If you’re like most people, you’ve heard quite a bit about NFTs lately. You may have even done some research to find that some of these digital artifacts have sold for millions of dollars. But, as with any new technology the general population’s understanding of these digital artworks is quite limited. 

So, What Exactly Is an NFT?

The term NFT is an acronym for the term non-fungible token, which, at a very high level, is a smart contract that lives on the blockchain, representing a unique piece of art. Let’s break that down a bit, shall we?

The blockchain is a communal system on which cryptocurrencies are built. The idea is that instead of having a central bank or other centralized party be in charge of issuing currency and controlling monetary policy, the members of the cryptocurrency community do so by mining crypto, with each member adding blocks that act as a source of validation of ownership to the chain. 

NFTs work in a similar manner. Like cryptocurrencies, these are tokens that live on a decentralized blockchain and are validated through the community. However, there’s one big difference between an NFT and a cryptocurrency. 

Cryptocurrencies are fungible, meaning that you can trade one coin for another and end up with the exact same thing. For example, one bitcoin is equal to one bitcoin, there’s nothing unique about it; it’s completely fungible. 

The term non-fungible means that the token simply can’t be traded for another similar token because it’s one of a kind. For example, your dog is non-fungible. Sure, there may be other dogs that look like your dog, but if you traded one for the other, you would know the difference. 

There Are Different Types of NFTs

All in all, there are two distinctly different types of NFTs – those that were designed as artworks and those that come with utility. Here’s how it works:

Art-Only NFTs

Art-only NFTs are essentially one-of-a-kind digital artifacts. When these NFTs are purchased, the buyer gains ownership over the digital piece of art, whether it be a still image, a GIF, a video, or any other form of digital art. 

These artworks are valuable for two reasons:

    1. Scarcity. The most valuable art-only NFTs are single-run pieces of art, meaning that there will only ever be one owner. Sure, that owner can sell the art to someone else, but once the sale is final, the new owner will be the sole owner. Following along the laws of supply and demand, when supplies are minimal and demand is high, the price must rise, which makes rare artworks valuable. It’s the same thing that makes the Mona Lisa so valuable. Ultimately, there’s only one original Mona Lisa painting, and everyone around the world would love to own it. 
  • The Cryptocurrency Behind the Art. When NFTs are purchased, they’re generally purchased using cryptocurrency, and their value is held in the cryptocurrency they represent. For example, most NFTs live on the Ethereum blockchain and are a representation of Ether, the cryptocurrency that runs the blockchain. Therefore, when the value of the underlying cryptocurrency of an NFT rises, so too does the value of the art. So, an NFT purchased for one ether today is worth around $4,000, but tomorrow, if ether climbs to $5,000, that same piece of art would now be worth $5,000. 

Utilitarian NFTs

NFTs aren’t just about digital art. The fact is that they have the potential to create a pivotal shift in how the internet works and how we see digital ownership. While the first NFTs were created as digital artworks and artifacts, the industry has quickly grown to become a highly utilitarian one, one where your NFTs can be used for various purposes. 

Some of the most common uses of NFTs include the following:

    • In-Game Experiences. There are several NFT-centric games on the market today where players use their tokens to gain an upper-hand in the game or enjoy parts of the game that aren’t available to others. For example, players of a racing game may actually own the digital versions of the cars they race, while players in a first person shooter may actually own the guns they use in the game.  
  • Product Tracking. Companies are also using NFTs as a way to track products. For example, Glenfiddich, a high-end scotch producer, launched a line of ultra-rare NFTs that were coupled with each bottle of an ultra-rare run of scotch. Buyers could trade or sell their NFTs, or redeem them to get their hands on the ultra-rare scotch represented by the token. 
  • Rewards Programs. There have also been several rewards programs launched that are centered around NFTs. These programs use entries in the blockchain to monitor customer activity and often reward their users with NFTs that can be redeemed for products or services in the future. 
  • Ticketing Systems. Finally, there have been several exclusive events only available to the owners of specific types of NFTs. Moreover, some companies are working to expand the NFT ticketing concept, creating non-transferable NFTs for tickets to sporting events, concerts, and other venues. 

The Value of Digital Ownership

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Whether you’re interested in art-only NFTs or those on the utilitarian side of the fence, there’s incredible value in proven ownership of digital assets. Think of it this way, when you buy a movie on your favorite streaming service, you own that movie, but do you really OWN that movie?

The simple fact is that you can’t trade that movie or sell it to a third party. On several platforms, you only have access to that movie as long as you pay the monthly membership fee to have access to the platform as a whole. 

NFTs are changing this. They’re essentially a way to verify the ownership of any asset in the digital realm, and in many ways, in the real world. 

The Bottom Line

The bottom line here is simple, an NFT is a token that lives on the blockchain and acts as a source of validation of ownership, whether it points to the ownership of the NFT itself or a product the token represents.