NFTs Definition & Explanation

Blockchain and crypto have taken the financial market by storm with all sorts of weird and volatile assets, and nowhere is this trend more evident than in the realm of non-fungible tokens. Are they just another bubble ready to burst as soon as the current techno-craze ends, or a brilliant invention that can revolutionize digital ownership? No one seems to know for sure at the moment.

In this article, you will find the answers to the following questions:

  • What is an NFT?
  • How does NFTs work?
  • What types of NFTs are there, and what makes them different?

We will also review some non-fungible tokens examples, their market value, and potential target audience. And, of course, we’ll discuss monetization.

What Is an NFT?

What Is an NFT?

Let’s start with the basics. What is a non-fungible token? NFT, in simple terms, is any type of content or digital object placed on a blockchain and assigned a unique identifier. Furthermore, it can exist only in a single copy.

Therefore, an NFT definition comes down to the following:

  • Uniqueness. An original ID and signature that cannot be forged or replaced.
  • Exclusivity. Most NFTs are purposefully scarce, which increases their value.
  • Value. Some digital items are worth six-figure sums, and the final price can get even higher.
  • Security. The token exists on the blockchain, preventing theft or unauthorized changes.
  • Portability. NFTs can be stored in both hot and cold wallets.
  • Liquidity. Tokens can be considered investments since valuable NFTs can increase in value on the secondary market.

Unlike classic cryptocurrencies, non-fungible tokens are not a form of currency per se; a token has a clearly defined ownership identification and is a subject for trading, not conversion. Let’s take a closer look at the differences between an NFT token and a crypto token.

How Is an NFT Different from Cryptocurrency?

How Is an NFT Different from Cryptocurrency?

In simple terms, NFTs mean digital objects on a blockchain network. An NFTcan be a music composition, a digitized rare record, a piece of art, an unpublished work of an artist, or even a representation of famous paintings. The only thing these assets have in common is that they have a defined holder and a unique ID on the blockchain network, marking them as digital property.

A cryptocurrency token, on the other hand, is a financial unit used for transactions, just like any other form of currency. The most popular cryptocurrencies at the moment are:

  • ETH (Ethereum);
  • BTC (Bitcoin);
  • Tether (USDT).

As you can see, the difference between the two comes down to the purpose for which the token is used.

How Does an NFT Work?

How Does an NFT Work?

To define NFT as a concept, let’s review its main operational stages:

  • Creation. Data is recorded on the blockchain, including unique information such as text, audio, video, and other digital files.
  • Storage and Identification. Each token is assigned an identifier for ownership verification.
  • Trading. The token can be bought and sold on specialized cryptocurrency marketplaces.
  • Usage. Tokens have value as collectibles, works of art, tickets, virtual real estate, or in-game assets. They can increase in value and be sold just as any other asset type, while some platforms offer alternative passive income-esque monetization strategies.

How an NFT can be used depends on the type of the token in question.

What Are NFTs Used For?

What Are NFTs Used For?

So, what are NFTs used for? At a bare minimum, they’re great collecting and trading, but there are also other less obvious uses, like:

  • Virtual real estate. Used in metaverses for building and decorating personal spaces, from individual locations to giant megacities.
  • Gaming assets. Skins, weapons, characters, unique cosmetic items like stickers, decals, sounds, and more. Currently, even major AAA developers are considering or even implementing NFTs in their projects.
  • Personal enjoyment. A rare track, demo recordings from a favorite band, unpublished works of writers or artists. All of this can be tokenized and monetized.

The initial waves of hype around NFTs have gradually turned into an endless ocean of possibilities, which the segment remains to this day. The main reason for this success are the benefits that non-fungible tokens can offer to widely different categories of internet users.

Benefits of NFTs

Benefits of NFTs

The NFT description we’ve provided above naturally reveals some of the system’s strong points. Still, let’s recount them one more time:

  • Ownership & authenticity;
  • Monetization for creators;
  • Scarcity & rarity;
  • Interoperability;
  • Security & transparency;
  • Fractional ownership;
  • Decentralization & control;
  • New market opportunities.

We suggest exploring each of these points in more detail.

Ownership & Authenticity

Storing information using blockchain means you can always verify the identity of an artwork, song, or any other form of digital content. Moreover, NFTs provide a distribution format for items that prevents copyright infringements or authorship/ownership attribution. This is possible thanks to the process identification technology used in blockchain, which allows users to  quickly determine an object’s point of origin.

Monetization for Creators

Every rights holder (usually the author) can monetize their work with NFTs by:

  • Setting a high price for the token on the marketplace;
  • Holding an auction where the highest bid wins;
  • Setting royalties on each transaction, e.g., 1% of the transaction value.

Each of these options is effective in its own way. Moreover, they are not mutually exclusive.

Scarcity & Rarity

The smaller the supply, the higher the value an item can command among collectors. However, there’s more to NFTs than just chasing scarcity. The artistic or cultural value of a digital work, gaming element, etc. is usually just as important.

Interoperability

Tokens can be sold on different markets or used in different metaverses. For example, by purchasing a token usable in a certain game, you may be able to transfer it to another title or even convert it into an artwork (though this isn’t always the case).

Security & Transparency

All NFT transactions are recorded on the blockchain. This means that any transaction involving the token can be traced and reviewed. This way, you can track the market journey of a digital item and verify its authenticity.

Fractional Ownership

Artworks, real estate, or other valuable assets can be divided into parts with corresponding NFT equivalents. As a result, more investors can own shares in them.

Decentralization & Control

Each NFT is controlled solely by its token holders. This applies to the value, state, and distribution terms of the digital asset and its lifespan (yes, some products have a limited existence cycle on marketplaces).

New Market Opportunities

NFTs broaden horizons not only for individual users but also for businesses. For example, companies can earn money by selling virtual collections, gaming items, decor elements for metaverses, and so on.

Conclusion

The potential NFTs have is hard to overstate. Currently, only a few corporate players are investing in the segment, although creators like Peter Molyneux are actively considering the creation of AAA metaverses.

For individual creators, NFTs represent a real opportunity to monetize their creativity. For businesses, it’s a chance to increase profits by selling additional items (especially in games) and features (in SaaS and similar products).