You will have no doubt heard the buzz recently around Non-Fungible Tokens (NFTs). If you are not aware of what an NFT is we will explain this in the article. We will also explain what NFTs are not as there is quite a lot of confusion about this.
NFTs are Digital Assets that are Unique
An NFT is a digital representation of something in the real world which is unique. One of the most common types of NFTs is digital art. People create NFTs and trade them with collectors. Usually, NFT transactions are based on cryptocurrency such as Ether.
NFTs are not entirely new and have been in existence since 2017. A lot of money has already been spent trading NFTs. An NFT may not be a one-off. It is fairly common to see limited editions of NFTs with a few copies available. The most valuable NFTs are only available as a single item.
You cannot replace an NFT with another asset as you can with a cryptocurrency for example. This is why they have the “non-fungible” element to their name. A $1 bill is fungible because there are lots of them and it is easy to replace one with another. These bills all have the same value which is $1.
NFTs are always on a Blockchain Network
An NFT cannot exist without a blockchain network. The most popular blockchain for NFTs is the Ethereum network. Blockchain provides distributed ledger technology and every element of a blockchain is unique. This provides a very high level of security.
As the name suggests, blockchain is a chain of data blocks. Each of these has unique identifiers which links all of the chains together. Users of a blockchain network must have a public key and a private key for identification and uniqueness of transactions.
NFTs are not the same as Cryptocurrencies
A lot of people think that NFTs are the same as cryptocurrencies but this is not the case. It is possible for you to hold a number of cryptocurrencies that have the same value. You cannot do this with NFTs. Many people hold more than one Bitcoin or Ether unit for example.
It is easy to see where the confusion comes with this. Both cryptocurrencies and NFTs rely on blockchain technology for their existence. But NFTs are unique assets and cryptocurrencies are not. It’s that simple.
There are different types of NFTs
You could be forgiven for thinking that NFTs are just about digital art because this is what makes the headlines the most often. The truth is that an NFT can be something else that is considered of value. Other examples of NFTs include:
- Audio (usually music)
- In-game resources
- Images and avatars
- Designer items
There is a classic NFT story where the founder of Twitter created an NFT from his first tweet on the platform and sold this for nearly $3 million. Think about an NFT as a digital item that a collector is interested in.
An NFT has only one owner
There can only be one owner of an NFT at a time. Anyone that purchases an NFT has the exclusive rights of ownership. Every NFT has totally unique data associated with it. This is ideal for verification and identification purposes.