Non-fungible tokens (NFTs) have been making headlines all year as they continue to sell for huge amounts and take the art and gaming worlds by storm. Whether it’s CryptoPunks NFTs selling for millions of dollars or Jimmy Fallon buying a Bored Ape Yacht Club NFT and making it his profile picture, the NFT space is buzzing with exciting news.
Yet despite the fact that NFTs are all the rage in some circles, many people still don’t understand NFTs and how they function. In fact, the most searched word of the year according to the Collins British Dictionary was NFT, implying that although folks are hearing about NFTs and certainly curious, many people still don’t know what they are.
While non-fungible tokens can seem like a lot to take in at first, in this guide we’ll break down some NFT key terms, how NFTs function on the blockchain, the success of NFTs, and some advice on how you can buy your first NFT if you’re interested in starting a collection.
So if you’re new to the NFT space and looking to understand this brand-new technology better, you’ve come to the right place.
Understanding Key NFT Terms
So what the heck is an NFT? Non-Fungible Tokens are unique, verifiable digital assets that exist on the blockchain. These digital assets can represent real-world objects like art, books, music, videos, and in-game items, and they can be bought or sold on NFT marketplaces using cryptocurrencies.
Some people believe NFTs will change the world, but before we get into the revolutionary capabilities of NFTs, it’s important to understand some basic definitions.
First, most assets are either fungible or non-fungible. Let’s take a look at the difference between fungible and non-fungible assets:
- Fungible. An asset that is fungible, like fiat currency, can be exchanged for something of equal value. For example, one Bitcoin can be traded for one Bitcoin and a twenty-dollar bill can be traded for twenty single dollar bills or a ten and two fives, and nothing is gained or lost. So fungibility is the ability for one asset to be easily swapped with something of the same type (i.e. Ether, Bitcoin, the USD).
- Non-fungible. NFTs are a new form of digital assets that are non-fungible, meaning they are unique and not interchangeable with other digital assets of the same type. Some examples of non-fungible assets include real estate or artwork. These are assets that cannot be easily traded or divided and retain the same value.
Now that we understand what non-fungible means, let’s look at the last word in NFT — tokens. Though most people are familiar with the concept of a token, not all tokens are the same.
When it comes to NFTs, tokens are cryptographic codes that represent something physical or digital and that can be exchanged for or represent a good, service, or another form of value of utility.
On the blockchain, tokens can represent a variety of things, like a stake, toll, store of value, ownership of a digital asset (an NFT), voting rights, or a currency. When an NFT token is created, it is called “minting,” and afterward it is stored on the blockchain to represent an asset.
So, when you buy an NFT, you are purchasing a cryptographic token that verifies a digital asset and proves ownership and authenticity. Since no two NFTs can have the same cryptographic code, you can think of an NFT like a piece of art in a gallery.
It is a one-of-a-kind digital asset, and the scarcity that comes along with being unique is part of what gives NFTs value. Whereas in the past, digital assets were difficult to monetize, the invention of blockchain technology and NFTs have created scarcity in the digital asset class.
What is blockchain technology?
Now that we know that NFTs are unique digital assets that live on the blockchain and can be bought with cryptocurrency, let’s dive a little deeper into blockchain technology and how it shapes the NFT world.
The blockchain, which was first devised by Satoshi Nakamoto in 2009 with the invention of Bitcoin, is a system of recording data and information that is difficult to hack, change, or defraud because the record is stored on a global network of computers.
The reason this is important is that just like a bank that keeps track of money coming and going through something known as a ledger, the blockchain tracks the buying, selling, and trading of cryptocurrencies and NFTs. You can think of one “block” like one page in the ledger and the blockchain like the entire ledger.
Listed below are the three fundamental pillars of blockchain technology:
- Decentralization. For the blockchain to function, data must be recorded and stored on multiple devices in locations all around the world, rather than by any one person, entity, or institution. This makes bringing down the network extremely difficult. It also creates a new decentralized and collaborative dynamic in finance, demonstrated in part by the fact that when changes or corrections need to be made to a blockchain, they must go through a collective consensus process first.
- Immutability. The data recorded and stored on the blockchain is almost impossible to change, alter, or forge. This is achieved through cryptography and block hashing methods.
- Transparency. Transactions are recorded on a live public ledger that is accessible to anyone at any time. Any person can join the network and look through a history of all the transactions that have ever occurred.
In summary, the blockchain is a secure transaction system that verifies the ownership and authenticity of digital assets. Although the blockchain was originally created to record the movement of fungible digital assets like Bitcoin, some blockchains, such as Ethereum and Solana, have created networks where non-fungible tokens are supported.
What is Ethereum?
The Ethereum blockchain was founded by Vitalik Buterin and went live on July 30th, 2015. When it comes to NFTs, there is no other blockchain that has been as fundamental to NFT development as Ethereum.
Because Ethereum is an open-source blockchain with smart contract functionality, it allows developers to make improvements and modifications to the network. This flexibility in the Ethereum network is what enabled NFTs to grow and evolve over the past four or five years.
Listed below are some of the most important modifications to Ethereum that affect NFTs:
- ERC-721. The single most important modification to the Ethereum network was pioneered by CryptoKitties in 2017. The ERC721 standard enabled the creation of tokens with different values to be stored on the blockchain, as well as made writing code easier and more predictable. This allowed developers to deploy tokens not only with different values, but also different attributes, descriptions, and quantity types, and the tokens can be transferred to other users in the ecosystem. ERC-721 tokens also created standards that enable anyone to create NFTs.
- ERC-998. This modification allows for ERC-721 tokens to be bought and sold in bundles. ERC-998 is very useful in gaming when someone wants to sell a character or item that is comprised of multiple NFTs.
- ERC-1155. Pioneered by ENJIN, an Ethereum-based platform that lets developers build applications, ERC-1155 allows for the deployment of both fungible and non-fungible tokens in the same contract.
Because of early innovation by developers, Ethereum quickly became the top blockchain for NFTs. Listed below are some of the most successful NFT projects that were launched on the Ethereum blockchain.
- Bored Ape Yacht Club
- Axie Infinity
- Art Blocks
However, Ethereum is no longer the only blockchain in the NFT game. Since they got the ball rolling in 2018, other blockchains have begun to host NFTs. Some of the most common alternative blockchains that host NFTs besides Ethereum include Solana, Flow, Cardano, and Tezos.
What do NFTs get from blockchain technology?
In order to understand how NFTs work, it’s important to know the role that blockchain plays in their existence. Listed below are some of the qualities that blockchain technology helps enable and that is vital for NFTs:
- Standardization. By tokenizing digital assets on the blockchain, users can create set standards and uniformity and ensure aspects like ownership, access transfer, and control are unified. Also, developers can build everything on one decentralized platform.
- Interoperability. This means the ability of a digital platform to exchange information or digital objects efficiently and accurately. Since NFTs use the same standards and operate on the same platform, they can be bought, sold, and traded across various Digital Ledger Technologies (DLT).
- Tradability. Blockchain technology allows users around the world to create and launch NFT projects on worldwide marketplaces that are instantly tradeable.
- Liquidity. Liquidity refers to the level of activity in a market. When a market is liquid, it means your assets will be easy to sell. Although NFTs still require individual buyers with interest and therefore are less liquid than a fungible asset such as Bitcoin, they are more liquid than other assets like real estate.
- Immutability. Because the blockchain cannot be changed or altered, it ensures authenticity and proves scarcity of digital assets.
- Programmability. Programmers and developers of NFTs can write smart contracts that make their NFTs behave in certain ways. This provides flexibility and encourages creative new projects that are programmed in new and interesting ways.
These are the most important ways that blockchain technology adds unique value-driving properties to NFTs. Furthermore, with digital assets like NFTs, there is far less risk of theft and virtually no chance of them being destroyed in a fire or natural disaster.
Finally, whereas digital assets and creations before these new technologies were of an almost infinite supply, by encoding digital assets and putting them on the blockchain, scarcity is created.
The History and Success of NFTs
The success of NFTs during their short history has been nothing short of spectacular, and the story is filled with the names of important artists and projects that helped shape what we know as NFTs today.
Let’s look at how NFTs got started:
- 2012: Colored Coins. These coins were initially issued on the Bitcoin blockchain and served to represent and manage real-world assets. The idea was to use the blockchain to store all sorts of assets like coupons, collectibles, property, precious metals, bonds, and more. The value of the Colored Coins were backed by the asset’s issuer’s promise to redeem the coins for goods and services. This idea was fundamental to the evolution of NFTs, and some argue that Colored Coins were the first NFTs in existence.
- 2014: Kevin McCoy. On May 3rd, 2014, long before The Summer of NFTs, Kevin McCoy minted the first non-fungible token on the Namecoin blockchain. His NFT is a pixelated digital image called “Quantum” and was originally sold for over $1.4 million at a Sotheby auction. It is currently on sale for $7 million on the secondary marketplace.
- 2014-2016: Counterparty. This peer-to-peer financial platform was founded by three developers of the Bitcoin blockchain. It was an open-source internet protocol that enabled the creation of assets and supported a decentralized exchange.
- 2015-2017: Spells of Genesis. This was the first blockchain-based mobile game ever created. Using something known as blockchainization, Spells of Genesis allowed players to transform in-game playing cards into unique, tradable digital assets on the blockchain using the Counterparty protocol. This was a major breakthrough as far as pioneering digital asset ownership for gamers.
- 2016: Rare Pepes. Also released on the Counterparty platform, Rare Pepes brought memes to the blockchain for the first time. Featuring a meme of a curious frog character with a passionate fanbase, Pepe the Frog has become an internet sensation over the years. When the Rare Pepe Wallet was created, it became the first time that digital art could have intrinsic value and CryptoArt as we know it was born.
While many of the early precursors to NFTs ran on the Bitcoin blockchain, it wasn’t until Ethereum came along in 2015 that NFTs started shifting to the Ethereum blockchain. The two most important NFT projects early on were CryptoKitties and CryptoPunks:
- CryptoKitties. CryptoKitties used the ERC721 standard on Ethereum to create a blockchain-based game that enabled players to adapt, breed, and trade virtual cats. The popularity of the game led to articles in Fox News and CNBC.
- CryptoPunks. Larva Labs followed shortly after with creation of CryptoPunks, a limited run of 10,000 pixelated profile pictures with attributes that varied in rarity and drew their artistic influences from London’s punk movement. Today, the rarest CryptoPunks sell for millions of dollars.
After the release of these two projects, NFTs slowly began evolving and demanding more attention from the public. Some of the other major developments occurred in the gaming space and metaverse projects.
One influential project in this space is Decentraland ($MANA), where gamers have the ability to play games, collect items, build things, and most importantly have ownership over everything they buy, find, build, earn, or trade for within the game.
Top NFT Sales in History
According to JP Morgan, the NFT market is now worth more than $7 billion, so it’s no surprise that their success has caught the eye of the public, the press, famous celebrities, and investors around the world.
There’s no doubt that another reason NFTs have made headlines and garnered attention these past couple of years is because of some of the record-breaking sales of digital assets.
Listed below are the top five NFT sales to date:
- Everydays: The First 5000 Days, by Mike Winkelmann (better known as the artist Beeple). This digital art piece was sold for a staggering $69.3 million at Christie’s Auction. The work is a collage of 5,000 individual pictures that sum up 13 years of his work as an artist.
- CryptoPunk #7523. As the third-rarest punk in the 10,000 piece collection, this CryptoPunk sold for $11.75 million on March 11, 2021.
- CryptoPunk #3100. This alien punk rocking just a headband is the seventh-most-rare punk in the collection and was sold for $7.67 million on March 11, 2021.
- CryptoPunk #7804. One of only nine Alien punks, this cryptopunk was sold for $7.6 million.
- Crossroad. Another digital artwork by Beeple, this 10-second clip shows people walking on a sidewalk past a fallen giant. It was sold for $6.6 million.
Another interesting project and big-selling NFT that doesn’t quite make the top five is Edward Snowden’s Stay Free NFT, which raised $5.4 million to benefit the Freedom of the Press Foundation.
The Future of NFTs
There is no doubt that NFTs are still new and evolving, so it is difficult to predict where the future is headed and what we should expect. Although a lot of the focus early on has been on NFT art and gaming items, there are several other projects in the works in other areas, and the potential for the future use of NFTs seems almost open-ended.
Listed below are some other genres of NFT art where non-fungible tokens are starting to make inroads:
- Music. Grimes, Timbaland, the Rolling Stones, and Kings of Leon are just a few of the musicians who have entered the NFT space. By tokenizing tracks, digital art, and merchandise, as well as adding smart contracts to distribute a fairer and more complex royalty system, musicians are looking to use NFTs to revolutionize a space that has historically been dominated by middlemen like agents, record labels and distributors.
- Books. NFTs can be great for traditional authors, enabling them to sell limited editions of their books to fans, promote special content, improve their royalties, and interact more closely with their readers. The smart contract feature also allows them to do more creative projects. For example, the author Rex Shannon is releasing each page of his novel as an NFT, and once all of the pages of the novel are purchased, the entirety of the book will be available to the public.
- Movies. Hollywood and Indie filmmakers have also caught the NFT bug, and many new and exciting projects are in the works. For example, Jennifer Esposito is financing her film Fresh Kills with a combination of a public offering of shares of the film and NFTs. Other directors such as Kevin Smith have auctioned full-length films as NFTs, leaving it up to the buyer to decide what to do with the film afterwards.
The implications of NFTs and blockchain technology also touch real estate, events, ticketing, verifying digital identities, and potentially many other spaces still unknown. Although we can’t know exactly what to expect from the future of NFTs, we should expect the release of even more exciting NFT projects in a variety of different categories.
Where can I buy an NFT?
If you’re interested in getting involved with NFTs, there are several NFT marketplaces where you can buy, sell, trade, and browse for digital assets. Some of the most important NFT marketplaces include OpenSea, Rarible, Nifty Gateway, NBA Top Shot, Solanart, and SuperRare.
When you shop for NFTs, make sure you do thorough research before investing in an NFT project and only invest money you can afford to lose. Finally, one of the most important things to keep in mind when buying and collecting NFTs is the rarity of the NFT you wish to purchase.
The rarity of a particular NFT within a collection is based on the rarity of their traits and the combination of traits, and as you might suspect, the rarer an NFT is, the more valuable it will be.