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What to know about non-fungible tokens (NFTs)

  • A non-fungible token (NFT) is a one-of-a-kind digital asset that symbolizes ownership of physical objects such as art, video clips, music, and so on.

  • NFTs are based on the same blockchain technology as cryptocurrencies, but they are not a currency.

  • While NFTs have sold for millions of dollars, they are extremely speculative investments that are not suitable for all investors.

A non-fungible token (NFT) is a one-of-a-kind identifier that may be used to assign and prove ownership of digital assets cryptographically.

Because NFTs for digital artwork have sold for millions, if not tens of millions, of dollars, calling them popular may be an understatement. NFT sales reached $2.5 billion in the first half of 2021.

However, after you grasp how NFTs operate, you'll notice that there are other applications for this technology.

What exactly is an NFT?

NFT is an abbreviation for "non-fungible token." An NFT is a digital asset that ties ownership to one-of-a-kind physical or digital assets such as pieces of art, real estate, music, or movies.

NFTs can be thought of as modern-day collectibles. They are purchased and sold online and provide digital evidence of ownership of any particular object. NFTs are securely recorded on a blockchain —the same technology that underpins cryptocurrencies— ensuring that the asset is unique. It is also possible that the technology will make it impossible to change or counterfeit NFTs.

To truly understand NFTs, it's important to first understand the economic notion of fungibility.

  • Because their worth isn't connected to their individuality, fungible items can be easily swapped. You may, for example, swap a $1 bill for another $1 bill and still have $1 even if your new bill has a different serial number.

  • Non-fungible objects cannot be interchanged. Each token in an NFT has distinct features and is not worth the same amount as other comparable tokens.

So, why are individuals willing to pay so much for NFTs? "By building an NFT, producers can certify scarcity and authenticity to just about anything digital," explains Solo Ceesay, Calaxy's co-founder and COO. "In conventional art collecting, there are countless copies of the Mona Lisa in circulation, but only one original. The use of NFT technology aids in the assignment of ownership of the original item."

In the art world, selling NFTs has proven to be a successful business. Here are a few instances you may be familiar with:

  • "Everydays — the First 5000 Days" by digital artist Beeple was auctioned off for $69.3 million at Christie's.

  • A 20-second video footage of LeBron James doing his "Cosmic Dunk # 29" sold for $208,000.

  • At Sotheby's first curated NFT sale, a CryptoPunk NFT sold for $1.8 million.

  • Twitter CEO Jack Dorsey auctions off an NFT of his first tweet for $2.9 million.

NOTE: The high-priced and attention-grabbing NFT craze is also attracting scammers and fraudsters, so investors should be cautious. Some people may try to sell you anything and claim it's an NFT when it isn't. Others may assert that they have the right to sell an NFT of a work that they do not own and did not produce.

When you purchase an NFT, others may be able to create copies of the image, video, or digital object that you own. However, similar to purchasing a one-of-a-kind piece of art or a limited-edition print, the original may be more expensive.

How do NFTs work?

Many NFTs are generated and stored on the Ethereum network, but NFTs are also supported by other blockchains (such as Flow and Tezos). Because the blockchain is accessible to everybody, NFT ownership can be easily confirmed and traced, yet the individual or company that holds the token can remain anonymous.

Different sorts of digital goods, such as artwork, gaming objects, and stills or video from a live broadcast, can be "tokenized" – NBA Top Shots is one of the major NFT marketplaces. While the NFT that transmits ownership is uploaded to the blockchain, the digital item's file size is irrelevant since it stays independent from the network.

Depending on the NFT, the copyright or license rights may not be included with the purchase. However, this is not always the case. Similarly, purchasing a limited-edition print does not automatically guarantee you exclusive rights to the image.

NFTs may have numerous potential uses outside of the art field as the underlying technology and ideas improve.

A school, for example, may give an NFT to students who have obtained a degree, allowing companies to quickly validate an applicant's education. Alternatively, a venue might utilize NFTs to sell and track event tickets, potentially reducing resale fraud.

What is the difference between NFTs and cryptocurrencies?

NFTs and cryptocurrencies both rely on the same blockchain technology. NFT markets may also compel consumers to use bitcoin to acquire NFTs. Cryptocurrencies and NFTs, on the other hand, are generated and utilized for various purposes.

Cryptocurrencies seek to function as currencies by holding value or allowing you to purchase and sell items. Cryptocurrency tokens are fungible, comparable to conventional currencies such as the US dollar. NFTs generate one-of-a-kind tokens that may be used to demonstrate ownership and transmit rights over digital commodities.

How to Buy an NFT

NFTs can be purchased, sold, traded, and created using internet exchanges or marketplaces. The creator or current owner may choose a price. Alternatively, there may be an auction in which you must bid on the NFT.

Foundation: A community-curated marketplace in which producers must be invited by other creators already on the network.

Nifty Gateway: An art-focused marketplace that collaborates with well-known companies, athletes, and artists.

OpenSea: One of the earliest and largest marketplaces for NFTs, for a broad variety of collectibles.

Rarible: Provides a variety of NFTs with a focus on art. Members are rewarded with their own RARI token.

SuperRare is a marketplace that specializes in curating and selling digital art.

It is important to note that NFTs can be extremely speculative investments. Some people have made tens of thousands or even millions of dollars by selling NFTs. Others may end up paying a high price for a digital product that is ultimately useless.

Depending on the marketplace, the sign-up process may vary. NFTs are often purchased with a cryptocurrency, such as ether (Ethereum's native coin), but the price may be advertised in dollars as well. Depending on the marketplace, each transaction may be subject to a separate set of costs.

The financial takeaway

While NFTs may have numerous practical applications in the future, they are now mostly employed in digital art.

"NFTs provide a smooth mechanism for creators to sell digital work that may not have a large market. Additionally, there are ways for artists to get compensated for each successive sale of their work "Ceesay explains. "On the other hand, collectors may speculate on digital art while also boasting rights to rare artifacts on the chain."

If you're thinking about buying an NFT as an investment, keep in mind that there's no assurance it'll rise in value. While some NFTs may be valued at hundreds or millions of dollars, others may be worthless.


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