Non-fungible tokens explained: What is an NFT?

NFTs are some of the buzziest investments around. Standing for non-fungible tokens, NFTs act as certificates of ownership and authenticity for mainly digital assets, containing anything from artworks to domain names to virtual sneakers. Learn more about how NFTs work and what gives them their value.

Connor Campbell Published on 26 July 2021.
Non-fungible tokens explained: What is an NFT?

Just like Bitcoin when it exploded in popularity, NFTs are the current talk of the town.

They’ve become so big that the most expensive NFT to date, Beeple’s EVERYDAYS: THE FIRST 5000 DAYS, sold for $69,346,250 at an online auction at Christie’s. In the first half of 2021 alone, total NFT sales hit $2.5 billion.

But what is an NFT? And what does NFT stand for? Below we answer these questions, as well as explaining how they work, and why people think they are valuable.

What is an NFT?

To start simply, NFT is an initialism standing for non-fungible token. They represent digital (and sometimes physical) assets, and act as certificates of ownership or authenticity. In a way, they give a more concrete value to things that would have previously been intangible.

Most of the headlines around NFTs have focused on the sale of digital artworks, memes or viral media, like the ‘Charlie Bit My Finger’ YouTube video. However, that’s a limited overview of the format. Other NFT examples include tickets to events, domain names, or in some cases even redeemable physical items.

What is the meaning of non-fungible?

NFTs and cryptos are often spoken of together. But they are not the same thing.

Cryptocurrencies such as Bitcoin or Ethereum work, in many ways, like any other currency. The value of one Bitcoin is the same as the next, just as the value of one pound coin is identical to another. They are fungible, i.e. mutually interchangeable.

The same is not true for NFTs. Each NFT is unique, or, as the name states, non-fungible. Non-fungible means something that cannot be traded or exchanged for an exact equivalent.

Other examples of non-fungible assets include owned homes, cars or collectibles, like Pokemon cards. For example, though two cars may be of the exact same manufacturer, model and year, there will be other factors, like mileage or damage, that cause their value to vary.

How do NFTs work?

The association between NFTs and cryptocurrency stems from the fact both use blockchain.

Blockchain is a form of database which chains blocks of data together in chronological order, and is predominantly used as a ledger of transactions. An NFT is a unit of data stored in this manner.

The aspect that puts the non-fungible into NFT, and separates them from cryptocurrencies, is the unique identification code and metadata that is created each time an NFT is minted.

What does owning an NFT mean?

The idea of ownership here is slightly tricky.

Say you own a physical piece of art. It is yours, to do with what you want. Display it, hide it away, whatever - it’s your choice.

However, when you ‘own’ a digital artwork, or anything else, via an NFT, that doesn’t necessarily mean that item is yours. It is not the image file (or whatever form the item takes) itself you are buying, but just the record of ownership.

Why do people see the value in NFTs?

The nature of blockchain, and how NFTs are minted, means there are certain guarantees when it comes to ownership.

The record of ownership cannot be amended, that individual NFT cannot be replicated, and there can only be one official owner at a time.

The concept of scarcity also plays a huge role in the value of NFTs. The creator of an NFT can dictate exactly how many exist. Unlike with other collectibles, especially digital artworks, that scarcity is 100% verifiable - it is built into the NFT itself.

Once released, the number of that original NFT in existence cannot be changed. Even if you were to mint the same digital artwork again, it would still be a different NFT. It is like how a first edition run of a book is different to a second edition run, despite having the same content inside. If you can prove scarcity, you can prove rarity, in theory increasing the value of said NFT.

Just as ownership and scarcity is verifiable with NFTs, so too is authenticity. You would always be able to prove that your NFT is the real deal, not a fake or a copy.

Beyond that, the value of NFTs starts to become harder to quantify. There are a number of intangibles that contribute to the value of a specific NFT, the same way a number of factors dictate the value of a physical piece of art, without necessarily considering quality or merit.

Where can I buy NFTs?

There is not just one NFT marketplace, but many. However, before you can buy an NFT, you will need to set up a cryptocurrency wallet to pay for your purchase.

Notable NFT marketplaces include:

  • OpenSea.io
  • Rarible.com
  • Foundation.app
  • SuperRare.com
  • Mintable.app

» MORE: How to buy NFT tokens

What should I be aware of?

Like with any asset, the long-term value of an NFT isn’t guaranteed. You could argue that is especially true of NFTs given their relative infancy and novelty.

You should also bear in mind the complexities around ownership mentioned above, and that there is currently no direct regulation of NFTs in the UK.

The other major question around NFTs is their environmental impact because of the amount of energy related to the mining of a NFT in the first place and the processes involved in blockchain. Not-for-profit environmental organisation Earth.org reports that an average NFT transaction is estimated to produce a carbon footprint of around 48kg CO2e (carbon dioxide equivalent). For context, a kilogram of consumed beef produces 27kg C02e.

The environmental impact of NFTs may not hurt their value, but given the enormity of the climate crisis, it is worth considering nevertheless.

It remains to be seen whether the fervour surrounding NFTs in the first half of 2021 can be sustained. Only time will tell if they truly are the new frontier, or merely a flash in the digital pan.

» MORE: Investing guide and how to get started

WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in.

Image source: Getty Images

About the author:

Connor is a writer and spokesperson for NerdWallet. Previously at Spreadex, his market commentary has been quoted in the likes of the BBC, The Guardian, Evening Standard, Reuters and The Independent. Read more

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