What Are NFTs and How Do They Work? Understanding Non-Fungible Tokens

NFTs, or non-fungible tokens, are digital assets that represent something in the real world, like art, music, or collectibles. Non-fungible, aka unique, means each NFT is one-of-a-kind and can’t be easily replaced with another NFT or another form of internet currency, unlike cryptocurrencies, such as bitcoin or dogecoin.

NFTs are something like virtual trading cards. The most popular and most common type of NFTs are in the form of digital drawings, often pixelated ones that look as if they’re straight out of a 1980s video game. However, they can also come in the form of virtual real estate in video games, sports memorabilia, domain names, and more.    

Each NFT has a unique identifying code and is valuable because of its scarce availability—and low supply often means high demand. According to CoinDesk, people have spent more than $25 billion on NFTs since 2017.

How Do NFTs Work?

Though NFTs can technically be anything, the biggest buzz right now is around digital art. (Although Twitter founder Jack Dorsey did sell a signed image of the first-ever tweet for $2.9 million.) Similar to collections of fine art, the value is held in owning something no one else has. In fact, collecting NFTs has been equated to fine art collecting, but in a digital rather than physical form.  

However, because the artwork is digital, anyone can download a copy of any NFT they like and it’s just as good as the original. The real power is in owning the original. For example, anyone can download images or prints of Vincent Van Gogh’s “Starry Night,” but only one person (or museum) can own the original. 

Blockchain and NFTs

Blockchain is a decentralized, unchangeable ledger that keeps track of transactions and assets. Cryptocurrencies, like bitcoin or Ethereum, and NFTs both exist and are stored on the blockchain. Each NFT has a linked “smart contract,” which is a program that automatically activates when an NFT is sold. 

The smart contract identifies the changing hands of an NFT, documents its new location, and facilitates the transaction. The information is then kept in a digital wallet, also stored on the blockchain. This allows for a clear, documented trajectory for each NFT and can catalog each one’s owner and value. 

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