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What are NFTs?

By Syedda Hassan , Updated on: Feb 06 2023.

In the past couple of years, the word "NFT" has popped up in both mainstream news outlets and crypto spaces. From record-breaking purchases of things like Jack Dorsey's first tweet to the famous Bored Ape NFT collection, people have been thriving big bucks at NFTs.

Yet, even after being around for such a long time, many people aren't really sure of what they're paying for. Sure, NFTs are "one of a kind," but such words can seem like buzzwords that don't really mean much to onlookers.

So, to clear the confusion and mystique surrounding NFTs, we've created a guide to help clear all misconceptions and questions about the subject. Let's begin.

What are NFTs?

For a lot of people, NFTs represent digital art. After all, we've got plenty of examples of that. Of course, the main selling point of art NFTs is that they're unique. But what does this mean? 

According to Wikipedia, the definition of NFTs is as follows:

A non-fungible token (NFT) is a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership.

Now, this sounds pretty high-tech. It’s actually pretty easy to get swept up in the technical terminologies mentioned here. After all, to an onlooker, the blockchain refers to Bitcoin. So, does it mean that the value of an NFT comes from the Bitcoin blockchain?

No! Absolutely not. 

Even though NFTs are often purchased using cryptocurrency, their values don’t depend on them at all. So, why do we see the word “blockchain” in the definition of NFTs?

That’s because NFTs use the blockchain to verify their ownership and authenticity. We’ll get back to this in a moment when we talk about how NFTs work. For now, let’s breakdown the definition. 

The first thing you need to understand about an NFT is that, as its name suggests, it’s a token. It is literally a digital token that represents something unique like a collectible or the digital profile of a piece of real estate or- as it’s popularly associated with- digital art.

Of course, we’ve seen “digital copies” of images, real estate and so many other things online over the last decade. So, how is the idea of an NFT different from say, some JPEG file on the internet? 

The answer lies with the way NFTs are “minted”.

What Do You Mean By “Minting” NFTs?

NFTs are “minted” which means that they’re created by converting digital data into a digital asset which is then recorded on the blockchain. This digital file contains all the information about the NFT. So, if it’s a Bored Ape NFT, its digital file will hold information like the colour of the background, colour of the ape, number of pexels in the image and more information. It will also include information such as when it was created, by whom it was created and an entire account of its ownership history.

Since the file is recorded on the blockchain, and cannot be edited, modified, or deleted. Moreover, everyone can check all the information loaded on the file. This way, if someone makes any changes or if there’s a transfer in ownership, it is publicly available.

Minting an NFT is simply another way of saying that NFT was created and exists on the blockchain. The word “minting” is used because until now blockchains were used to create cryptocurrencies which had to be “minted” - kind of like how governments “mint” new currency.

How do NFTs Work?

So, now we know that NFTs are created on the blockchain, and that their digital files are available for everyone to see. But what does the blockchain have to do with it? 

Well, as it turns out, the blockchain has everything to do with it.

Most people associate the blockchain with Bitcoin, and that’s a fair assumption. After all, at the most basic level, the blockchain is a public ledger that records information. The Bitcoin blockchain records all transactions that occur on it in real-time. Other cryptocurrencies have their own blockchains too.

NFTs are based on the Ethereum blockchain and use the ERC-721 standard (there are other blockchains and different protocols of course but for this case we'll only talk about Ethereum). Of course, this sounds really high-techie but the standard simply refers to the fact that all NFTs use the same cryptographic security as the Bitcoin or Ethereum cryptocurrencies. This means that each NFT created has its own unique identifier and ownership record, making it easy to verify authenticity and prove ownership.

This data, of course, is stored on the public ledger (the blockchain) and is verified by a large network of computers. If anyone wants to buy an NFT, they will have to use a cryptocurrency to make the purchase. The transaction is then broadcasted across the network and stored on the blockchain. This ensures that the ownership of the NFT is securely recorded and tracked. 

Side Note: The decentralisation part of the entire crypto space comes from the fact that a network of computers check and verify information. There’s no central computer or network which eliminates the chance of data being corrupted or modified in any way. 

Since everything is verified and there’s that unique identifier we've talked about on your NFT, you can now “hold” it as proof that you own something on the internet that no one else has.

What are NFTs Used For?

NFTs rose to fame in the form of digital art. Since the blockchain offers a simple way to prove ownership and authenticity of digital assets, they offer a way to create scarcity in the digital world. This allows us to associate a monetary value with an NFT. Artists, in particular, benefit from NFTs because they allow them to create value and thus, generate revenue.

But NFTs are much more than that.

NFTs can be used in gaming applications to represent in-game assets. This could include virtual weapons or armour, game currency, or even limited edition items. By tokenizing these assets, users can easily trade or sell them without the need for any middleman. This also helps to ensure that game items remain secure and are not copied or duplicated by malicious actors.

They can also be used to tokenize real-world assets such as real estate or machines. By creating a unique digital representation of a physical asset, users can buy and sell these items without having to physically transport them. This makes it easier for collectors to purchase pieces from around the world without worrying about shipping costs or other logistical challenges. 

NFTs are also perfect for tokenizing real-world assets like stocks, bonds, and commodities. This makes it easier to trade these assets on various exchanges and platforms. In a fantastically digitised future, NFTs could be everywhere. 

The Future for NFTs

As the digital world continues to expand and evolve, so does the way we interact with it. The potential applications for NFTs are vast and range from digital art, music, and collectibles to virtual real estate, gaming, product authentication, data verification and even tokens for cryptocurrency exchanges. They offer a unique way for users to purchase, own, and trade digital assets securely and with confidence. As the NFT market continues to grow, so does the interest from investors and entrepreneurs who are eager to capitalise on this new asset class.

The future of NFTs looks bright as more people become familiar with the technology and its potential use cases. Currently, the majority of NFTs are focused on art, collectibles, and gaming. However, as the technology develops and matures, we may see more use cases such as virtual real estate, tokenized securities, and even tokenized physical goods. The possibilities for NFTs are endless and there’s no telling what new applications may arise in the future.

Conclusion

By now, it’s probably clear to you that the reason everyone’s super excited about NFTs is because they don’t really know what to make of it. Everything about the application of NFTs that we've discussed so far is based on predictions and speculations. It’s a new technology and until the NFT artworks appeared, no one really thought about creating unique digital assets on the blockchain. Unless they were minting cryptocurrency, of course.

The reason behind this is because we're essentially creating value to what is essentially a digital receipt on the blockchain. Sure, it represents a cool one-of-a-kind artwork and it verifies that you're the only one who owns but that’s about it. So far, vith NFTs, the only thing offered in return for the cryptocurrencies spent on them is the knowledge that you own something no one else has on the internet.

The crypto space has often been compared to the dot-com bubble of the nineties. Even though it’s usually regarded as something bad, you have to understand that this always happens when there’s a new technology on the block (no pun intended) that no one really understands.

Therefore, you should ensure that you understand what all of these new terms mean so that you’re not seeing money bags where there are literally just buzzwords. So, keep up with the news and make sure that you understand exactly what every crypto-related term is. It’ll help you make good decisions in the future.