A non-fungible token (NFT) is a unit of data that lives on a blockchain. Each NFT has a unique identification code that can’t be replicated or copied and metadata that can be linked to a variety of things to provide immutable proof of ownership. For example, the metadata an NFT contains can be tied to digital images, songs, videos, or avatars. It can also be linked to physical items, like cars and yachts, or used to give an NFT owner access to exclusive merchandise, tickets to live or digital events, or other exclusive perks.
In this respect, NFTs allow individuals to create, buy, and sell things in an easily verifiable way using blockchain technology.
This is especially relevant when it comes to digital items, as NFTs give creators a way to establish an item’s provenance. For the uninitiated, “provenance” is documentation that authenticates the creator, ownership history, and appraisal value of a particular piece of art. Prior to NFTs, there was no way to verify the creator and ownership history of digital works.
When it comes to creating and selling NFTs, the process is really rather simple. It works like this.
An individual (or company) selects a unique asset to link to an NFT.
They add the object to a blockchain that supports NFTs through a process called “minting,” which creates the NFT.
The NFT now represents that item on the blockchain, verifying proof of ownership in an immutable record.
The NFT can be kept as part of a private collection, or it can be bought, sold, and traded using NFT marketplaces and auctions.
As you might imagine, the technical definition is a bit more convoluted. If you’re interested in that kind of breakdown, our NFT dictionary gives you a comprehensive overview of all the technology and infrastructure in the NFT ecosystem.
How are NFTs different from cryptocurrency?
You use the money in your bank account to purchase goods and services in the real world. Similarly, cryptocurrency is what you use for any and all transactions on the blockchain. Crypto can be purchased or converted into fiat currencies (dollars, euros, yen, etc.) or other cryptocurrencies (BTC, ETH, SOL, etc.) via crypto exchanges. By contrast, an NFT is a unique and irreplaceable asset that can be purchased using cryptocurrency. It can gain or lose value independent of the currency used to buy it, just like a popular trading card or a unique piece of art.
In short: NFTs are non-fungible, and cryptocurrencies are fungible.
To better understand this, it makes sense to think of traditional fiat currencies. If we asked you to let us borrow a dollar, you wouldn’t open your wallet and say, “Which one-dollar bill do you want?” Doing so would be silly, as each $1 bill represents the same thing and can be exchanged for any other $1 bill. That’s because the U.S. dollar is fungible. Cryptocurrencies are also fungible. They’re not unique and can easily be traded and replaced.
NFTs, on the other hand, are non-fungible in the sense that no two are the same. Each NFT is a unique unit of data that cannot be replaced by an identical version because there is no identical version.
When it comes to NFTs, uniqueness and scarcity increase their appeal and desirability. And as is true of all rare items, this scarcity allows individuals to sell their NFTs for premium prices.