Simple Guide: What Are NFTs and How Do They Work?

NFTs have taken the world by storm: Everybody is talking about them and how some of them are worth millions. But what exactly do we know about them? What is this thing everyone obsesses about?

What is an NFT?

NFT stands for “non-fungible token.” That probably doesn’t clarify much, so let’s break it down. A non-fungible token is one that is unique, and there is no other like it. Let’s take a look at a couple of other things we’re more familiar with and see if they’re fungible or non-fungible.

Let’s say you wish to trade crypto. You can trade one bitcoin for another. Any two bitcoins are essentially the same. The same goes for dollars or any other fiat currency.

On the other hand, if you own a piece by, say, Edward Hopper, it’s one of a kind and can’t be exchanged like-for-like. Sure, you can exchange it for other paintings, but they won’t be the same, even if they are faithful copies. That’s why we can say a painting by Edward Hopper is non-fungible.

A comparison with a piece of art, or even better, a collector’s item, is in fact the easiest way to understand NFTs. NFTs can be anything that can be stored digitally: digital art, music, photos, videos, even tweets, memes, and so on.

Of course, there’s one big difference between a physical and a digital item: All digital copies are exactly the same as the original, something that can’t be achieved when reproducing a physical object. This brings us to the next important question: How does creating an NFT from a digital item ensure its uniqueness?

How does an NFT work?

Most NFTs live on Ethereum blockchain. This blockchain stores all the necessary information to make them work. Blockchain is crucial as it allows anyone to verify the authenticity and ownership of the NFT. So while regular digital items can be reproduced endlessly, an NFT has a unique digital signature stored on Ethereum’s blockchain that makes it one of a kind.

NFTs are often purchased with cryptocurrencies, and the blockchain keeps a record of all transactions. And even though anyone can view the NFT and even copy it, only the buyer is recognized as its true owner.

In recent times, NFT communities have emerged on alternative blockchain networks prominently, including Solana and Polygon.

Buying NFTs

OpenSea Homepage

(OpenSea is currently the world’s largest NFT marketplace)

Now that you know what they are and how they work, you might become interested in owning your own NFT. Although you can view an NFT, you can’t just right-click, save it, and pretend it’s yours. As mentioned, every NFT is a part of the blockchain which recognizes which file is the original one.

If you wish to buy an NFT, you can visit some platforms that have them on sale. There are dozens of NFT marketplaces, including OpenSea, Axie Marketplace, Rarible, Nifty Gateway, SuperRare, and others.

Most of these platforms have a specific niche, and they don’t all support the same types of tokens. So, before you make a decision about the platform you wish to buy your NFT on, check if it supports digital assets you’re interested in.

Another important thing you should know is that you would need to open a wallet specific to that platform and put some crypto in it.

​​Who uses NFTs?

An NFT can literally be used by anyone. If you’re an aspiring young artist looking to monetize your newest artwork or a gamer who wishes to own digital assets from a particular game, you can do it with an NFT. Some major brands use NFT platforms to sell their themes and images, while the NBA offers trading cards with some of the most iconic basketball moments.

The Importance of NFTs

NFTs are rapidly becoming mainstream, and many reputable auction houses, including “The Big Three” – Christie’s, Sotheby’s, and Phillips – already sell them at their auctions. This encouraged many to believe NFTs are the future of ownership and that, at one point, all kinds of property would be purchased this way.

One thing is certain – NFTs are a great way for artists to monetize their digital art and reach a much broader audience. Earlier this year, an NFT artwork was auctioned off for $69.3 million. Yes, that’s right, almost $70 million for a piece of digital art. This record-breaking artwork called “Beeple’s Everydays – The First 5000 Days” was sold by Christie’s and achieved the third-highest price ever paid for a piece of art by a living artist.

Possible risks of NFTs

The main disadvantage of NFTs is the fact that, like cryptocurrency, they are still mostly unregulated. Scams are relatively common – “artists” and “developers” offer collections for sale, attract investors, and then disappear with the money, leaving the collectors empty-handed.

Furthermore, there’s no actual guarantee of value since anyone can create and sell NFTs. Finally, many participants use pseudonyms when selling and buying NFTs, which makes the whole process even less transparent.