Lesson 15 – What are NFTs?

NFTs, which stand for Non-Fungible Tokens, have quickly become an important part of the crypto world. NFTs are based on their own token standard, which operates differently from common crypto assets. While Bitcoin can be exchanged for another Bitcoin, an NFT cannot be easily exchanged for another NFT because each NFT is unique. Additionally, as they are stored on the blockchain, NFTs provide secure and immutable proof of authorship and ownership.

How NFTs work – The case of “CryptoPunks”

NFTs first made a significant impact in the digital art market with CryptoPunks, a collection of thousands of algorithmically generated images with different characters. Since each of these images only exists digitally and can be infinitely copied, determining the original owner can be challenging. This is where NFTs come in: each of the CryptoPunks is linked to a unique non-fungible token, allowing its owner to prove ownership and authenticity. Moreover, like other crypto assets, the NFT can be sent over the blockchain – making it easy to transfer ownership of the token and the asset it represents.

NFTs are also useful outside the art market. They can be used wherever digital assets are traded or real assets are digitized. Essentially, any asset can be represented and traded via an NFT.

From digital proof of ownership to the Metaverse

Currently, the most significant use cases for NFTs are in the realm of digital assets. Virtual lands in video games, digital concert tickets, copyrights to music and films are all tradeable in the form of NFTs. However, assets beyond the digital sphere, such as property ownership or shares in real estate, can also be traded as NFTs. Additionally, NFTs could become integral to the emerging Metaverse — a virtual world where users interact digitally, aiming to closely resemble the real world.

This digital parallel universe is expected to be realistic and immersive through the use of virtual and augmented reality headsets. Users explore their surroundings as digital personas, attend virtual concerts, decorate their digital homes, and wear clothing made of bits and bytes. All of these virtual items can be bought and sold in the form of non-fungible tokens, similar to those that exist in the crypto space. In short, NFTs can attribute authorship, ownership, and value to future virtual assets in the Metaverse. In addition, the token standard fulfills another important function: it enables the scarcity of digital assets that could otherwise be infinitely replicated, causing them to lose their value faster.

How do NFTs work from a technical perspective?

Technically, NFTs, like other crypto-assets, are based on blockchain technology. All information, such as the asset’s value, ownership, and usage rights, is stored there. The blockchain is considered technically secure because it is distributed. It is not controlled by a central actor, but by many different users. Data is thus protected from manipulation and cannot be changed retroactively. To create NFTs, a programmable blockchain is required. Non-fungible tokens are generated and transferred using smart contracts. These are codes that are automatically executed on the blockchain, making the Ethereum network, for example, an ideal platform for such functions.

How are NFTs traded?

NFTs are traded online on dedicated trading platforms. Those wishing to create their own NFTs upload the underlying asset – a digital work of art, for example – to the relevant NFT marketplace. At that moment, the NFT is “minted”, meaning the digital file is transformed into a digital blockchain asset.