What are NFTs and How Do They Work?

NFTs (non-fungible tokens) are one of the most talked about applications of blockchain technology today. But you may still be wondering – what exactly are NFTs and how do they work?

This beginner’s guide will explain what makes NFTs unique, how they are created, and their potential uses.

The Basics of Non-Fungible Tokens

At a basic level, most NFTs are part of the Ethereum blockchain. They are supported by ERC-721 and ERC-1155 standards. This allows NFTs to be traded on the blockchain.

Unlike cryptocurrencies, NFTs are non-fungible. This means each NFT is unique and not interchangeable. For example, 1 Bitcoin is equal to any other 1 Bitcoin. But 1 NBA Top Shot NFT video highlight is not equal to any other.

NFTs Explained in 3 Key Properties

  • Digital Scarcity – Each NFT is unique. Their scarcity is verifiable on the blockchain.
  • Ownership – NFTs allow transparent ownership of digital items like art, collectibles, videos, etc. Ownership is tamper-proof.
  • Interoperability – NFTs can be traded across different platforms seamlessly. Yet their ownership data always remains intact.

How NFTs Are Created

NFTs come in many formats – JPEG images, GIFs, videos, music files and more. Underlying each NFT are metadata that make it distinct on the blockchain.

NFT creators first build their digital artwork file. Then they mint the NFT on a marketplace like OpenSea, looksRARE or Rarible. Minting records the NFT’s metadata like name, description, characteristics, serial number etc.

The metadata allows each NFT to have a verifiable level of scarcity and ownership rights.The actual artwork file can be copied and shared endlessly. But its corresponding NFT maintains uniqueness as data recorded on the blockchain.

Ownership and Royalties

When an NFT is purchased, the transaction is recorded on the blockchain. This allows easy verification of current and past ownership of the NFT at any time.

NFT contracts can also be coded to pay out royalties automatically to the original creator whenever their NFT is sold to a new owner. This ensures creators earn from secondary NFT sales.

Use Cases of NFTs

While NFT art gets the most attention, the technology has many use cases, including:

  • Digital Collectibles – unique trading cards, digital sneakers/fashion items, music tracks etc.
  • Gaming Items – weapons, avatars, tokens that can be used across games
  • Domain Names
  • Tickets & Passes – concerts, events, travel tickets
  • Physical Asset Ownership – property/land deeds, luxury items
  • Access Keys – membership cards, VIP status, backstage passes

NFTs unlock provable digital scarcity, ownership and asset utility that can disrupt many industries.

The Future of NFTs

As creators realize the advantages of NFTs, adoption is growing rapidly. Global NFT trade volume grew to over $17 billion in 2021 as per Chainalysis.

And most agree NFTs are just getting started transforming digital ownership, creative economies, gaming, and more. Each NFT use case highlights the immense potential of blockchain verified digital property rights.