NFTs: Understanding Non-Fungible Tokens

What Are NFTs?

Non-Fungible Tokens (NFTs) are unique digital assets that represent ownership of a specific item or piece of content on the blockchain. Unlike cryptocurrencies like Bitcoin or Ethereum, which are fungible (each unit is identical and interchangeable), each NFT is unique and cannot be exchanged on a one-to-one basis.

Think of it this way:

• Fungible: One Bitcoin equals another Bitcoin (like dollars)
• Non-fungible: Each NFT is unique (like a painting or concert ticket)

How NFTs Work Technically

NFTs use smart contracts to create verifiable proof of ownership and authenticity. Here's how it works:

Token Standards

Most NFTs use specific standards that define how they function:

ERC-721

The original NFT standard on Ethereum. Each token is unique and has:

• Unique token ID
• Metadata (name, description, image URL)
• Owner address
• Transfer functions

Example: CryptoPunks, Bored Ape Yacht Club use ERC-721.

ERC-1155

A more flexible standard that supports both fungible and non-fungible tokens in the same contract. Allows:

• Multiple token types in one contract
• Batch transfers (send multiple NFTs at once)
• More efficient gas usage

Popular for gaming NFTs where you might have many item types.

Metadata and Storage

NFTs store ownership on-chain, but the actual files (images, videos, etc.) are usually stored off-chain:

On-Chain Storage

Some NFTs store everything on-chain (SVG images, traits encoded in contract). Benefits:

• Truly permanent (survives if external storage fails)
• Fully decentralized

Drawbacks: Expensive gas costs, limited to simple data.

Off-Chain Storage

Most NFTs store files on IPFS (InterPlanetary File System) or centralized servers. The NFT contract stores a link to the file. Benefits:

• Lower gas costs
• Supports large files

Drawbacks: If storage fails, link breaks. IPFS is more permanent than centralized servers.

Minting

"Minting" an NFT means creating it on the blockchain. When you mint:

1. You pay gas fees to create the token
2. Smart contract generates unique token ID
3. Metadata is linked to the token
4. Token is assigned to your wallet address

You can mint on marketplaces (OpenSea, etc.) or directly through the contract.

What Can NFTs Represent?

NFTs can represent ownership of various types of assets:

Digital Art

The most visible use case. Artists mint their work as NFTs, allowing collectors to own and trade digital art. Examples: Beeple's "Everydays," CryptoPunks, Art Blocks.

Collectibles

Digital trading cards, profile pictures (PFPs), and other collectibles. Often organized in collections with traits and rarities.

Music and Media

Albums, songs, videos, and other media minted as NFTs. Can include royalty rights that pay creators automatically on resales.

Gaming Assets

In-game items, characters, weapons, and virtual real estate that players truly own and can trade outside the game.

Real-World Assets

NFTs can represent physical assets like real estate, luxury goods, or event tickets. The NFT proves ownership, though the physical item exists separately.

Identity and Credentials

Digital identity documents, certifications, memberships, and credentials that are verifiable on blockchain.

For more on utility NFTs, see our NFTs Beyond Art article.

How To Buy NFTs

Buying NFTs involves several steps:

1. Set Up a Wallet

You need a crypto wallet that supports NFTs. Popular options:

• MetaMask (browser extension)
• Coinbase Wallet
• Rainbow Wallet
• Hardware wallets (for secure storage)

2. Get Cryptocurrency

Most NFTs are bought with ETH. You'll need ETH for:

• Purchasing the NFT
• Paying gas fees

Buy ETH on an exchange and send it to your wallet.

3. Choose a Marketplace

Popular NFT marketplaces:

• OpenSea: Largest marketplace, supports multiple blockchains
• Blur: Popular for trading, lower fees
• Magic Eden: Focus on Solana NFTs
• Foundation: Curated art marketplace
• LooksRare: Community-focused marketplace

4. Connect Wallet and Browse

Connect your wallet to the marketplace, browse collections, and find NFTs you want. Check:

• Verified collections (blue checkmark)
• Floor price (lowest price in collection)
• Rarity traits
• Recent sales and volume

5. Make an Offer or Buy

You can:

• Buy at listed price
• Make an offer below asking price
• Participate in auctions

When you buy, you pay the NFT price plus gas fees. The NFT transfers to your wallet.

How To Sell NFTs

Selling NFTs is similar to buying:

1. List on Marketplace

Connect your wallet, select the NFT you want to sell, and choose:

• Fixed price listing
• Auction with end time
• Accept existing offers

2. Set Price

Research similar NFTs to set a competitive price. Consider:

• Floor price of collection
• Rarity traits
• Recent sales of similar NFTs
• Market conditions

3. Pay Gas Fees

Listing requires gas fees. When someone buys, you receive payment (minus marketplace fees, typically 2.5-5%).

Key NFT Concepts

Floor Price

The lowest listed price for an NFT in a collection. Often used as a benchmark for collection value.

Royalties

Percentage paid to original creator on each resale. Programmed into the smart contract. Typical range: 5-10%.

Rarity

Traits that make an NFT unique within a collection. Rarer traits typically command higher prices. Tools like Rarity.tools rank NFTs by rarity.

Provenance

The ownership history of an NFT, recorded on blockchain. You can verify who previously owned an NFT.

Gas Wars

When many people try to mint popular NFTs simultaneously, gas fees spike as users compete to have transactions included first. Can make minting very expensive.

NFT Risks and Scams

NFTs have risks like any crypto investment:

Common Scams

• Fake collections: Copycats of popular projects
• Rug pulls: Creators abandon project after minting
• Phishing: Fake websites or links to steal wallets
• Discord scams: Fake support messages or links
• Fake marketplaces: Sites that steal NFTs or funds

How To Protect Yourself

• Verify collection addresses match official project
• Check for verified badges on marketplaces
• Research projects before buying
• Never share seed phrases or private keys
• Use reputable marketplaces
• Be skeptical of "too good to be true" deals

Other Risks

• Price volatility: NFT values can drop dramatically
• Liquidity: Hard to sell some NFTs
• Storage risk: If metadata links break, NFT might lose value
• Smart contract bugs: Vulnerabilities could be exploited
• Regulatory risk: Future regulations could affect NFTs

Market Dynamics

The NFT market has experienced significant volatility, with periods of explosive growth followed by corrections. Understanding market dynamics helps:

Factors Affecting Value

• Utility: Does the NFT provide real benefits?
• Community: Strong communities support prices
• Creator reputation: Well-known creators command premiums
• Rarity: Rarer traits typically worth more
• Trends: Market sentiment affects prices
• Floor price: Collection floor affects individual NFT values

Market Cycles

NFT markets follow cycles similar to crypto:

• Bull markets: High prices, high volume, new projects launching
• Bear markets: Lower prices, lower volume, projects consolidating

Environmental Considerations

NFTs have faced criticism for environmental impact, particularly when minted on proof-of-work blockchains like Ethereum (before the Merge).

Current State

Ethereum's move to proof-of-stake reduced energy consumption by ~99.9%. Most NFTs are now minted on more efficient chains:

• Ethereum (post-Merge): Proof-of-stake
• Layer 2s (Arbitrum, Optimism): Lower fees, efficient
• Solana: Proof-of-stake, fast, low fees
• Polygon: Proof-of-stake sidechain

Carbon Offsets

Some NFT projects and marketplaces purchase carbon offsets to neutralize environmental impact. However, the effectiveness of offsets is debated.

Future of NFTs

NFT technology continues evolving:

• Better utility: More real-world applications beyond art
• Cross-chain: NFTs moving between blockchains
• Fractionalization: Owning shares of expensive NFTs
• Better UX: Easier to buy, sell, and use NFTs
• Regulation: Clearer rules may increase adoption