata include the minting timestamp, the wallet address of the minter, and the current NFT owner. The metadata also usually contains a reference link to the actual digital item, like a .jpg, .mp3, or any other format. Once the data block receives approval, the NFT gets “minted” and assigned a unique identification code.
How to Buy and Sell NFTs
The easiest way to buy or sell NFTs is in an NFT marketplace. Each blockchain has a variety of different marketplaces, and some marketplaces support NFTs from multiple different blockchains. Let’s say you want to buy an NFT on the Ethereum blockchain network. Here are the steps you would need to follow:
- Set up a wallet that supports the Ethereum network. There are many good wallet options available, but the most common is Metamask. This wallet can hold valuable assets like NFTs and Ether tokens, so you should think of a wallet almost like a safe in your house.
- Add Ether (ETH) tokens to your wallet. In order to buy an NFT, you need to have purchasing currency in your wallet – in this case, the Ether token. You can buy Ether on a cryptocurrency exchange like Coinbase, Binance, or Gemini. After you buy Ether on the exchange, you will have to send it to the Metamask wallet that you created.
- Choose a marketplace. There are many marketplaces that support NFTs on the Ethereum Network. The most common currently are Opensea and Blur.
- Connect your wallet. In order to use the marketplace, you will connect your Metamask wallet. You should be very careful and cautious any time you connect your Metamask wallet to any site. Remember, your wallet is like a safe in your home. So if you connect the wallet to a scam website, it could be possible for them to steal your assets.
- Select an NFT and make a purchase. Once you click purchase, the marketplace with ask for your confirmation to authorize a purchase. This will allow Ether to leave your account, and the NFT will be sent to your Metamask wallet.
- Sell NFTs using the same wallet. Using almost the same steps as above, you can connect your wallet to a marketplace and list NFTs for sale. When a purchase occurs, the marketplace will oversee the transaction using blockchain smart contracts.
What Happens Behind the Scenes?
One of the fundamental attributes of blockchain is that it allows transactions to occur between a buyer and a seller without an intermediary. To avoid this, marketplaces can take different approaches to how they handle transactions, but here are the most common:
A marketplace can use a decentralized wallet as a type of “escrow” account for the transaction to pass-through. This would ensure that a buyer receives the intended NFT and the seller receives payment. If the marketplace is highly decentralized and secure, the “escrow” wallet would be inaccessible to any single entity that might seek to manipulate the transaction.
A marketplace can build logic into a smart contract that requires authorizations and confirmations. For example, a seller can authorize an NFT to be sold at a specific price. This effectively creates an open transaction, governed by the blockchain, that any purchaser can fulfill. The buyer can authorize a purchase using their own wallet, confirm the transaction, and the smart contract will be fulfilled.
What are the Differences Between NFTs on Different Blockchains?
Most blockchain networks have significant differences, which can affect the types of NFTs that can be minted, bought, and sold on the respective blockchains. As mentioned above, Bitcoin, Ethereum, Polygon, and Solana all have NFTs, which all have different advantages depending on the network. Below are some of the primary differences between networks that affect how NFTs function.
Since Bitcoin was invented in 2009, many blockchains have been created to improve speed and efficiency. The networks with higher congestion, like Bitcoin and Ethereum, tend to have much slower speeds than newer chains. The network speed affects how long transfers and transactions take between wallets on the chain.
Most blockchains require transaction fees to process transfers or purchases within the network – these fees are commonly referred to as Gas Fees. Fees vary widely depending on the network and the congestion at the time of a transaction. The older, and more popular blockchains typically have much higher gas fees. Some newer blockchain technologies, like Internet Computer Protocol, have found ways to eliminate gas fees altogether.
When NFTs are minted, they commonly have data, like images, associated with the token. On some networks, like Bitcoin, this image is stored on the network itself. In the case of Bitcoin, storing data on-chain is incredibly expensive, which creates a natural limit on the types and size of files that can be minted. On other networks, like Ethereum, the data is store “off-chain” with a traditional cloud service provider like Amazon Web Services or Google Cloud. In these cases, the NFT contains a reference link to the image, but the image itself is not stored on the blockchain.
What Does it Mean to Own NFTs?
You technically own an NFT if the NFT is in your blockchain wallet and you have the private keys to access the wallet. But there are multiple instances where NFT ownership can be more complex, depending on where you buy it, and who sold the NFT in the first place.
One of the primary considerations around NFT ownership is whether the creator of the NFT reserves some rights regarding the intellectual property contained in the NFT. For example, if you buy a music NFT, do you now have exclusive rights to license that song and earn royalties from it? NFT creators have taken many different approaches to their artwork. Some creators give up all rights to the intellectual property. Other creators give business rights to the NFT holder, but reserve the right to monetize the intellectual property themselves also. And some creators reserve all of the creative rights to their work, so that the NFT owner owns just the NFT, and no intellectual property.
When you purchase an NFT, it’s important to understand the rights that the creator assigned, so that you know exactly what you can or can not do with the image, music, or other data files minted with the NFT.
Why are NFTs Important?
Now that we’ve discussed what is an NFT, it’s time to dive deeper into the significance of NFTs. We’ve discussed blockchain, tokens, and all aspects of owning, minting and buying NFTs; now let’s take a look at the bigger technological picture. While some people dismiss NFTs as hype or a market bubble, there are a number of reasons they could impact our lives going forward. Here are some of the “big ideas” that NFTs enable through their technical properties.
Today, most digital products that we engage with don’t actually belong to us. For example, when we stream movies on Netflix or music on Spotify, we’re paying for a license to access content, not to own it. Even when we purchase digital content, like audiobooks on Audible, the actual ownership and control over the digital files rests with Amazon. Unlike these digital assets, NFTs are entirely owned by individuals. The tokens are stored in your secure wallet and you are the only person who has the keys. In the future, it is likely that NFTs will also be able to manage our digital identities and personal information or data, so that we control our online presence, rather than forfeiting that to technology corporations.
Most online ecosystems, whether they are social media sites or marketplaces, include three parties: two primary parties (like a buyer and seller), and the intermediary platform that enables their interaction. For example, on eBay you have the seller of an item, the buyer of the item, and eBay. In this situation, eBay itself is an important part of the equation – it ensures that the seller gets paid, and the buyer receives a high quality product that matches the seller’s description. However, eBay can also take advantage of its role in the transaction to charge high intermediary fees. With NFTs on the blockchain, however, transactions can occur directly between two parties, without the need for an intermediary. Although service providers may still act as intermediaries to improve the quality of the experience, they have much less financial leverage. The blockchain guarantees transparency, security, and trust, without the need for trusted intermediaries.
Transferability and Composability
While we might own certain digital assets online, our control over them often exists only on a specific platform. Online video games serve as a prime example. Many top-tier games give players a treasure trove of hard-earned or purchased digital assets. But if a player decides to leave that game, they don’t have the ability to sell, monetize, or even transfer those assets. NFTs are poised to solve this problem. Not only do they transform digital ownership, but they also empower individuals to transfer digital assets across platforms. NFTs have the potential to increase composability between digital platforms, unlocking a future where games and other digital spaces are more interconnected and universally accessible.
NFTs represent an important development in how we think about digital ownership and online transactions. Using blockchain technology, NFTs allow us to own unique digital assets and verify provenance and authenticity. While NFTs emerged from the worlds of cryptocurrency and video gaming, their applications span music, art, collectibles, real estate, identity management, and many other domains.
Ultimately, NFTs have the power to reshape our relationship to digital content. Of course, NFTs come with risks and complexities that must be navigated thoughtfully. Speculation and over-hyping of NFTs could lead to market instability. There are also concerns around environmental sustainability, security, and proper management of intellectual property rights. However, if embraced prudently, NFTs represent an opportunity to empower everyday people in an increasingly digital world. The technology is still nascent, but NFTs give us an early glimpse of how blockchain innovations can transform digital ownership, creativity, and community.