An NFT is a unique digital asset on the blockchain that represents a digital or physical asset and the ownership of that asset. NFT enables for the first time in world history that all digital objects can be owned, traded, stored, verified and tracked.
NFTs enable the creation and trading of digital assets where authenticity, ownership and origin are ensured via the blockchain. Through NFTs you can own assets in the digital world we spend more and more time in. Here we explain the NFT basic concept and its properties.
To describe what an NFT is, we first need to understand what both fungible and non-fungible mean.
What are fungible assets?
Assets that can be exchanged or replaced for another of a similar nature. Primarily financial assets are fungible. For example, a dollar is fungible, it can be exchanged for another dollar as they have similar properties.
What are non-fungible assets?
Assets that cannot be exchanged or replaced for another of a similar nature. Most assets in the world are actually non-fungible. Homes, Paintings, Land, Diamonds, Air Tickets, Boats, are non-fungible as they rarely are interchangeable (for similar Homes, Paintings, Land, Diamonds, Air Tickets, Boats) as they all have different properties.
What are non-fungible tokens (NFTs)?
Digital assets on the blockchain distinguished from each other by unique identifiers and metadata. Since all NFTs are unique, they can not be exchanged or substituted for another NFT of a similar nature.
To some extent, NFTs can be compared to computer files in the sense that their type and use can be extremely variable. Unlike computer files, you can easily ensure the provenance, ownership and authenticity of an NFT.
Each NFT is a unique digital representation of an asset. All NFTs are unique units of data on the blockchain with built-in certificates of ownership and authenticity, enabling proof of authenticity, ownership and provenance of any digital asset.
Each NFT has its own identification code, metadata (descriptive information of what a specific NFT actually is), ownership and transaction history. NFTs can thus be described as digital passports, with unique, non-transferable identities that distinguishes one NFT from another.
An NFT can only have one owner at a time where ownership is identified by a unique identifier that cannot be replicated. Transfer of ownership of an NFT is handled through smart contracts on the blockchain where authenticity and provenance also is easily verified.
Digital media has the built-in property of natural abundance where it is easy to save copies of images and videos that can be sent to anyone. With NFTs, through a digital representation, you can ensure the provenance and ownership of virtually any asset, including digital media.
All NFTs are naturally scarce as they are all unique. However, just as an organizer of an event can choose how many tickets to issue, the creator of an NFT can decide on how many editions to create.
Sometimes the creator choose to create a single NFT that represents a single asset (1/1), sometimes several are created that are similar, but each slightly different (1/1/x), and sometimes several identical editions are created (1/x).
In all cases, each NFT still has a unique identifier and only one owner. In other words, multiple NFTs can be created that point to assets that all look the same, but each has a unique identifier.
Due to the high cost of storing data on the blockchain, the digital asset, metadata, and code representing the properties of an NFT are typically not stored on the blockchain.
Instead, it is a token which is stored on the blockchain that points to where the digital asset, metadata and code is stored. The digital file and metadata is normally stored on a decentralized or centralized server.
Decentralized servers such as IPFS or Arweave are preferred since they are more resilient to malicious attacks as their systems are distributed and thus there is no single device for hackers to target, no single point of failure.
One of the more powerful concepts of NFTs for creators is royalties, a concept that means creators can get paid when their work is sold on the secondary market. This also creates a natural alignment among creators and collectors as both benefit from an NFT increasing in value and being resold at a higher price.
Some NFT marketplaces automatically pay out royalties when creators' works are sold on the secondary market. At the same time there are NFT marketplaces who choose to not automatically pay royalties, and some who has made it optional for the seller of an NFT to pay royalties or not.
Perhaps you had Pokémon cards as a kid. Since you owned the card, you could trade or sell it. With NFTs, anyone can trade digital assets with anyone who has a crypto wallet. Blockchains and NFTs enable trade between people worldwide in an efficient and transparent way.
Many assets that cannot be easily verified are counterfeited. NFTs are verifiable via the blockchain where the metadata shows exactly what the buyer is buying, while all ownership history is available.
An NFT can change over time, depending on how the creator designed the smart contract the NFT was created on. For example, an NFT can be programmed to react to events or actions taken by the owner, or react to external events such as the weather or the final score of a football game.
Due to the public nature of the blockchain, NFT data is accesible to everyone. This opens doors for partnerships, network effects and opportunities to transfer NFTs between games and virtual worlds, among other things.
NFTs offer a new channel for creation, participation, consumption and distribution. Communities are built around NFTs where collectors feel ownership and inclusion, which means the incentives of both creators and collectors go hand in hand.
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