What Are NFTs?
What Are NFTs? The Definitive Guide on Non-Fungible Tokens


NFTs may be the hottest topic in blockchain, but what led to their meteoric rise? (bbc.com)


Table of Contents:


What Are NFTs?

You’ve probably heard of Beeple’s $69 million NFT digital art sale, making him the third highest-paid living artist, but what are NFTs, and why are they taking the world by storm? Non-fungible tokens, better known by their acronym, NFTs, are verifiably unique digital cryptocurrency tokens that are not interchangeable with one another, or non-fungible. This allows anyone to create, buy, sell, and exchange unique and one-of-a-kind digital assets with transparent ownership rights and a trackable history. Unlike Bitcoin and many other cryptocurrencies, NFTs can be applied to a variety of distinct physical or digital assets, representing an evolution of cryptocurrency functionality.

Before NFTs, there was no way to ascribe ownership rights, proof of origin, or a trackable transactional history to a unique digital asset. When looking at the physical art world, there is fraud that results in the sale of fakes or reproductions, sometimes to the tune of $80 million or more. If you thought scams in the physical art world were pervasive, the fraud within the digital world would have been much greater without this technology. NFTs solve this problem through the utilization of blockchain, ushering in an era where digital items can now mirror their physical counterparts in authenticity, scarcity, collectibility, and usability through tracking on a distributed and decentralized ledger.


The History of NFTs

NFTs started on the Ethereum smart contract platform with the introduction of CryptoPunks in June of 2017. CryptoPunks are 10,000 unique digital avatars with different characteristics and representations; no two are the same. Since its inception, CryptoPunks remained widely in obscurity, but with the recent growth in the NFT market, many now go for millions of dollars each depending on rarity.



Various CryptoPunks out of the 10,000 created (larvalabs.com)


CryptoPunks set a precedent for uniquely verifiable digital tokens on the blockchain, a concept that had not yet been theorized before their implementation. This led to the creation of the ERC721 token standardTe in September of 2017. Submitted as an Ethereum Improvement Proposal (EIP), ERC721 tokens allow anyone to create one-of-one tokens that are not interchangeable, presenting a brand new use case for the Ethereum blockchain.

The first NFTs to launch with this new token standard is the popular collectible blockchain game CryptoKitties, featuring unique tokenized digital cats. Each CryptoKitty is different and is owned wholly by the token holder. This means that only the owner can decide to transfer or sell the cat, with no input from any other party, even the game developers. The first CryptoKitty, known as the ‘Genesis Kitty’, sold for approximately 247 ETH, about $117,000 at the time, but now surpassing over $500,000 at current prices.

Initially, CryptoKitties was so popular that it single-handedly increased Ethereum transaction fee prices, at one point representing over 10 percent of the total traffic on the Ethereum network. This transaction price increase due to CryptoKitties speaks to a significant deficiency within the current implementation of the Ethereum blockchain, which we will expand on shortly. CryptoKitties eventually morphed into a new company, Dapper Labs, the NFT-focused organization behind the creation of NBA Top Shot, which has generated hundreds of millions of dollars in revenue since its release. With its rise in popularity, influx of capital, and Ethereum’s deficiencies, Dapper Labs created the Flow blockchain to support its NFTs. This Proof-of-Stake network is significantly more cost-efficient than Ethereum and settles transactions at faster speeds.

Following the hype cycles surrounding CryptoKitties, resulting in price fluctuations, NFTs fell out of the crypto spotlight for a while. The blockchain market and its investors focused on traditional and up-and-coming cryptocurrencies, decentralized finance (defi), scalability, and new use cases. NFTs took a back seat within the overall blockchain industry. Now, NFTs are back in the spotlight, generating more attention than ever before.



The search comparison between ‘NFT’ and ‘Ethereum’ showing NFTs increasing popularity (trends.google.com)


The Difference Between NFTs and ‘Traditional’ Cryptocurrencies

When looking at a cryptocurrency market capitalization aggregator, each network you see contains millions of identical tokens. Each token is fully fungible with one another, meaning any one coin can be exchanged with any other without the owners losing value. Think of Bitcoin or USDT; 0.5 BTC is always worth the same as any other 0.5 BTC, regardless if it was the first Bitcoin created or the ten-millionth. USDT works in the same way — one USDT always holds the same exact value as any other USDT token. This reflects an important characteristic seen in fiat currencies, as each bill or coin issued by a government is always interchangeable with its equivalents of the same denomination.

This is not the case with NFTs, as every single token is different. Even if a user mints multiple copies of the same token, each one will hold an individual value. If there are ten identical copies of an NFT art piece made by a famous artist, the market may value the first copy higher than the sixth copy due to its being the first iteration created. Thus, it would be unwise to directly interchange them, as they do not maintain the same amount of value for the token holder.


Why Are NFTs Valuable?

You may be thinking, at least in the case of NFT-based art or collectibles, “If I can download the image directly to my computer, print it, and frame it, then why are NFTs valuable?” This is a good question, but you can apply the same concept to any work of art. Nothing is stopping you from buying a print of the Mona Lisa and framing it to look exactly the same as the copy in the Louvre, but obviously, this would not give you the authority to say you own the original Mona Lisa. This concept is identical when applied to NFTs; anyone can show off the piece, but only one entity can provably claim ownership rights. Verifying the provenance of a digital item has previously never been possible, but with NFTs, it’s easy to prove and verify authenticity and ownership rights, as anyone can track back the piece directly to the artist.

NFTs give investors, collectors, and speculators a way to verifiably own digital items from their favorite artists, celebrities, and creators. They can also be used to represent event tickets, gaming items, network domain names, ownership stake in physical items, and more. The item’s value depends on what a potential buyer is willing to pay and what the market deems the price. For example, many think an infant can recreate Jackson Pollock’s splatter-filled renditions, but nobody wants to buy an infant’s creation for an eight-figure sum. For a less abstract-valued item, such as a concert ticket, the price will be easier to discern.t

Many intangible factors go into the value of art and NFTs. Like art, the value of an NFT is subjective and determined based on the collectibility and popularity of the creator, as well as the story, scarcity, and other features behind the NFT. This is why some NFTs can sell for millions while others cannot sell for just a couple of dollars.


How Do NFTs Work?

Most NFTs were issued using Ethereum’s ERC721 token standard, but now many more options allow for greater creator customizability. Many networks support the minting and exchanging of NFTs, with different blockchains using different methodologies to create and effectively store data.

The basis of NFT functionality is through smart contracts. Smart contracts are self-executing verifiable computer programs that operate based on predetermined inputs, or in more straightforward terms, a pre-programmed digital agreement between two or more parties solidified through computer code. For NFTs, this can include factors such as the name of the tokens, the total produced, the royalties the artist gets for each sale, and more. When breaking down an ERC721 NFT, it is lines of code on the Ethereum blockchain. By coding with smart contract governance, the creator can determine which type of immutable qualities and characteristics they would like the NFT to have.

After creating the NFT, a process known as minting, the owner has complete discretion on how they want to use it. They can give it away, trade it, auction it, sell it, or hold it. Since NFTs are deployed using a decentralized network, no third party has jurisdiction over it, leaving the creator with 100 percent sovereignty over their creation.



An example of a NFT marketplace (NFTrade.com)


ERC721 was the tip of the iceberg, with networks like Flow, Binance Smart Chain, Polkadot, Tezos, HECO, Cardano, and more offering the ability to mint NFTs. Even Ethereum has upgraded its options, now offering an alternative through the ERC1155 token standard. This enables users to create NFTs and fungible tokens at the same time within a single smart contract, allowing for more options and cheaper transactional costs.


So, How Did NFTs Become So Popular?

NFTs present verifiable scarcity and digital ownership rights for the first time in history. On top of that, NFTs are fully decentralized and distributed, meaning they can never be shut down or censored. These factors allow for new methodologies of creation that directly reward creators, buyers, and sellers without intermediaries having an unjust say or the ability to skim profits off the top.

These concepts can be applied across a spectrum of applications, but are the backbone that creates the value of any NFT. As more users and enterprises begin to enter the cryptocurrency market, more people are waking up to the potentials that the NFT market presents.


NFT Use Cases

The use cases of NFTs expand across various asset classes and industries, with new ideas created every day. Here are some of the most popular NFT use cases and how they function.



One of the most widespread uses of NFTs (currently only rivaled by NFT-based digital collectibles) is the creation and distribution of art. Through all the characteristics NFTs provide to creators, this is the first time artists can easily monetize their skills and user following through digitally creative means. The NFT art explosion has had a significant impact on innumerable artists, allowing them to turn their passion into a full-time income stream.

With all the inefficiencies in the traditional art market, many speculate this new medium will revolutionize art investing. This has caused many NFTs to command staggeringly high prices, as to some, they are regarded as the next evolution in modern artistic masterpieces. As mentioned above, minting and distributing NFT artwork is simple, and can be done using platforms like NFTrade, creating a new speculative market and income streams for a lot of users.

When you mix famous artists, new technology, free-market economics, and speculation, a robust marketplace is sure to follow. This is the case with the NFT market, with many new collectors and investors coming into the space at unprecedented levels.



Beeple’s ‘Everydays: The First 5000 Days’ collection, the most expensive NFT sold to date (christies.com)


Digital Collectibles

The original NFT use case has stayed strong, dominating the NFT marketplace alongside NFT art. Before NFTs, there was no way to have digitally verifiable online collectibles. Even if a third-party created limited edition pieces, nothing stopped them from making more and diluting their rarity. With NFTs, digital collectibles finally have the same abilities as their physical counterparts. Even if a creator decides to mint more of the ‘same’ NFT, it is easy to distinguish between the original and new copies, creating a clear path to value. This is why so many have speculated on CryptoPunks; although many new NFT digital collectibles are debatably cooler and provide more utility, as some of the first NFTs, CryptoPunks have retained a specific value in the marketplace.

No longer are only blockchain developers creating NFT digital collectibles, as a whole swathe of celebrities and influencers have gotten in on the game. From celebrities like Lindsey Lohan, Paris Hilton, Snoop Dogg, and Mark Cuban to influencers like Logan Paul, Mr. Beast, and DoggFace, the cranberry juice sipping longboard riding viral sensation, many famous names have used NFTs to create awesome new verifiably scarce digital collectibles for their fans. As the NFT market continues to mature, NFTs will become a more legitimate means of creating collectibles.



Although not yet as popular as NFT art and collectibles, this use case should not be overlooked. With NFTs, musicians can tokenize their music to more efficiently monetize it without the need for a greedy third party. Musicians can also create limited runs of their music as tokens, so only certain users have audio access. With a framework of digitally verifiable scarcity, digital music may someday become collectible in the same way as old records and physical albums.

Many musicians have begun to cash in on this new technology, with famous electronic dance music DJ, DJ 3LAU, generating millions of dollars through the sale of 33 unique NFTs. His most expensive NFT contained an exclusive custom song, with the owner being the only one with audio access unless he decides to share it with the world. Popular band Kings of Leon is also involved in the NFT industry, producing their third album as a NFT. Unlike buying a regular album, the Kings of Leon token comes with additional perks, such as access to a limited edition (physical) vinyl album and future front-row concert seats.


Gaming Items

Another NFT category that does not get enough attention yet is in-game items. NFTs have the opportunity to revolutionize gaming asset ownership, giving complete control to the player. Many NFT-based games have already been created, with every aspect of the game tokenized to provide tangible value to the user. This makes characters, land, items, rewards, quests, and other elements tokenizable, giving users the ability to monetize their gameplay.

Through this introduction, many gamers worldwide will be able to turn their hobbies into a side hustle and alternate source of income. With E-Sports on the rise and with no signs of slowing down, NFTs fundamentally change how users can approach gameplay.



A screenshot from Upland, the current most popular NFT-based game (cryptoticker.io)



NFTs in sports are an exciting concept that goes way beyond sports-focused digital collectibles. Recently, Croatian tennis star Oleksandra Oliynykova sold the tattoo and body art rights of her right arm, specifically between her elbow and shoulder, as an NFT. This reintroduces the concept of a body billboard in a whole new way, offering the owner advertising space on a pro athlete and also acting as an investment in the athlete.

Oliynykova’s NFT sold for around $5000, and depending on her career as a tennis player, her arm’s advertising rights may fluctuate based on her performance. This opens up new doors for professional and non-professional athletes to monetize themselves and get their fans much more involved. The owner of Oliynykova’s NFT now has a direct stake in her future career, and can also choose to carry out advertisements on her dominant arm during match play. Currently, there is an offer for Oliynykova’s right arm NFT for around $10,000 (5 ETH); it is up to the original owner if they decide to sell the rights or hold them into the future.


E-Commerce and Influencer Marketing

Imagine being able to act as a brand ambassador or spokesperson and earn commission on sales without ever having to actually contact the seller. Through NFTs, we can imagine new forms of e-commerce that empower all parties within the transaction.

Platforms have created NFTs that represent physical items within a store’s inventory. Let’s say you are an influencer in a specific niche, such as cooking. Using NFTs, you can promote and sell items directly to your followers without having to own them, like drop shipping but on another level. When the buyer purchases the NFT-equivalent item, such as a spatula, the vendor is notified and ships it to the buyer. The NFT acts as a receipt and proof of purchase, and the influencer gets a cut of the sale as commission. This presents the opportunity to drastically streamline the influencer marketing process, allowing anyone from micro-influencers to the biggest names in the industry to monetize their following with focused item sales.



The final category we will cover is the incorporation of licensing and creative ownership, an industry that NFTs can drastically improve. Although exclusive ownership and licensing rights aren’t always included in an NFT sale, it is possible to incorporate them. Whether the creator is an artist, musician, author, or anything else, they can tokenize their intellectual property’s licensing rights and auction or sell it for a fixed price on the open market. We have seen many musicians do this with their discographies without NFTs, selling out to music-focused VC firms for millions, but now, any musician can obtain the true market value for the sales rights of their creations without the need for a third party.

With NFTs just starting to reach mainstream attention, there will undoubtedly be more NFT use cases developed over time.


Current Drawbacks Within the NFT Market

Although non-fungible tokens present many opportunities, there are still significant bottlenecks restricting them from maximum market penetration. Since most users mint NFTs on the Ethereum blockchain, they are suffering from unsustainably high transaction fees. Ethereum struggles with scalability, so as more users flock to the platform and conduct additional transactions, the network gets overloaded with transactions and requires higher costs for fast transaction finality.

The increase in demand for NFTs, decentralized finance, and a general interest in cryptocurrency has caused Ethereum transaction fees to spike over $100 each on occasions. When it comes to NFTs, there are a lot of opportunities to improve on these transactional capabilities. By creating a blockchain-agnostic NFT marketplace, users can mitigate these fees by opting to use a layer two solution or alternative chain. This is why NFTrade is building an interoperable NFT platform, to better serve the community’s needs. With interoperability, anyone can complete the same transactions while vastly reducing the overall operational costs.



A visualization of Ethereum’s rising average transaction fees (ycharts.com)


There is also a problem with the ability to access NFTs. Under current iterations, most NFT media (such as a picture or video) does not actually reside on the blockchain, but refers to a file that sits elsewhere online. It is very expensive to store a massive file like a .GIF on Ethereum at the moment, so the NFT directs the user to the associated asset. This means that if the original file is compromised or taken offline (which it can be if not stored on a blockchain), the owner could lose its value. Developers are implementing various solutions to fix this problem, such as layer two scalability solutions or introducing NFTs on a more cost-effective blockchain.

A final obstacle is the storage solutions offered for NFTs. There is a famous idiom in the cryptocurrency industry, “not your keys, not your coins”, meaning that if you don’t control the private keys to your digital wallet (which give full access to all assets stored on the wallet), you are liable to lose them if the website you keep them on is compromised. Many of the NFT exchanges currently available are highly centralized and do not allow for easy off-platform storage; if they are ever hacked or taken advantage of, there is a chance someone steals your NFTs. NFT insurance coverage options platforms are under development, but are not currently live.


How to Create NFTs Without Coding Experience

If you are not a coder, many options offer the ability to create an NFT without a coding background. Platforms like NFTrade take all the technical expertise out of the process, allowing anyone to upload digital media to instantly create an NFT in many forms, such as pictures, videos, and audio files. Once you have a cryptocurrency browser wallet, such as MetaMask, you need to connect it to the creation platform. After it’s connected and you have your media ready for upload, the rest of the process is intuitive and requires only a few button clicks to complete.


How Do You Buy, Sell, Trade, and Store NFTs?

In general, a NFT marketplace should offer its platform users the ability to buy, sell, trade, and store NFTs. They create an easy to interact with environment to make the NFT market as accessible as possible. Usually, you will need a browser or in-application digital wallet to set up your account, and from there, transactions are relatively easy. If you are buying an NFT, you can hover over the NFT you’d like to purchase in the marketplace and offer the seller a fixed price or bid on the item. Even if the NFT isn’t explicitly for sale, you can still put in an offer. Some NFT exchanges let users trade NFTs directly without having to swap cryptocurrencies, such as NFTrade, but not all marketplaces will offer this feature.

Selling an NFT falls under a similar umbrella. To sell an NFT, all you have to do is make it available on a marketplace and decide if you want to sell it at a fixed price or through an auction. Once you have your browser wallet set up, the process is almost the same. If you are more technically savvy and have the NFT stored directly on a wallet you control, you can also do peer-to-peer transactions where you swap a NFT with another user without using an exchange.


What to Expect From NFTs Moving Forward

When looking at the progress the NFT landscape has made since its inception, it’s clear that this is just the beginning for this new type of asset. For one, the majority of people still have no idea what an NFT is or what digitally verifiable ownership entails, so the market will grow as more people become aware. The NFT market offers the first and only way to provide digital ownership and scarcity, meaning it is ripe for innovation as it continues to become more adopted. NBA Top Shot may not always generate hundreds of millions of dollars in monthly revenue and not every artist is going to be able to sell their NFT for $69 million, but the market should continue to grow as the capabilities NFTs present permeate global society.


This guide has been brought to you by NFTrade, the first cross-chain and blockchain-agnostic NFT platform. NFTrade hosts the complete NFT lifecycle, allowing anyone to seamlessly create, buy, sell, trade, and leverage their NFTs across different blockchains. Using NFTrade, anyone can gain access to the entirety of their NFT, unlocking the full value of the NFT market.

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