What is an NFT?

NFTs are unique digital assets. Each is made up of digital data stored in a blockchain — often the Ethereum blockchain. NFTs can represent real-world objects and are often used for artworks. They can be collected and traded but can’t be replicated.

It’s important to note that NFTs can be used in lots of different ways, one of the most common being digital art. The first NFT was a video clip, Quantum, created on 3rd May 2014. This was the first time that a non-fungible, tradable blockchain token was linked to a work of art through metadata. 

NFTs are also often used in sports, such as by football clubs or by the NBA, which has the NBA Top Shot marketplace, commemorating memorable moments in NBA games. In football, Socios has used NFTs to celebrate the most memorable moment from an AC Milan match against AS Roma. 

Other NFTs include internet memes, film scores, uncut film scenes, patent disclosure forms, tweets, and much more. Anything that can be represented in digital form can potentially be turned into an NFT.

NFTs can be traded and may go up or down in value. They’re a form of speculative asset and a type of high-risk investment. 

The contents of NFTs are publicly available. Someone can copy a meme represented by an NFT, for instance – but only one person actually owns the NFT itself. Due to the size of many digital files, NFTs don’t generally contain the file itself on the blockchain. Instead, the token includes a web address linking to the piece of art, video file, audio file, or other asset.

In some cases, NFTs aren’t unique but are instead limited editions. For instance, 100 NFTs might be created as limited edition digital collectables, so 100 people can own the same piece of artwork or other asset. 

Each NFT is a special digital collectable. Some people only own a single NFT, perhaps from an artist, musician, or football club that they’re a keen fan of. Other people collect multiple NFTs, potentially from different sources. 

What does NFT stand for?

The term NFT stands for “non-fungible token”. When something is “non-fungible” it can’t be exchanged for something exactly equivalent. It also can’t be subdivided (broken into two or more parts), unlike cryptocurrency coins, where you can own part of a Bitcoin, for example. You can’t copy an NFT, either.

Of course, you could sell an NFT, but the cryptocurrency you get in return isn’t the same thing as the NFT itself. The NFT could also go up or down in value: it isn’t worth a consistent amount of any currency, due to its non-fungible nature. Fungibility isn’t about value but about uniqueness.

Something that’s fungible can be replaced by something else that’s identical. This term is commonly used for currency. For instance, a €10 note is fungible. Someone could swap your €10 note for their €10 note, and you’d both still have a €10 note. 

Equally, cryptocurrency coins are fungible: if you own 10 $CHZ, for instance, that’s exactly the same as any other 10 $CHZ. Lots of other items are also fungible: such as two identical brand-new copies of a football shirt.

How do NFTs work?

Let’s take a closer look at how NFTs work. When you buy an NFT, you can decide what to do with it. You could keep it forever, or you could wait until it goes up in value and then sell it to another NFT collector. You might even choose to give your NFT to a friend as a gift.

In many cases, NFTs are completely unique — there’s only a single NFT. But it’s also possible for NFTs to be created as limited edition collectables, usually in very limited quantities of up to 100 or 1000. In this case, no more copies will ever exist than that limited number. Compare this with Fan Tokens, where there are often 20,000,000 or more potential Fan Tokens for a given team.

Note that there are certain things you can’t do with an NFT. You don’t own the copyright, so you can’t claim that the artwork (or photo, piece of music, etc.) is your own work. You may also not be entitled to display the artwork, including online, such as on a website or in a tweet. What you do have full ownership over is the metadata under intellectual property law. 

When an NFT is minted (added to the blockchain), it can then be bought and sold. The blockchain uniquely and securely identifies each NFT, so its ownership can be transferred in a publicly verifiable way. It’s virtually impossible for an NFT to be hacked.

NFTs are indestructible. They can’t be deleted from the blockchain because the blockchain is distributed between multiple “nodes.” Information on the blockchain can only be added, not deleted. However, an NFT can be removed from circulation permanently through a process called “burning.” This involves transferring the NFT to an inaccessible digital wallet address.

What are NFTs in Crypto?

How are NFTs related to cryptocurrencies?  You might be aware of lots of similarities, but maybe you’re not exactly sure how they’re different.

NFT Blockchain

Like cryptocurrencies, NFTs are backed by blockchain technology. Most NFTs are part of the Ethereum blockchain, along with the Ether (ETH) currency and a large number of other Ethereum-based cryptocurrencies, including $CHZ. So NFTs use the same underlying technology (the blockchain) as crypto.

The Ethereum blockchain went live in July 2015. Today, its currency, Ether, is the second-most popular in the world (behind only Bitcoin). The Ethereum blockchain is open-source, making it easy for developers to create their own cryptocurrencies, NFT exchanges, and more based on the blockchain. 

The Ethereum blockchain originally used proof of work to verify new transactions and add them to the blockchain but is now switching to proof of stake. Proof of work involves using a huge amount of processing power to solve complex maths problems, validate new transactions, and therefore mine cryptocurrency. Proof of stake involves validators staking their own cryptocurrency in order to validate new transactions and doesn’t require lots of processing power. It’s a more eco-friendly option, which is why Ethereum is switching over to using proof of stake instead of proof of work.

NFTs aren’t a cryptocurrency

It’s important to understand that NFTs aren’t themselves a cryptocurrency. Remember, currencies are fungible (one $CHZ token, for instance, can be exchanged for any other $CHZ token of the same value). NFTs are unique or limited edition. Of course, you can trade NFTs in a similar way to trading cryptocurrencies, but they’re best seen as unique collectables.

NFTs are bought using cryptocurrencies

Normally, you’ll need to use a cryptocurrency (most commonly Ethereum) to buy NFTs, further cementing the link between NFTs and cryptocurrencies. However, some platforms are now allowing NFTs to be purchased without owning cryptocurrency outright. 

Why are NFTs valuable?

NFTs are valuable in a number of ways. The easiest way to understand their value is to think of them as works of art. Like a painting by a famous artist, they’re valuable because they’re unique, and only one person can own each NFT. Some NFTs will also have special aesthetic value, such as NFTs produced by famous digital artists.

Some people love to own NFTs, buying NFTs relating to their hobbies and interests, such as an NFT based on a moment from their football team’s latest derby match. Others value NFTs as investments, buying NFTs that they hope to sell at a profit in the future. 

Are NFTs a scam?

NFTs are not a scam. They’re genuine digital items that can’t be faked, due to the blockchain that underpins them. But it’s important to understand that NFTs are a high-risk investment. That means they could go up a lot in value, but their value could also go down significantly.

If you’re new to NFTs, you might worry that they’re a scam. Maybe you’ve heard about people making lots of money from NFTs and you think they might be a good money-making scheme — but you can also see that there are lots of risks involved.

One of the most useful ways to think about NFTs is as collectibles, not as an investment. If you enjoy owning NFTs, then go ahead and buy them. Unlike plenty of other collectibles, they won’t take up space or gather dust in your home! They’re also really easy to display online, making it easy to show your collection off to friends and family.

What are NFT collections?

An NFT collection is a set of closely related NFTs released by an artist or a group of artists. Collections might be complete upon their release, or their creator might add to them with new NFTs over time. Collections can be worth huge sums of money (millions or even over a billion, taken in total), but individual collectors are likely to own only a small number of NFTs from a collection.

One of the best-known NFT collections is the Bored Ape Yacht Club, made up of 10,000 unique NFTs that all show different Bored Apes with distinct characteristics. The rarer the characteristics within the collection, the more valuable the Bored Ape NFT. Ownership of a Bored Ape also gives the owner access to an online members-only club.

Some NFT collections can be used in a similar way to trading cards, such as the NBA Moments collection from NBA Top Shot. You can also use collectible NFTs in games, such as the NFT assets that drive the Dribblie football manager game. 

Are NFTs bad for the environment?

One concern that some people have about NFTs relates to their impact on the environment. Certain types of blockchain technology work by using massive amounts of computing power in a process known as “proof of work.” The minting of those types of NFTs uses extensive computing resources, provided by cryptocurrency miners who use specialist hardware to solve highly complex maths problems.

The environmental impact of this is twofold. First, the hardware required creates electronic waste (as the hardware quickly becomes obsolete). Secondly, the computing power required uses up vast amounts of electricity. 

Of course, fiat currencies like the dollar and associated banking systems also use up raw materials and electricity in their creation. Collecting real-world objects rather than NFTs could also have a significant impact on the environment. For instance, you might pay to transport artworks around the world, generating more air traffic.

One way to make NFTs more environmentally friendly is to mint NFTs on a blockchain that’s backed by “proof of stake” rather than by “proof of work.” A proof of stake system doesn’t require specialist hardware. The Ethereum blockchain, which underpins the majority of NFTs, is transitioning to a proof of stake system.

Another option is to consider carbon offsetting. When you mint or purchase an NFT, you can use a tool such as Aerial to offset the carbon footprint you produce. 

Trading NFTs

Many people collect NFTs, often because they’re a fan of a particular artist, musician, or sports team. But lots of people also like to trade (buy and sell) NFTs, either to form their own collection or in the hopes of making a profit.

If you want to trade NFTs, you’ll need to:

1. Create a crypto wallet and purchase cryptocurrency (probably ETH). You’ll need cryptocurrencies to buy NFTs in most marketplaces. If you want to sell NFTs, you’ll be paid in crypto, so you’ll definitely need a crypto wallet.
2. Create, buy, or earn NFTs. To trade NFTs, you’ll need to acquire some. That could mean creating your own NFTs as described above. You could also buy existing NFTs, or you could earn them, perhaps as a fan reward or by taking part in competitions.
3. Decide which NFTs you want to sell. You might want to sell NFTs to realise a gain in value, or you might simply sell NFTs that you no longer want to keep for any reason. 
4. Put your NFTs up for sale. This is usually done through an NFT marketplace (see below for more information). You could choose a big, general marketplace such as OpenSea, or you could opt for a smaller, specialist NFT marketplace. Alternatively, you could sell your NFTs privately. For instance, you might strike a private deal with a fellow football fan to sell them some of your NFTs.

For more information on trading NFTs, please visit our guides: How to buy NFTs and How to sell NFTs.

What is an NFT marketplace?

An NFT marketplace is a platform where NFTs can be minted, bought, and sold. Whatever marketplace you use, you’ll need to have a crypto wallet that’s compatible with the blockchain that the marketplace uses. You’ll also need some cryptocurrency in your wallet to fund minting, buying, or selling an NFT.

Most NFT marketplaces are based on the Ethereum blockchain, but you can also find marketplaces based on other blockchains such as Solana. When you visit marketplaces, you’ll be able to see NFTs that are currently for sale, along with details about when they were minted, what offers others have already made on them, and much more.

Next up:  How to create an NFT

Whether you want to buy NFTs to form a collection, to support your favourite football teams, to get special perks from clubs that you love, or even as an investment, you now have everything you need to know to get started.

Now that you know what they are and how they work, our next chapter explains the process of minting NFTs and describes some of the different types available, which we cover in Chapter 2: How to create an NFT.