What is an NFT?
NFT stands for ‘non-fungible token’. When something is fungible, like a dollar bill, it is equivalent to, and can thus be exchanged for, any other dollar bill. In contrast, a non-fungible token is a unique asset in digital form that cannot be exchanged for any other NFT. This means that every NFT is a ‘one-of-a-kind’ item. NFTs are transferred from one owner to another using blockchain technology, which creates a digital trail from seller to buyer that verifies the transaction. This encodes the unique ownership rights to the buyer (new owner).
The physical world counterpart would be a unique collectible asset such as a piece of art, for which you might have a certificate of ownership attesting to its authenticity. The NFT with its blockchain technology replaces the need for certificates of ownership. Some NFTs even use blockchain technology to create a digital ownership certificate for a unique physical asset.
NFTs became a popular investment in 2021, even though they’ve been around since 2014. As cryptocurrency investing exploded, so did the idea of taking certain digital assets and selling them to investors online.
How Do NFTs Work?
NFTs are marketed and distributed through online marketplaces such as Opensea or Rarible. Investors can look through an inventory of assets before choosing one to buy. One must have cryptocurrency to buy the digital asset and create an account on the marketplace that is connected to the cryptocurrency wallet holding the coins.
The most common blockchain NFTs use Ethereum ERC-20 tokens. The ERC-20 token is what the blockchain uses to issue a smart contract on the Ethereum blockchain. NFTs can also be purchased with Polygon, Solana, and Polkadot cryptocurrency.
NFTs have opened up a new door for artists, companies, and celebrities to monetize their assets. Artists are able to create a library of digital assets to market to a new wave of investors and collectors. Celebrities are creating assets that capitalized on their celebrity brand identity. Some NFTs are selling for thousands, even millions of dollars.
How Are NFTs Different From Cryptocurrency?
NFTs are not the same as cryptocurrency. An NFT uses cryptocurrency to conduct the transaction. It uses the same blockchain technology that cryptocurrency uses but the asset is set up differently. Whereas a cryptocurrency coin can be traded or exchanged at equivalency, the NFT cannot. This is because each cryptographic asset is set up with a unique identification code and metadata that distinguishes one NFT from another. In other words, you can trade one Bitcoin for another Bitcoin – they are equal – but NFTs don’t trade equally.