What Is an NFT? Your Guide to Non-Fungible Tokens in 2024

NFTs are digital assets that are stored on a blockchain. They represent various forms of digital content and may even be tethered to physical assets. Ownership of these assets is recorded on the blockchain, creating an immutable record that enables the selling and trading of NFTs. If crypto and NFT terms are new to you, you can browse the glossary of terms at the bottom of this page. 

What does NFT stand for?

NFT stands for non-fungible token. Although non-fungible tokens are widely regarded as a new technology, the first NFT was minted in 2014 by digital artist Kevin McCoy and tech entrepreneur Anil Dash. You can trace the origins of NFTs even further back to 2012 when Meni Rosenfeld published the "Coloured Coins" whitepaper. “Coloured Coins” describes the methodology for representing and managing the ownership of real-world assets on a blockchain. 

What does non-fungible mean?

The term “non-fungible” is not limited to the NFT space. It also describes assets in law, finance, or commerce that are difficult to exchange with similar goods. In other words, non-fungible assets are unique. You cannot replace them with similar items. Diamonds are a great non-digital example of a non-fungible good. Many different cuts, grades, and styles of diamonds exist. These qualities make them unique and non-interchangeable with other diamonds. 

Non-fungible vs. fungible

In contrast, Indian Rupee notes are an example of a fungible good. You can exchange one ₹500 note for five ₹100 notes or two ₹200 notes and two ₹50 notes. Anything that is mutually interchangeable can be described as fungible. Fungible goods are easily replaced with items of identical or practically identical value. 

What is a non-fungible token?

A non-fungible token is a digital identifier recorded on the blockchain. It cannot be copied, substituted, or changed. Non-fungible tokens validate the authenticity and ownership of a digital asset. Essentially, a non-fungible token is proof of ownership. This type of certificate is digital and cannot be altered due to the nature of blockchains. 

What is an NFT?

NFTs are proof of an asset’s purchase. They are not the asset itself. These circumstances mean that you can create an NFT out of virtually anything. In addition to digital objects, you can use a digital object to represent a tangible item. Here are a few examples of things that can (and have been) turned into NFTs:

• Digital content like video clips and social media posts

• Media files such as GIFs

• Video game items like avatars and skins

• Digitised fashion, such as NFT trainers

The difference between cryptocurrency and NFTs

Despite their similarities, cryptocurrency and NFTs are not the same thing. Cryptocurrency is, however, a digital currency used for trading NFTs. The primary difference between cryptocurrency and NFTs lies in their value. The value of cryptocurrency depends on its utility, similar to the Indian Rupee. If every merchant in India decided to stop accepting Indian Rupees, their value would plummet because they are purely economical. NFTs have both economic and non-economic value. Since an NFT can represent anything from artwork to a video game, its value depends on factors like investors, collectors, and rarity. 

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Examples of NFTs

The list below contains a few of the most widely recognised NFTs and NFT collections.

• Cryptopunks: As one of the earliest NFT collections, Cryptopunks are well-known in the NFT space. Cryptopunk #8857 went viral in September 2021 after selling for USD 6.63 million or 2000 Ether (ETH), the Ethereum network’s cryptocurrency. One reason behind its staggering price tag is a rarity—Cryptopunk #8857 is one of 88 Zombie Cryptopunks. 

• Bored Ape Yacht Club: The Bored Ape Yacht Club is an iconic NFT collection, thanks to its popularity among celebrities and high-profile athletes. Much of its notoriety derives from using Bored Apes as profile pictures on social media. Bored Ape #3739 sold for USD 2.9 million in September 2021. 

• Lazy Lions: Avatars from the Lazy Lions NFT collection are trendy among those in the NFT community. Upon their debut, 3,000 and 4,000 of the 10,000 Lazy Lion NFTs released sold in just five hours. As of July 2022, the most expensive NFT available from this collection is Lazy Lion #6632, currently listed for 2,000 ETH or USD 2,120,500.

• The House of Hiranandani: This project launched India’s first real estate NFTs in September 2022 to a great reception, joining other countries such as the US, where real estate NFTs are making big money.

Why do NFTs look like that?

You may have noticed that mainstream NFTs look strikingly similar to one another. This phenomenon is due to the usage of layering and generative coding. Layering is the process of generating images from a list of visual elements. For example, you might add “hat” and “shirt” to your list and produce variations like a cowboy hat, a polo shirt, a Hawaiian shirt, and a top hat. Then, you’d use a computer program or generative coding to stack each of these layers on top of each other in a randomised order. Creators can also input rules such as “if the avatar is wearing a top hat, it cannot also be wearing a Hawaiian shirt.” 

These rules and variations make creating thousands of unique avatars from over a hundred elements possible. Programmatically generated NFTs are similar to randomising a character when playing a role-playing video game (RPG). RPGs often include hundreds of options for clothing, facial features, and accessories. Choosing to randomise your character rather than customise it will prompt the game to generate a random combination of each element for you.

Why are NFTs so expensive?

The value of an NFT depends on many different characteristics.  A few contributing factors include:

• The source's credibility

• The artist's relevancy

• The current market for NFTs

• The utility of the NFT 

Kevin McCoy, co-creator of the first-ever NFT, told Ocula Magazine that NFT pricing could be broken down into a set of questions:

“Do you believe that assets will be digital? Do you believe that scarce digital assets will be more valuable than non-scarce assets? If yes to both, then the scarcest digital assets will be the most valuable. This is currently how the crypto-collectors view things [1].”

Why do people buy NFTs?

The reasoning behind an NFT purchase is likely to vary significantly from one person to another. Since NFTs can be made from collectible items, personal preferences or brand loyalty can drive investments. Some NFT collections strive to create an exclusive community of owners, driving sales among those who want to join. Ultimately, buying an NFT is a personal choice. 

Pros of NFTs

• Decentralisation: Like Cryptocurrency, a central authority does not control NFT selling and trading. Instead, each member of the blockchain network receives a copy of identical, immutable data (in the form of a distributed ledger). This removes the need for a mediating party because it enables people to execute transactions without trusting one another. You can learn more about decentralised finance by taking an online course like Decentralised Finance (DeFi): The Future of Finance Specialisation offered by Duke University.

• Networking: Depending on the creator of the NFT, real-world perks could be tethered to purchases from their collection. These perks include access to exclusive events and membership in groups or associations.

• Artist advocacy: Anil Dash, co-creator of the first NFT, was a consultant to auction houses and media companies at the time of the idea's conception. Dash wrote for the Atlantic that this role had him "obsessively thinking about the provenance, ownership, distribution, and control of artworks". NFTs were meant to use blockchain technology to protect artists from exploitation. Instead of working with third-party companies who often syphon earnings, NFTs aimed to help artists protect their creations by connecting them with sellers and investors directly.

Cons of NFTs

• Environmental impact: NFTs are traded with major cryptocurrencies like Bitcoin and Ether (ETH). These cryptocurrencies use a protocol called Proof of Work to validate transactions. In short, Proof of Work is like a mathematical puzzle proving a certain amount of computational power has been expended, confirming the validity of a blockchain transaction. This process is often called mining. As the networks grow, the puzzles become more challenging and require more computational power for miners to solve. According to some environmental advocates and financial regulators, the energy it takes to uphold this digital economy is unsustainable [2]. In 2020 alone, mining consumed more energy than Switzerland [3].

• Community impact: Energy is expensive, leading miners to relocate their operations to areas with cheaper energy costs. These mining operations can drive up energy costs for locals and cause cities to exceed their hydropower quota. Depending on the extensiveness of the hardware, mining operations can also generate a constant, tangible vibration in the area [4].

• Legal rights: When an NFT is purchased, the owner obtains the rights to the digital asset that lives on the blockchain. They do not receive legal rights to the underlying content. Suppose another party trademarks the artwork or item that an NFT represents. In that case, that party retains control over the legal rights of the intellectual property (IP) regardless of who owns the NFT.

• Value fluctuation: Since NFT value is not purely economic, it can fluctuate based on the current social climate. For example, Jack Dorsey, co-founder of Twitter, sold his first-ever tweet as an NFT last year for over USD 2.9 million. Today, Dorsey's NFT tweet is owned by crypto entrepreneur Sina Estavi. He listed the NFT for sale at USD 48 million and closed the auction with just seven total bids ranging between $ 5 and USD 277.

Key takeaways

• NFTs are digital assets that are stored on a blockchain. They act as certificates of ownership and authenticity over tangible or intangible objects. 

• NFTs and cryptocurrency are not the same. NFTs are traded using cryptocurrency. 

• The value of an NFT hinges on several factors, including social relevancy and scarcity.

• Purchasing an NFT does not inherently provide you with the rights to the artwork or asset the NFT represents.

Glossary of terms

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