While they may have been around in various forms for nearly a decade, non-fungible tokens (NFTs) have exploded in popularity in 2021 after receiving a string of celebrity endorsements, and artists like Beeple selling digital works at auctions for millions, or tens of millions of dollars.
What is an NFT?
Put simply, non-fungible tokens are unique digital assets. Cryptocurrencies like Bitcoin on the other hand are fungible, meaning that every single BTC in circulation can be swapped for another — they will both have the exact same characteristics, value, and purchasing power.
Unlike Bitcoin, US dollars, or other fungible assets, NFTs are one-of-a-kind collectibles ranging from digital images of art to player cards, items that can be viewed, traded, and held only in the online world.
Where did they come from?
The ‘Colored Coin’ is probably the earliest concept of an NFT, created in 2013 by early Bitcoin developers. The basic premise of the Colored Coin was to mark unique fractions of Bitcoins that, in turn, could represent items like property, coupons, equity, and more.
It wasn’t until 2017 that NFTs hit the mainstream spotlight in any meaningful way, thanks to the novel blockchain-based game, CryptoKitties. With some of its players making six-figure profits breeding and trading virtual cats, CryptoKitties quickly took the world by storm and became an early poster child for the idea of digital collectibles.
Why do they matter?
By allowing any item online or in real life to become a unique, irreplaceable digital asset, NFTs introduce a proven means to bring authenticity to the digital world.
For anyone that creates content — artists, musicians, authors, sports franchises and influencers — NFTs are a way to monetize work, defeat piracy and plagiarism, reach a wider audience, and manage royalties in a way that has never been possible before.
For consumers, NFTs are a whole new asset-class that enable early adopters and aficionados to take a stake in their favorite sub-culture, enabling anyone to become a collector or speculator.
How do they work?
At a technical level, NFTs are a variant of cryptocurrency and they rely on blockchain technology to verify their provenance, authenticity, and ownership. Most NFTs are based on the Ethereum blockchain, an open, decentralized platform that stores all the details of an item and guarantees it is digitally unique.
That said, NFT technology has come a long way in a short space of time, and nowadays many applications don't require users to have any knowledge of cryptocurrency or blockchain to participate.
How are NFTs made?
You can take any image, video, or audio file and turn it into an NFT in just a few steps. You'll need an Ethereum wallet that supports the ERC-721 standard, such as MetaMask or Trust Wallet, loaded with roughly $100 in Ether (ETH).
Next, head to OpenSea, Rarible, Mintable, or another marketplace that allows users to create NFTs. Click "create" on your platform of choice, and follow the steps to upload and name your file. Along the way, you will have to approve a number of transactions in your Ethereum wallet, and wait until each transaction is processed successfully. Once you've reached the final step, the NFT will appear in your collection — you can then hold, trade, or put it up for sale.
How do people buy NFTs?
A number of marketplaces have launched over the years, allowing anyone to browse, buy, and sell NFTs including OpenSea, Rarible, Nifty Gateway, and more. Now with solutions like MoonPay, NFTs can be purchased directly using fiat currency (although right now most are paid for with ETH).