Skip to content

Guide to NFTs: What They Are, How They Work, and What to Know Today

What Is an NFT? The Ultimate Guide to How Non-Fungible Tokens Work

Dear fellow tech enthusiast,

Unless you‘ve been living under a rock, you‘ve likely heard about the craze around NFTs or non-fungible tokens. From bored-looking apes selling for millions of dollars to iconic internet memes being auctioned off, it seems like NFTs are everywhere these days. But what exactly are they and how do they work under the hood?

As someone fascinated by emerging technologies, I‘ve dove deep into the world of NFTs to understand the technical details of how they function as well as their vast potential to change digital ownership as we know it. In this ultimate guide, I‘ll break down for you in simple terms what NFTs are, the nitty gritty of how they work, and why they‘re such a big deal. Let‘s jump in!

NFTs in a Nutshell

The simplest way to define an NFT is that it‘s a unique digital asset whose ownership is tracked on a blockchain. Think of an NFT as a digital collectible item – it could be digital artwork, a music track, an in-game item, virtual real estate, etc.

Just like how collecting rare baseball cards or fine art can be valuable in the physical world, NFTs let people own, buy and sell unique digital assets that were never really "ownable" before. Literally anything that‘s digital could be turned into an NFT.

The key thing that makes an NFT special is that it‘s non-fungible which means each one is totally unique with its own identity. NFTs are not interchangeable for other items because they have unique properties. Even if someone made an exact digital copy of the NFT artwork, it wouldn‘t be the authentic, original version.

With physical collectibles, there‘s always some risk that it could be forged or faked. But an NFT has a clear record of ownership and authenticity since it‘s a unique token on a blockchain. Let‘s unpack exactly how that works!

How NFTs Work: The Technical Stuff

Under the hood, an NFT is actually just a piece of code – it‘s a cryptographic token that lives on a blockchain network, most commonly Ethereum. The token contains unique metadata and an identifier that no other token has. When an NFT is created, this information is recorded forever on the blockchain.

Think of the blockchain like a big public spreadsheet in the cloud that records all the data and transactions associated with each unique NFT – what properties it has, who owns it now, who owned it in the past, how much it last sold for, etc. Once data is recorded to the blockchain, it‘s permanent and can‘t be altered.

When someone buys an NFT, they‘re not actually getting the digital file attached to it. Instead, they receive the token that proves they own the original asset. This token is sent to their digital wallet and as the new owner, they have the private key to access or sell it.

The actual digital file of the artwork or collectible is still accessible for anyone to view or copy. But similar to fine art collecting, the value is in owning the original, authentic version even if replicas exist. With an NFT, ownership of the real deal digital asset is forever tracked as part of the token on the blockchain.

Minting an NFT: How Digital Assets Become Tokens

So how do regular digital files get turned into unique assets on a blockchain? The process is called minting an NFT. It‘s how the file and its details become a tradable crypto token.

To mint an NFT, you start by choosing a blockchain platform that supports them – Ethereum is the most common but others like Solana, Tezos and Flow are growing. Then you upload your unique digital file to the platform whether it‘s an image, video, audio, 3D model, etc.

Next, you fill out details like the NFT title and description and define its properties and rarity – these all become part of the token‘s metadata. Finally, you set a price for the NFT and list it for sale on the platform‘s marketplace. Once someone buys it, the transaction happens on the blockchain and the minting is complete!

The Ethereum blockchain is home to the majority of NFTs and it has token standards that make the process more universal. ERC-721 tokens are used for NFTs while ERC-20 tokens are used for cryptocurrencies. There are platforms like OpenSea and Rarible that make creating and selling NFTs more user-friendly by handling the token minting process.

Under the hood, minting leverages smart contracts on the blockchain. A smart contract is a piece of code that executes the terms of an agreement between a buyer and seller. With NFTs, the smart contract code handles transferring the token and cryptocurrency between wallets and recording the transaction on the blockchain.

The Value of NFTs: Digital Ownership, Patronage and Community

So why are people shelling out so much money for NFTs? After all, doesn‘t it seem strange to pay for a digital file that anyone can view or copy? As it turns out, there are a number of factors that give NFTs their value.

First and foremost, NFTs make it possible to truly own a unique digital asset in a way that wasn‘t possible before blockchain technology. Sure, you‘ve always been able to buy digital files like JPEGs or MP3s. But NFTs provide a public proof and record of ownership that is valuable for both collectors and creators.

For collectors, that ownership can come with perks like access to an exclusive community, engagement with the artist, tickets to events, and more. It‘s the token that verifies they are part of an inner circle of fans and supporters.

That ties into another source of NFT value – patronage. Buying an NFT is a way to directly support artists and creators you admire. When you buy an NFT artwork or music track, more of that money goes directly to the creator compared to traditional sales models.

There‘s also the basic economic principle of scarcity. Most NFT projects release a limited number of tokens which makes them more rare and valuable, especially the ones with the most unique traits. Scarcity can drive up prices as more people want to own a piece of a popular NFT collection.

And of course, some people are buying NFTs with the hope that they‘ll be worth more in the future. Speculation is certainly a big driver of sky-high prices for some NFT sales. Like any new technology or asset class, there‘s an element of risk.

Popular NFT Projects

To get a sense of the eye-popping amounts of money in the NFT space, let‘s look at some of the most popular and valuable projects:

  • Beeple‘s Everydays: The First 5000 Days – This digital artwork was the first NFT sold by Christie‘s Auction House. It‘s a collage of 5,000 daily futuristic illustrations created by artist Mike Winkelmann AKA Beeple. In March 2021, it sold for a record-breaking $69.3 million dollars to NFT investor Metakovan. This sale really kickstarted the mainstream NFT craze.

  • CryptoPunks – Launched in 2017 by Larva Labs studio, CryptoPunks were the first "profile pic" style NFT collection on the Ethereum blockchain. There are 10,000 unique punks, each with a different set of traits and rarity. CryptoPunks have sold for upwards of $10 million dollars and kick-started the trend of using NFTs for social media avatars.

  • Bored Ape Yacht Club – Created by Yuga Labs, BAYC is a collection of 10,000 unique cartoon apes each with different traits like clothes, accessories, and more. Beyond being a valuable NFT collectible, the Bored Ape doubles as a membership pass to an exclusive club with perks and a community of owners including many celebrities. The most expensive Bored Ape NFT sold for over $3 million dollars.

  • NBA Top Shot – Built by Dapper Labs, NBA Top Shot lets fans own collectible NFTs of their favorite NBA and WNBA video highlights called "moments". Over $1 billion dollars worth of Top Shots have been bought and sold, making it one of the most popular NFT marketplaces. A rare LeBron James dunk Top Shot moment sold for over $387,000.

As you can see, NFTs are selling for huge amounts and the market has grown rapidly – the largest NFT marketplace OpenSea saw $2.5 billion in sales in the first half of 2022 alone. But these headline-grabbing projects are really just the tip of the iceberg in terms of the potential applications of NFTs.

The Future of NFTs

The technology behind NFTs – proving digital ownership on a blockchain – will likely impact and disrupt many industries beyond digital art and collectibles. Here are a few exciting areas where NFTs could be game-changing:

  • Gaming – NFTs can represent unique in-game items like skins, weapons, characters and more. Players can truly own, buy and sell these items across gaming marketplaces. Games that fully embrace NFTs could create new "play-to-earn" models.

  • Music – NFTs give a new way for musicians to make money and engage fans. Artists can release limited edition tracks and album art as NFTs. Fans can get access to exclusive content and experiences. NFTs could disrupt the traditional music industry by letting artists earn more directly from fans.

  • Metaverse – In immersive virtual worlds, NFTs will play a key role in owning your avatar‘s identity, virtual real estate, and other unique assets. You‘ll be able to take these NFTs between different metaverse spaces. An NFT could be your pass to VIP areas and experiences in the metaverse.

  • Tickets and Passes – NFTs are ideal for tickets to events, transportation, memberships, and other types of access passes. They are more secure as they can‘t be forged or duplicated. Smart contract capabilities mean an NFT ticket could automatically grant access or perks at an event.

  • Records and Certificates – University degrees, medical records, birth certificates, car titles and other essential documents could be authenticated on the blockchain as NFTs. This would make record-keeping more efficient and secure while giving users more control over their information.

  • Fundraising – NFTs give a new way for charities and causes to raise money. One popular example is Ukraine selling NFTs to support its war efforts against Russia. The country raised over $100,000 by selling an NFT of its flag.

Of course, the future of NFTs isn‘t without its risks and issues to figure out. The hype and speculation around NFTs have contributed to scams, hacks and big financial losses for some. There are also valid concerns about the environmental impact of energy-intensive blockchain networks that most NFTs use.

NFT copyright is a gray area and hasn‘t been fully tested legally. While an NFT can prove you own an asset, the actual copyright might still belong to the original creator or artist. And anyone can still view or copy the digital file associated with an NFT, which makes some question what the point of "ownership" is.

Like any emerging technology, NFTs will continue to evolve as creators and developers experiment with what‘s possible. I believe the long-term potential for NFTs to reinvent digital ownership and community is huge, even if we‘re currently in a hype-fueled, speculative phase.

As someone who is optimistic about the future of the internet and technology, I‘m excited to follow the NFT space and see how it supports a new creator economy while changing how we experience ownership in a digital world. At the very least, NFTs have sparked mainstream interest in previously niche topics like blockchain tech – and that‘s a good thing in my book!

Thanks for coming along on this deep dive into how NFTs work under the hood. I hope you found it helpful and informative in breaking down this complex, fast-moving space. To stay up to date on the latest with NFTs, I recommend following some of the top collectors, creators and communities on Twitter and Instagram. Happy exploring!

What are your thoughts on NFTs? Do you think they‘re a world-changing innovation or an overhyped fad? Let me know in the comments below! And if you found this guide valuable, I‘d appreciate you sharing it with your network.

Until next time,
Your resident tech geek

*Disclaimer: This content is for informational and educational purposes only. It is not financial, legal or investment advice. Be sure to do your own research and due diligence before buying or investing in NFTs. Cryptocurrency and NFTs are highly speculative and the market is largely unregulated. Never risk more money than you can afford to lose.