What are NFTs And How Do They Work?

Josiah Nang-Bayi, MD
10 Min Read
NFT non fungible token golden coins falling. Trendy cryptocurrencies and coins on the blockchain technology. Close up view of crypto money in 3D rendering

NFTs, or non-fungible tokens, are one of the latest blockchain-based phenomena disrupting industries from finance to art to gaming. But what exactly are NFTs, how do they work, and what is driving adoption? This comprehensive guide demystifies the world of NFTs, their capabilities, and applications.

Defining NFTs

At the most basic level, an NFT is a unique blockchain-based token representing ownership of a digital asset. “Non-fungible” means each token is essentially one-of-a-kind and not interchangeable nor replicable. This differs from cryptocurrencies like Bitcoin where each token is identical to the next.

NFTs allow for verifiable digital scarcity and proof of ownership. Any type of unique asset like art, music, videos, collectibles, domains, avatars, tweets, virtual land, and more can be tokenized into an NFT. Blockchain metadata immutably records transaction history to establish provenance.

While the underlying asset remains freely replicable, its corresponding NFT functions as a permanent digital certificate of authenticity and ownership when transacted. NFTs introduce scarcity, liquidity, and network effects to previously unownable digital content.

How NFTs Work

NFTs are minted via smart contracts that assign ownership to a blockchain wallet address. They operate on standards like ERC-721 and ERC-1155 which are supported by the bulk of NFT marketplaces and wallets.

Once created, NFT ownership can be provably and permanently transferred between parties on the blockchain. NFTs can only have one official owner at a time. But ownership records and transaction histories remain public and verifiable.

NFT marketplaces like OpenSea, Rarible, NBA topshot and Nifty Gateway provide platforms to create, trade, and display owned NFTs. Some platforms also facilitate auctions, bids, and artist profiles. 

Due to their programmable nature, NFTs can include flexible features in their underlying contract logic like commissions, royalties, distribution rights, fractionalization, voting rights, and more. This extends their utility beyond just simple ownership representations.

Why NFTs are Significant

NFTs mark a paradigm shift around digital ownership and creative monetization online. Here are some reasons they are generating so much excitement:

Verifiable scarcity – Unlike abundant digital files, NFTs enable real digital ownership of unique items with transparent records.

New value from digital goods – Previously worthless digital goods like artwork now carry value via demand and provable scarcity.

Programmable ownership – Smart contracts allow creators to embed royalties, voting rights, commissions, and other features into the NFTs themselves.

Immutable provenance – The record of NFT ownership and transactions establishes the origin and authenticity of valuable items.

Interoperability – Some NFTs provide access and utility across multiple platforms and metaverses rather than just single uses.

Unlocked liquidity – By representing ownership of assets as tradeable NFT tokens, it unlocks transferability and market pricing.

Direct monetization for creators – NFTs allow creators to capture value from works directly without relying on platforms.

New avenues for engagement – NFTs enable digital collectibles, identities, memberships, tickets, in-game assets, and more.

Innovation in ownership models – The composability of NFTs allows novel experiments in community ownership, fractionalization, and joint access.

NFTs present a powerful new toolkit for the digitally native world to claim ownership of unique works and engage in creative crypto economies. Expect NFTs to continue spreading into diverse industries given these capabilities.

Major NFT Use Cases

Here are some of the most popular current and emerging use cases for NFTs across different sectors:

Digital Art

NFTs allow digital artists to sell scarce original works like images, GIFs, videos, and 3D sculptures directly to collectors and prove authenticity. NFT marketplaces like SuperRare and Nifty Gateway have enabled new crypto art markets.

Sports Collectibles

Sports teams and brands are selling collectible NFTs representing memorable video highlights, iconic moments, tickets, merchandise and more. NBA Top Shot pioneered NFTs for sports fandom engagement.

Gaming Assets

In-game assets like skins, avatars, wearables, victory dances, potions, and more can be tokenized as NFTs with verifiable scarcity and ownership. Players even gain real value from game accomplishments.

Domain Names

Crypto domain names like .crypto and .eth domains containing keywords have sold for large sums as NFTs due to their exclusivity and utility. Domain NFTs grant permanent ownership.

Physical Asset Certification

NFTs are being used to represent ownership for high-value physical assets like luxury products, trophy properties, equipment, or collectibles to establish authenticity and prevent forgeries.

Brand Building

NFTs enable brands to deepen customer relationships by crafting scarce digital goods and experiences as branded collectibles or through loyalty programs.

Event Ticketing

Tickets to concerts, festivals or conferences can be issued as NFTs that provide streamlined verification, eliminate scalping, and unlock added utility like VIP perks for holders.

Provenance Tracking

NFTs can carry immutable records of an asset’s origin, transaction history, and other contextual data as it changes hands to establish authenticity and prevent fraud. This has major potential for supply chain tracking.

As more asset classes become “NFT-ized”, expect complex new ownership models, behaviors, and markets centered around programmable blockchain-based tokens.

Evolution of NFTs

While the original vision for NFTs dates back over 5 years, mainstream conversation exploded in 2021 with surging trading volumes and million-dollar sales.

Here is a quick timeline of major developments as NFT adoption gained momentum:

2017 – ERC-721 standard created allowing unique digital tokens

2017 – CryptoPunks NFT collection launched 

2018 – ERC-1155 multi-token standard released

2020 – NBA Top Shot launched kickstarting modern NFT collecting

Early 2021 – NFT art like Beeple’s $69M sale gain attention

Mid 2021 – Major brands explore promotional NFT drops

Late 2021 – Metaverse and gaming NFTs gain steam

2022 – Additional chains like Solana and Mumbai enter NFT ecosystem

While the original vision was more focused on assigning ownership, we have shifted to more emphasis on the experience, community and Built-in access that comes with owning the NFT rather than just the underlying asset value.

As adoption spreads, expect continued evolution around emerging social signaling behaviors, interoperability, and new ownership paradigms. NFT capabilities will expand as technology and creativity collide.

Driving Factors for NFTs

Several important crypto and technology trends have driven the growth of NFT adoption:

– The rise of blockchain networks like Ethereum allowing secure digital ownership

– Maturation of cryptocurrency markets providing liquidity and payment rails

– Increasing virtualization of human experiences and identities

– Emergence of digital creator economies and patronage models

– Innovation in blockchain user experiences and wallets like Metamask

– Desire for provable scarcity and authenticity as more aspects of life digitize

NFTs sit at the intersection of digital ownership, creator monetization, crypto payments, digital collectibles, online status symbols, and emergent virtual worlds. This unique blend gives them outsized importance and appeal.

Challenges for Mainstream Adoption Of NFTs

Despite hype and soaring markets, NFTs face notable obstacles to widespread mainstream use including:

– Understanding the underlying technology and why NFTs hold value

– Price volatility and frequent scams erode consumer trust

– Limited interoperability between different blockchains and applications

– Convoluted purchasing flows via crypto wallets like Metamask

– Environmental sustainability concerns around energy-intensive NFT minting

– Perception that NFTs enable rampant piracy of IP

– Lack of clear regulations around blockchain property rights

Addressing these perceptions and friction points will be necessary to transition NFTs from speculative hype to stable long-term value. Maturation of blockchain scalability, consumer-friendly applications, hardware integration, sustainability, and regulatory clarity will expand markets.

Future of NFT Potential 

NFTs are still in their infancy but hold disruptive potential to empower digital ownership, creative monetization, community signaling, and gamified experiences across industries.

Unlocking that long-term future requires moving beyond short-term speculative hype to sustainable utility driving regular people to adopt NFTs. Some possibilities include:

– Concert tickets that provide dynamic experiences based on NFT holdings

– A metaverse identity passport with access to worlds based on token holdings

– A social network where influence stems from community-owned NFTs conferring status

– Virtual museums and galleries where patrons can appreciate and purchase scarce digital art

– Global treasure hunts with AR interfaces to collect locale-

Share this Article
Josiah Nang-Bayi, MD is a medical doctor by profession, an author, a financial literacy and digital assets enthusiast, an entrepreneur and a growing philanthropist.
Leave a comment
Would love your thoughts, please comment.x