An NFT, or ‘non-fungible token’ is a unique digital file that can represent things like photos or videos online.
- NFT ownership is stored and tracked using blockchains, the same technology that supports cryptocurrencies such as Bitcoin
- NFTs differ from cryptocurrencies by the fact that they are unique and they are not interchangeable with each other
- As they are one of a kind, popular NFTs can be extremely valuable and change hands for large amounts of money
What is an NFT?
An NFT is a digital token that proves ownership of an asset. It can represent anything in a digital form, and most commonly represent things that people value such as art, music, videos, video game items, trading cards, digital homes, and other forms of creative work.
NFTs are stored on blockchains, digital ledgers that are also the foundation of cryptocurrencies. The first NFTs were created in 2015 and they are based on Ethereum. In recent years, more exposure has led to a rapid increase in their popularity. You can buy, trade and sell individual NFTs just like you would a single unique Bitcoin.
While NFTs themselves are digital files, they can be used to represent ownership of both physical and digital assets – such as artworks or videos uploaded to the internet.
What does non-fungible mean?
It means one of a kind. A fungible asset is interchangeable with another of the same kind, while something non-fungible is unique.
The most obvious example of something fungible is money. Every pound, dollar, or Bitcoin is exactly the same as any other pound, dollar, or Bitcoin and can therefore be used as a medium of exchange. The Mona Lisa, on the other hand, is non-fungible: it is a unique painting which has a value separate from all other similar works.
What makes an NFT different from a cryptocurrency?
The fact that each NFT is unique. Cryptocurrencies and NFTs share a common feature in that they use blockchain technology to keep a record of transactions, but NFTs use this to demonstrate ownership of a separate asset, whereas cryptocurrencies are an asset class of their own.
With an NFT, what’s important is the thing it represents – be that a picture, tweet, video, or other asset. In terms of cryptocurrency, the central concern is how many of each coin you have: your Bitcoin is worth exactly as much as anyone else’s.
A quick history of NFTs
The original NFT was a digital animation called “Quantum” that was created in 2014, but it wasn’t until 2020 that they leapt into the public consciousness. It was then that the launch of NBA Top Shot, a marketplace that sold clips of basketball highlights as NFTs, started the first NFT craze.
Since then, the desire to own a piece of online history has led to the creation of NFTs representing everything from digital art, to famous tweets, to the original source code of the internet itself.
The value of these NFTs has risen exponentially over the last few years. In the case of digital artwork, their scarcity has led to works selling for tens of millions of dollars. Beeple is by far the most successful digital artist around and some of his works have sold for prices comparable with the traditional art world.
Examples of NFTs
Pretty much anything can be an NFT and the best way to think about it is that for everything where scarcity is important in the real world, there’s likely to be an NFT of it in the digital world. Trading cards and artwork are good examples, and you can even buy digital horses with their own bloodlines and characteristics that compete in online races. Here are a few examples of the most prominent NFTs.
- Digital art: ‘Everydays—The First 5000 Days’. The most valuable piece of digital art ever created is a work by Beeple, a digital artist who has made his fortune from selling NFTs. This piece was sold at the auction house, Christie’s, for a whopping $69 million in 2021. The work is enormous, comprising 21,069 pixels x 21,069 pixels and weighing in at over 0.3GB.
- Tweets: Jack Dorsey’s first tweet. The digital form of the Twitter founder’s first tweet, reading ‘just setting up my twittr,’ was sold for $2.5 million in an auction.
- Virtual worlds: Mars house. A virtual reality house on the planet Mars was sold in NFT form for $500,000. It is a 3D digital file, and the owners can use it to have a virtual tour of their house. It is regarded as the first NFT digital house in the world.
How are NFTs made?
In simple terms, someone uploads a file of whatever the NFT represents and it is minted (i.e. added) to the Ethereum blockchain. When that happens, the file is attached to a unique string of characters which, together, form the NFT itself. The characters are like a digital signature that can be used to identify the file and prove its authenticity.
How can I create my own NFT?
Through any platform that allows you to buy NFTs, such as OpenSea, Rarible, or AtomicHub, which are three of the most popular marketplaces. Once there, you just need to go to the ‘create’ section and choose a PNG, GIF, MP3 or another file type to upload it.
Then, you can name it and mint the token via the platform you have chosen. To put it on sale, you need to pay the ‘gas’ fee, which is like a processing fee. Once there, its movement is constantly tracked – because blockchains keep a publicly visible history of every transaction – so that it’s always possible to know who owns it.
Are NFT’s safe?
As with anything new, they should be treated with a degree of caution, but for the most part they are safe. When there has been issues it has often been an argument over who exactly owns the copyright to certain images and files, rather than anything more sinister.
Where NFTs, and cryptocurrency in general, differ from traditional investments is in the lack of regulatory oversight. If something goes wrong, you have very few options and there is certainly no governing body that you can appeal to. That may change over time but it’s worth being extra careful about what you put your money into until then.
Where can I learn more?
For more information about cryptocurrency, and to learn about how it works, check out our cryptocurrency courses. To find out more about investing in them, our helpful guides will take you through everything you need to know.
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