What are NFTs and how do they work?

These three letters have become one of the terms that has burst with more force in recent times. I’m sure you’ve heard of NFTs lately. No wonder. This new type of investment, somewhat complex to understand at first, is becoming more and more visible. The NFT, Non Fungible Token, is a digital certificate of authenticity that through blockchain technology, the same technology used in cryptocurrencies (and tokens), is associated with a single digital file. From there, a new form of digital expression (and business) has been built. But what is an NFT, how do they work, how did they originate? Let’s see what they consist of.

These digital certificates, called to revolutionize multiple sectors and the multiverse, also suffer the ups and downs of the cryptocurrency market.

A non-fungible token is defined as a type of token that can be uniquely identified and distinguished during interaction and circulation. In blockchain technology, assets can be divided into two categories: coins and tokens. The former, such as Bitcoin, have their own blockchain system, which use transactions to maintain their own independent ledger. The latter do not have their own blockchain, but run on the blockchain of a cryptocurrency, using smart contracts to record data. In turn, tokens can be subdivided into two types: fungible and non-fungible. Fungible tokens (FTs) are tokens that can be divided into parts and replaced one for another. NFTs, on the other hand, are a type of token that is unique and cannot be split. If you still don’t quite know what cryptocurrencies are, we invite you to also read our article “What are cryptocurrencies and how do they work?”

What is an NFT?

NFTs, or non-fungible tokens, are digital assets certified through blockchain technology. The cryptography of these tokens is what makes these assets unique: no two are alike, and they cannot be exchanged with each other. This makes it possible to prove that the person who bought them is their sole owner.

NFTs can be practically anything that can be digitized: from works of art, to memes, tweets, photographs… The universe is enormous.

If the above explanation of what NFTs consist of has not cleared up all doubts, it is worth remembering that a non-fungible good is one that is not consumed with its use, cannot be replaced and is not substitutable. Again, it is something unique, contrary to what happens with money: you can exchange without problems a $10 bill for a $10 bill because both bills have the same value, i.e., they are fungible. The same thing happens with cryptocurrencies. On the other hand, a work of art is the most illustrative example of a non-fungible good: it is an unrepeatable, unique piece, irreplaceable by another.

Now let’s take all this to digital. NFTs are individual units - image, video, audio, text or compressed file - with a unique value. This is possible because each digital asset gets an identifier in which metadata (author’s name, its initial value or sales history) is recorded using blockchain technology, ensuring that the piece cannot be duplicated.

With these premises, these assets have triggered a sort of new gold rush in the form of crypto-art. The sale of NFT is a new way to (try to) make easy money in the online world and many artists, influencers, celebrities, companies and organizations are jumping on the bandwagon.

In just one year, in 2021, NFTs in the form of artwork files, memes, stickers and just about anything that can be digitally recorded generated more than $3.5 billion.

Keep reading on how NFTs work.