What are non-fungible tokens (NFTs)?

How do you define a NFT? Simply put, a non-fungible token (NFT) is a type of cryptocurrency that runs on a blockchain.

NFT explained

A simple NFT meaning is that it is a token, or unit of currency, that is non-fungible, or unique, as it cannot be exchanged for something else. NFTs can represent digital or physical assets, and act effectively as a certificate of authenticity to verify ownership.

Where have you heard of non-fungible tokens?

Although the first non-fungible token projects emerged in 2017, they took off in 2020 with some high-profile sales. You have likely heard of the sale of NFTs containing digital art and other collectibles for millions of dollars, attracting the attention of the mainstream media.

What do you need to know about non-fungible tokens?

As a digital record of an asset, NFTs can be used to obtain, exchange and verify ownership of any asset that has value in its scarcity, including original digital artworks, music, collectibles, and event tickets.

Understanding NFTs

As NFTs increase in popularity with the spread of cryptocurrencies, they provide a way for content creators to have a new level of control over their work. In the case of digital art, their most common use so far, NFTs provide limited rights for the holder to view and display the work they contain. 

For this reason, the use of NFTs has caught the imagination of the music industry, which has struggled to monetise content as streaming services have replaced physical sales. The use of NFTs would allow artists to earn royalties each time their work is resold without transferring copyright or trademarks to the holder. 

There is also potential for the use of NFTs in gaming to create digital economies where players can buy and sell items and earn rewards. NFTs could be used as collateral in decentralised finance for loans and other financial services and could even be used to represent real estate.

How NFTs work

Rather than acting as digital coins like Bitcoin (BTC) or Ethereum (ETH), NFTs are used to sell items in online marketplaces. NFTs are created on a blockchain – typically the Ethereum blockchain, although some other blockchains have similar capabilities – through a process called “minting”. 

NFTs are minted through an NFT marketplace, where a creator uploads a digital file and assigns characteristics that define how many copies of the file are available. Some works are one of a kind, while others can multiple versions. NFTs are bought and sold through marketplace auctions using cryptocurrencies as payment.

Non-fungible tokens examples

High-profile auctions of work by celebrities and artists earning millions of dollars have intensified the hype around NFTs. For example in March 2021, an NFT containing a digital artwork called “Everydays: the First 5000 Days” by Mike Winkelmann, known as Beeple, sold for a staggering $69.3m at auction house Christie's.

In February 2021, music artist Grimes sold a collection of ten works, including music, video and images, for $6m in an NFT auction.