What Are Non-Fungible Tokens (NFTs)?
Sidney Richardson5-Minute Read
June 03, 2021
If you’ve been hearing a lot about NFTs, Ethereum and blockchains recently and have no idea what any of it means, you’re not alone. As cryptocurrency has exploded in popularity, NFTs have seen a huge spike in interest as well – but what even is an NFT? Here’s what you need to know.
NFT stands for “non-fungible token.”
The “non-fungible” part means that whatever is being sold is one of a kind and can’t be replaced. The Mona Lisa, for example, couldn’t be substituted – it’s a completely unique painting, and there’s only one. You could buy a print of Van Gogh’s Starry Night, but it will never be equal in value to the original artwork.
The “token” part means that it is some sort of digital asset. This could take many forms, but most commonly, NFTs are digital artworks or images. They are always intangible, meaning they aren’t ‘real’ objects and exist only in a digital format. Owning an NFT means that you own the ‘original copy’ of some digital item. Some people see it as a new form of art collecting – but with digital collectibles.
How Do NFTs Work?
NFTs are digital files, which means they can easily be copied, shared and reproduced. So how can an NFT be an ‘original copy?’
When an NFT is purchased, the record of the transaction as well as the unique ID of the ‘item’ itself is recorded in a decentralized database called a blockchain. Data entered into a blockchain is essentially recorded irreversibly, so a buyer’s purchase of an NFT is permanently recorded.
The owner of an NFT holds the digital certificate of ownership of the original work of art that they purchased – and that’s about it. The image or asset itself that they bought could be copied and shared any number of times and would be indistinguishable from the ‘original,’ which makes NFTs a little different from collecting physical art.
What Can Be Sold As An NFT?
Any digital asset can be sold as an NFT. NFT artwork includes many digital formats, including video. In fact, a Charleston digital artist known as Beeple recently sold an NFT video for $6.6 million. NFTs can truly be almost anything – from GIFs of Nyan Cat to trading cards and even memes.
A few examples of popular NFT ‘types’ are:
- Digital original ‘trading cards,’ including sports related memorabilia like NBA Top Shot and more off-the-wall collectibles like Cryptokitties
- Video clips/animations
- Digital art/paintings
- Notable first tweets/posts
- Virtual items such as video game skins or avatars
- Virtual real estate
- Other collectible digital files
How To Buy NFTs: NFT Marketplaces
There are many different platforms currently available to use for buying and selling NFTs. OpenSea, Rarible and Nifty Gateway are a few popular NFT marketplace sites. They are essentially like online art galleries where you can browse available NFTs. On sites like these, to purchase NFTs, you’ll first have to create an account and then (typically) fund it with cryptocurrency.
Most NFT marketplaces currently accept Ethereum (ETH), a form of cryptocurrency, as payment. To invest in cryptocurrency which can be used to purchase NFTs, you’ll need to use a platform such as Coinbase, Robinhood or any fintech app that allows you to invest in crypto. When investing in crypto, you’ll probably want to start by purchasing fractions of a single unit of currency. As of May 2021, a single ‘Ether’ is worth well over $2000 USD.
Once you have a bit of whatever cryptocurrency you need, likely Ethereum, you’re all set to purchase NFTs. Some are sold outright, and others are sold in an auction format, depending on what type of art you’re collecting.
What Is NFT Trading?
Just as NFTs can be bought, they can also be resold. Using a digital wallet that allows cryptocurrency and supports NFTs, you can buy and sell NFTs on any digital marketplace that hosts them. The idea with NFT trading, much like collecting art, is that a piece that you buy is one of a kind and might appreciate in value. If it becomes worth more later, you have the power to resell it to someone else.
Interestingly, some NFTs contain digital contracts that might give the artist a cut of the sale price when you do resell the work. This is part of what makes NFTs very appealing to many artists, as there are not many other ways to market your art to a large audience and continually profit from the work.
Still want to know more about NFTs? We answer some more of your frequently asked questions below.
Can anyone make an NFT?
Technically speaking, yes, anyone can create an NFT. If you’ve created a digital art piece, GIF or any other virtual creative work, all it takes is an NFT marketplace account to sell it. If you have an account with a site like OpenSea, it’s as easy as hitting the ‘create’ button on the site, setting a price and uploading your file.
Is an NFT a type of cryptocurrency?
An NFT is purchased using cryptocurrency, but it isn’t the same as crypto. Cryptocurrency is considered fungible – one bitcoin can be exchanged for another bitcoin and it is exactly the same. NFTs are each unique and are different from cryptocurrency.
Are NFTs bad for the environment?
If you’ve heard that the NFT market is harming the ecosystem and you're curious what that’s about, the rumor is definitely based in truth. NFTs exist and operate through blockchain technology, which requires energy from computers around the world to operate. Cryptocurrency, too, requires energy simply to exist and process transactions. According to Digiconomist, the carbon footprint of the Ethereum network is comparable to the entirety of Sri Lanka, and the amount of power needed to fuel the network is on par with the power consumption of Portugal.
So yes – NFTs are very energy inefficient and are, technically, contributing to emissions.
Is real estate fungible?
If you recall earlier, ‘non-fungible’ means an item is totally unique and one of a kind. On the opposite end, ‘fungible’ means that an item is completely interchangeable and could be instantly replaced. So, can real estate be fungible?
Truthfully, no – even if a home is made from all the same parts as the one next to it, it has different views from the homes around it and is likely in a slightly different state of repair. Every home really is unique in that regard, even if the differences are small.
Are diamonds fungible?
Like real estate, diamonds aren’t truly fungible, either. Since no two diamonds are technically exactly the same, they can’t be considered completely interchangeable, either.
Should You Buy NFTs?
While they are being hailed as the next logical evolution of art trading and collection, buying NFTs isn’t for everyone. Financial decisions are personal, and before making any decisions you are unsure of, we always recommend you consult a financial advisor or professional.
For more on emerging finance trends, advice on budgeting, debt management and more, visit the Rocket HQSM Learning Center.
Check Your Credit Score
Create a Rocket Account to check your credit score.Create Account
Financial Technology: What Is Fintech?
Financial technology, or “fintech”, has played an integral role in creating greater ease and efficiency in the modern finance world. Learn more about it here.
What Is Bitcoin, And How Does It Work?
If Bitcoin seems mysterious to you, that’s because it is. Learn what Bitcoin is and how it works, as well as what it’s worth and how to use it.