What Are NFT's And How Do They Work?

What are NFTs and how do they work? NFTs have been everywhere this year. If you’re not quite sure what an NFT is and you don’t want to carry on pretending you know what you’re talking about with your mates, we’re here to help with a simple set of questions and answers. You’ll soon be the one holding court and telling your friends all about how great NFTs are and how they work!

What is an NFT?

what is a non fungible token

Let’s start simple, eh! An NFT is a Non-Fungible Token, a unique item in digital form that is stored on a blockchain. The idea is that you can own a unique digital item with no other copy available of that precise item.

Although NFTs have been around since 2014, it wasn’t until 2021 that they gained widespread attention after a piece of digital artwork was sold for $69 million at auction, prompting people the world over to become interested in many different types of NFT. The prices of some NFTs have been mind-boggling.

Before you can fully understand what NFTs are and how they work, you are best trying to understand the difference between fungible and non-fungible tokens.

What is a fungible token?

A fungible asset is something that can be exchanged for an item of a similar form and retain its value in the process. If you think about it in terms of traditional currency, either paper notes or cryptocurrency, you can exchange a five-pound note for another five-pound note and you end up with the exact same value in your hand, or you can exchange a five-pound note for five one-pound coins and have the exact same amount.

What is a non-fungible token?

The difference with a non-fungible asset is that it is completely unique and cannot be exchanged for something of a similar value. So, for instance, a physical painting, a ticket that you have for a sports event or a music concert, a trading card for your favourite sports person, these are all unique. The idea of NFTs is to bring this characteristic into the digital world.

How do NFTs work?

Non fungible tokens

An NFT is stored on a blockchain as a digital certificate. A blockchain is a public ledger that is digitally distributed and decentralised. Every transaction on a blockchain is recorded between peer-peer, which means that an NFT is verifiable publicly, stored on a network of computers and cannot be changed once they have been committed to record.

How do NFTs work in terms of ownership?

Understanding ownership is where things get a little complicated for NFTs. When a person purchases an NFT, they have the ability to prove that they are the unique, sole owner of that digital asset. When you own an NFT though, you only own the digital token that represents the asset, not the actual asset itself. In essence, you own a digital receipt of an asset. This is important to designers and artists selling an NFT. If you do sell this digital token to a buyer, you are not transferring the copyrights to your work unless you make a separate agreement with the buyer. What this means is that whoever buys an NFT does not have the right to reproduce the art or design for commercial products to make a profit.

What are the different types of NFTs?

learning about an nft

As NFTs have grown in popularity and become part of the wider consciousness, there has a proliferation of the different forms they take. Here is a brief list of NFT types:

Art NFTs

Some of the most expensive items sold at auction over the years have been within the art world. NFTs make sense when you are talking about unique pieces of art and a need to verify authenticity and genuine value in the process. In the modern world where digital art could struggle to gain a foothold within the realms of authenticity amongst traditional, physical art pieces, NFTs have provided a solid footing. “The First 5000 Days” was sold for $69m at Christie’s in March 2021 as an NFT single edition (which is known as a 1/1 NFT). This is the piece that got the rest of the world talking about NFTs. Artists can also create multiple editions of NFTs

Sports NFTs

NFTs in the sports world have yet to fully take hold, especially in UK and European sports, but it is on the way. We are already seeing NFT collections from some of the biggest football clubs in the World, following the success of US sports, such as the digital player profiles and short video clips in the NBA, NFL, and MLB NFTs (that was way too many letters and abbreviations in one go!).

Think about how massive sports fan culture is? As a fan, if you can collect your favourite players, matchday moments, kits, or anything related to the team you support or the sport that you love, NFTs give you that collectible joy. The sky is the limit with sports and NFTs and it will be interesting to see how it evolves.

Collectible NFTs

One of the ways that NFTs have become popular is in their collectible element. You know how people go wild for anything that is collectable and unique and if you have the chance to collect a range of anything, the interest and the price will go up? It’s the same with an NFT. By its very nature, an NFT is collectable, as it is a unique digital asset. Some of the most popular collectibles in the world of NFTs though include:

NBA Top Shot – a platform of digital basketball trading cards that continues to grow with the option to buy and sell short video clips from the NBA.
Cryptopunks – one of the legendary originals of the NFT game, there are over 10,000 Cryptopunk characters available, with NFT records constantly broken (Punk #5822 sold for $23.7m in February).
Generative Art – This is an interesting form of art where artists create using code they have written. Art Blocks is one platform where artists can upload algorithms to the site and then set a maximum number of NFTs that can be created from their code. The Fidenza series is one of the popular collections within this type of NFT.
Videogame NFTs – Gamers have always paid good money to buy collectibles and little bits within their favourite games. The problem is though that investment does not give them sole access to what they are buying, instead, the publisher of the game owns those assets. With NFTs, you can own a piece of a game, whether that’s a card or a character profile, adding real excitement to the gaming world.

Why are we seeing such expensive NFTs?

a picture of an nft amongst lots of money

In much the same way we see high-value items in the physical art world, there are many different factors as to why an NFT might become valuable and have a high sale price. The value of any piece of art comes from its ‘market-driven value’, consisting of the popularity of the artist who made the piece, the speculated potential resale value of the item, the subjective value of a piece of art in terms of whether it makes a moral or political statement, alongside the objective value of an item which is determined by the technical skill and expertise of the artist.

Do NFTs make a good investment?

Investing money in anything is very serious and probably not something you want to worry about too much during your student years. The chat about NFTs though does come around quickly as to whether they are a good investment. What we would say right now, is that if you do wish to buy an NFT, think about it in the same way that you would as buying a special edition trading card for your favourite football player, or that luxury piece of jewellery that you’ll wear on a special occasion. NFTs are currently a big collectible trend, but there’s nothing to say they will still be worth your investment in 10, 15 years’ time.

Also, as we have previously mentioned, when you buy an NFT that includes the copyright of the original artwork, you do not have the rights to reproduce or sell the content, so that is not an avenue you can look at for making money on your investment. So, an NFT is a high risk, high reward investment. The NFT market runs on scarcity and collectability, and though you might get excited and dizzy when you see some of the prices of NFT sales, it is very, very unlikely that you could make an investment now at a reasonable price and sell an NFT for millions.

Where can I buy NFTs?

You can only buy NFTs if you have cryptocurrency, so it isn’t as simple as just purchasing any item online using your bank card like you usually would. Instead, you can use cryptocurrency to purchase NFTs of all kinds on different NFT platforms. These include NBA Top Shot, Crypto and OpenSea.

Is there an environmental impact to NFTs?

the environmental impacts of nfts and how they affect our world

It is thought that the process of minting NFT uses over 263,538 kWh of energy on average. The uncomfortable truth about NFTs, in much the same way that there have been warnings about the environmental impact of Bitcoin, is that the massive energy required to process them is having a harmful effect on the planet.

Any NFT transaction takes place using computer transactions that are energy-intensive. Whether you are creating NFTs, buying or selling them, your fossil fuel consumption is likely to increase. This is due to the cheapest source of fuel being used to maximise profits. There is also a worry about the recycling and production of the computer hardware required for the NFT and Bitcoin industries.

What is the future of NFTs?

With anything like this, it is hard to predict exactly what will happen. We could be talking about something completely new in 18 months, something that doesn’t exist yet, and NFTs will be forgotten about, but we doubt it will be that dramatic a collapse in interest, if at all.

The beauty of an NFT is that there are endless possibilities within this world. Think about it for a second, you can authenticate ownership of any digital asset, you can create your own NFTs, purchase and trade NFTs. At the moment there are collectable trading cards linked to computer games, sports franchises and big digital art pieces being traded as NFTs, but this is just the beginning. It could soon evolve into fan club memberships, event tickets for live music concerts and big sporting events and research will be taking place right now by all the big global brands as to how to leverage NFTs to use in many different ways. Don’t be surprised if NFTs are used in the future as a way of verifying your identity. There is no definitive answer as to the long-term viability of NFTs, but the early signs are that they are here to stay and will evolve to become part of our everyday existence in the near future. It is an exciting time for the NFT world.