What are NFTs and how do they work?

  • Daniel Marsh
  • |
  • January 05, 2022

What is an NFT?

An NFT, short for a non-fungible token, is a unique digital asset or item that cannot be replaced, forged or otherwise manipulated in any way. At the time of writing this article, NFTs are typically only known for their ability to provide authenticity and proof of ownership in markets such as internet collectables like art, music, and games. However, this technology can be applied to much more than just authenticating a digital image and will most likely be used in all areas regarding proof of ownership and authenticity. 

Some key points to remember:

  • NFTs are unique and so cannot be forged or replaced
  • NFTs have proof of ownership and authenticity
  • NFTs can be applied to multiple industries and applications

How do NFTs work?

Authenticity and proof of ownership are the main focus when it comes to NFTs. Digital collectables and other NFT items contain distinguishing and unique information that makes them distinct from any other NFT and easily verifiable. Forging NFTs doesn't work because each item can be traced back to the original creator or issuer. And unlike cryptocurrencies, they can't be directly exchanged with one another because no two are exactly the same. 

NFTs reside on a distributed public ledger that records transactions known as the Blockchain. The most common Blockchain used for NFTs is the Ethereum cryptocurrencies network (read more about Blockchain here).

Because all NFTs are directly held on the blockchain network, all previous transactions regarding an NFT are available for anyone to view; this includes the date and time of the transaction, price of sale and previous and current owners. This means all current NFT owners have an un-forgeable unchangeable history of their NFT and proof of ownership, as all records of the NFT are available to anyone at any time without the risk of being edited. 

Why the Ethereum blockchain network?

The Ethereum blockchain makes it possible for NFTs to work due to the reliableness of the network, which means your tokens will always be available to sell. All Ethereum products also share the same "backend", making NFTs portable to buy on one product and sell it on another effortlessly. While also being impossible to manipulate the data to forge the ownership once a transaction is confirmed.

Current uses for NFTs

NFTs have been around since 2015 but gained most of their popularity in 2020. This is primarily due to the higher interest in cryptocurrencies and blockchain technology. NFTs are currently known for their digital collectables and art use because the technology offers artists and content creators a unique opportunity to sell their work without the need for art galleries or auction houses. Instead, the artist can sell the art directly to the consumer as an NFT, letting them keep more of the profits. In addition, artists can program in royalties, so they'll receive a percentage of sales whenever their art is sold to a new owner. This is an attractive feature as artists generally don't receive future proceeds after selling their art.

The most common NFTs are created or "minted" from digital objects that represent both tangible and intangible items such as:

•  Art

•  GIFs

•  Videos and sports highlights

•  Collectibles

•  Virtual avatars and video game skins

•  Designer sneakers

•  Music

Future uses for NFTs

Because the technology provides the ability to authenticate an item and provide proof of ownership, the applicational benefits could be endless. Any form of identification or record of ownership could be replaced by NFTs such as your driving license, passport, birth certificate and even your medical card. NFTs could also be used to provide the authenticity of commodities like a plane ticket or expensive jewellery. 

Real estate titles

physical real estate opportunities are taking shape via NFTs and encouraging a new frontier for property ownership. In traditional real estate, property transfer is labour-intensive and requires title management. Connecting an NFT with a physical property allows for straightforward usage and easy collateral, an idea Europe-based start-up, Propy, is already exploring. The property offers a transaction platform with which each NFT comes with access to ownership transferred paperwork. The first Propy-hosted NFT auction sold an apartment for 36ETH or $93k at the time of sale.

How to Buy NFTs

currently, the only way to purchase an NFT is through cryptocurrency and in order to do this, you will need to acquire some essential items:

  • A digital wallet that allows you to store NFTs and cryptocurrencies.
  • Some cryptocurrencies, like Ether, depend on what currencies your NFT provider accepts, be sure to keep fees in mind as you research options. Most exchanges charge at least a percentage of your transaction when buying crypto.

Popular NFT Marketplaces

 Currently, the largest NFT marketplaces are:

•  OpenSea.io: This peer-to-peer platform bills itself as a purveyor of "rare digital items and collectables." All you need to do is create an account to browse NFT collections to get started. You can also sort pieces by sales volume to discover new artists.

•  Rarible: Like OpenSea, Raible is a democratic, open marketplace that allows artists and creators to issue and sell NFTs. RARI tokens issued on the platform enable holders to weigh in on features like fees and community rules.

•  Foundation: Here, artists must receive "upvotes" or an invitation from fellow creators to post their art. The community's exclusivity and cost of entry. Artists must also purchase "gas" to mint NFTs, which means it may boast higher-calibre artwork. For instance, Nyan Cat creator Chris Torres sold the NFT on the Foundation platform.

Recommended articles to read on this subject:

What is the Blockchain and how does it work?