Non-Fungible Token (NFT): What It Means and How It Works

Andrew McDowell

06 Jan 2025 • 6 min read

Introduction

Non-Fungible Tokens (NFTs) have rapidly evolved from a niche blockchain experiment into a mainstream phenomenon. Initially gaining popularity through collectible digital cats and meme-worthy art pieces, NFTs now extend into numerous fields such as finance, gaming, music, and even healthcare. Yet they also face criticism and controversy, from environmental worries to questions about their actual value. This article explains what NFTs are, how they work, their history and practical uses, and the critical issues and risks worth considering before diving into this new realm of digital ownership.

Non-Fungible Token (NFT): Definition and Core Principles

NFTs are unique digital assets recorded on a blockchain, providing verifiable proof of ownership and authenticity. Unlike interchangeable cryptocurrencies such as Bitcoin or Ethereum, each NFT has distinct identification codes and metadata, making it inherently non-fungible. This uniqueness is akin to owning a rare baseball card: no two cards are entirely identical, and they cannot simply be swapped on a one-to-one basis.

Characteristics of NFTs

NFTs stand apart from traditional digital assets primarily because of their indivisible, one-of-a-kind nature. Key points include:

Uniqueness and Scarcity: Each token has a distinct set of data, guaranteeing that no two NFTs are identical
Immutability: Once an NFT is minted and recorded on the blockchain, its transaction history cannot be altered
Easy Transfer of Ownership: Blockchain technology enables direct, peer-to-peer trading without needing intermediaries like art galleries or banks

Copyright Considerations

One common misunderstanding is equating NFT ownership with having the underlying copyright. Owning an NFT typically means owning the token itself, plus any rights defined in the associated smart contract. In most cases, buyers do not automatically receive copyright or intellectual property rights to the art or file behind the NFT. It's comparable to purchasing a physical painting: you own the actual piece, but not the right to reproduce and sell copies.

A Brief History of NFTs

Early Projects

The concept of NFTs can be traced back to 2014 with the creation of "Quantum" by Kevin McKoy. However, NFTs truly entered the public consciousness in 2017 through a blockchain-based game called CryptoKitties, which allowed users to breed and trade collectible digital cats. This popularity spike showcased both the immense potential and inherent scalability challenges of blockchain technology.

The ERC-721 Standard

In 2018, the Ethereum blockchain introduced the ERC-721 standard, defining how to create and manage non-fungible tokens. This provided developers and platforms with a uniform language to build upon, leading to an ecosystem of marketplaces, NFTs, and applications.

The Origins of the Term "NFT"

While the idea of one-of-a-kind digital assets existed before CryptoKitties, the term "NFT" gained widespread traction thanks to that game's success. The name emphasizes the core concept of non-fungibility—tokenizing something unique that cannot be exchanged on an equal footing with another token.

Market Influence and Growth

The initial success of early NFT projects laid the groundwork for dedicated marketplaces like OpenSea, which soared to a $1.4 billion market cap by 2021. Although the NFT market experienced explosive growth and subsequent pullbacks, it continues to evolve with increasing emphasis on practical utility and broader adoption.

Common Uses of NFTs

Digital Art

Digital art remains the face of NFTs, highlighted by multimillion-dollar sales:

Beeple's "Everydays: The First 5000 Days" sold for $69.3 million
Pak's "The Merge" reached a total of $91.8 million
CryptoPunks and Bored Ape Yacht Club have boasted multiple high-value sales

NFTs empower artists to prove the authenticity and scarcity of their work, build direct relationships with collectors, and potentially earn royalties whenever their pieces are resold.

Gaming

NFTs are a natural fit for gaming, enabling players to truly own in-game assets like skins, weapons, and virtual land. Despite early successes, the gaming community's reaction has been mixed, with some companies embracing NFTs and others banning them. Concerns often revolve around the commercialization of gameplay and additional costs to players.

Music and Film

In the entertainment sector, NFTs offer new ways to distribute content and engage fans:

Music: Limited edition releases, royalty-sharing mechanisms, and VIP passes
Film: Collectible movie scenes, behind-the-scenes content, and novel financing methods

Other Associated Files

Beyond art and gaming, NFTs have been tied to an array of digital or hybrid assets such as domain names, sports highlights, internet memes, and digital fashion items. Metaverse platforms also use NFTs to represent virtual real estate and other digital valuables.

NFTs in Science and Medicine

Scientific and medical use cases are emerging:

Research Funding: Tokenizing research papers or equipment to raise capital
Patent Management: More transparent licensing and sale of patent rights
Medical Records: Improved data sharing, verification, and supply chain tracking

Speculation and Money Laundering Concerns

The volatile nature of NFTs makes them targets for speculation. In some cases, criminals may use NFTs for money laundering, exploiting anonymity and decentralized marketplaces. These risks have prompted closer scrutiny from regulators and law enforcement agencies.

Additional Use Cases

Event Tickets: Transferable, verifiable digital passes
Real Estate: Tokenizing property ownership rights
Charitable Donations: Tracking donations and distributing funds
Collectible Memorabilia: Digitizing and authenticating sports cards, historical documents, or celebrity items

Standards in Blockchains

While Ethereum pioneered NFTs with ERC-721, other blockchains support their own non-fungible token standards. Popular options include Solana, Cardano, Binance Smart Chain, Flow, and Tezos. These networks often aim to lower fees, reduce environmental impact, and improve scalability.

Issues and Criticisms

Unenforceability of Content Ownership

Purchasing an NFT does not universally grant control of the content. Many creators still host NFT-related files on centralized servers or use external services, potentially risking deletion or alteration outside the buyer's control.

Off-Chain Storage

Storing large files on-chain is expensive and resource-intensive. Consequently, most NFTs store only a link to an off-chain file. This reliance on external hosting introduces risks like server outages, link rot, or service disruptions that may impact an NFT's long-term value and availability.

Environmental Concerns

NFT minting and trading initially consumed high amounts of energy due to proof-of-work consensus methods. However, Ethereum's 2022 upgrade dramatically reduced energy consumption, and many emerging blockchains prioritize eco-friendly proof-of-stake solutions.

Artist and Buyer Fees

Transaction (gas) fees, listing charges, and platform commissions can be steep, especially on Ethereum during peak network usage. These costs may discourage artists with lower-priced works and create challenges for new collectors.

Plagiarism and Fraud

Unauthorized duplication of art, impersonation, and false claims about NFT utility are prevalent. Reputable marketplaces use verification systems, community reporting, and blockchain analytics to combat fraud, but scams persist in an evolving market.

Security

NFT scams range from phishing attacks to counterfeit tokens. Investors should practice strong security measures, including hardware wallets, careful link-clicking, and thorough research of unfamiliar projects.

Pyramid/Ponzi Scheme Accusations

Critics label certain NFT projects as pyramid or Ponzi schemes, where only early entrants profit. Lack of genuine utility or reliance on hype may signal unsustainable models.

"Rug Pull" Exit Scams

In a "rug pull," project creators abruptly abandon a venture after collecting significant funds from investors. These scams highlight the importance of doing due diligence and evaluating a project's roadmap and community trustworthiness before buying.

The Bottom Line

NFTs introduce a novel framework for digital ownership, unlocking new opportunities for artists, collectors, and innovators across various industries. Key advantages include verifiable authenticity, decentralized trading, and fresh revenue streams for creators. At the same time, market volatility, security threats, and ethical concerns underscore the importance of informed participation. Whether you see them as the future of asset ownership or as a passing hype, NFTs have undeniably changed the conversation around how we value and trade digital content.

Frequently Asked Questions

General NFT Questions

What exactly is an NFT?
An NFT (Non-Fungible Token) is a digital certificate recorded on a blockchain, representing ownership of a unique asset. Unlike cryptocurrencies, each NFT is one-of-a-kind and cannot be directly exchanged for another on a like-for-like basis.

How do I buy an NFT?

Create an account with a cryptocurrency exchange
Set up a digital wallet (MetaMask is popular)
Purchase the cryptocurrency needed (often Ethereum)
Connect your wallet to an NFT marketplace
Choose and buy the NFT that interests you

Are NFTs a good investment?
They can be speculative and volatile. While some NFTs have sold for huge sums, others have depreciated sharply. Prospective buyers should weigh their risk tolerance, research the project's creator and community, and consider broader market trends.

How can I protect myself from NFT scams?

Use strong passwords and enable two-factor authentication
Store cryptocurrency in a secure, preferably hardware, wallet
Verify the legitimacy of any marketplace before transacting
Start with small test transactions to ensure the process is safe
Research thoroughly and avoid unsolicited offers

What if I lose access to my NFT?
Losing your wallet or private keys can mean losing access to your NFTs indefinitely. Protect your recovery phrase and consider using multiple backup methods to mitigate risks.

Technical Questions

Can NFTs be copied?
Digital files themselves can be duplicated, but the blockchain record of ownership—what the NFT represents—cannot be replicated. The verifiable ownership is what underpins an NFT's value.

What blockchains support NFTs?
Ethereum is the most popular, but other blockchains like Solana, Cardano, Binance Smart Chain, Flow, and Tezos also offer NFT capabilities. Each has its own advantages regarding fees, speed, and energy consumption.

Market Questions

Which NFT marketplaces are most popular?

OpenSea (largest marketplace)
Nifty Gateway (curated drops)
NBA Top Shot (sports highlights)
Rarible (community-driven)
Foundation (invite-only for artists)

How do I create and sell my own NFTs?

Choose a blockchain and compatible marketplace
Prepare your digital content (art, music, etc.)
Set up a creator account on the marketplace
Pay minting fees and list your NFT for sale
Promote your work through social media and community channels

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