An NFT (Non-Fungible Token) is a unique digital identifier that is recorded on a blockchain and is used to certify ownership and authenticity. It cannot be copied, substituted, or subdivided.
1. Fungible vs Non-Fungible
To understand NFTs, it helps to understand the word fungible. Physical money and cryptocurrencies are "fungible," meaning they can be traded or exchanged for one another. They are also equal in value, one dollar is always worth another dollar, and one Bitcoin is always equal to another Bitcoin.
Non-fungible means the opposite. Each NFT contains a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible).
Common NFT Use Cases
- Digital Art: Proving ownership of digital artworks and generative art collections (like CryptoPunks or Bored Apes).
- Gaming: In-game assets, characters, and land that players truly own.
- Collectibles: Digital trading cards and sports moments.
- Real World Assets: Tokenizing physical real estate or luxury goods.
2. How Do NFTs Work?
NFTs exist on a blockchain, which is a distributed public ledger that records transactions. Most NFTs are held on the Ethereum blockchain, although other blockchains (like Solana and Polygon) support them as well.
An NFT is created, or "minted", from digital objects that represent both tangible and intangible items. The data stored inside the NFT points to the location of the actual image, video, or audio file, while the blockchain secures the ledger of who owns it.