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What is NFT? How Do NFTs Work?

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10th Aug, 2023
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What is NFT? How Do NFTs Work?

NFTs have seized the spotlight in the investment market and the internet for some time now. They have been around for a while but took off only around 2020. With some of these digital assets selling for millions of dollars, experts are divided over the hype it has created. While some say they are bubbles ready to burst any moment, others believe they are here to stay. 

What Is NFT?

The first question that needs to be answered is- what does NFT mean? NFTs, or non-fungible tokens, are digital assets tokenised via blockchain technology. They use the same underlying codes as many cryptocurrencies and are bought and sold online. The distinction between NFTs and normal currency is that each NFT has a unique code distinguishing them from other tokens. 

As mentioned earlier, NFTs are digital assets, from art pieces, songs, and videos, to everyday things, like toilet paper. NFTs can be exchanged for other NFTs, cryptocurrency, or money, depending on the cost the owner has assigned to them. 

How Do NFTs Work?

So what are NFTs, and how do they work? We have already covered the first half of the question, so let’s understand how NFTs work and how they differ from other preexisting cryptocurrencies. 

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NFTs are produced through minting, where all information about the NFT is recorded on a blockchain. After being minted, all NFTs are given a unique identifier code linked to a blockchain address. Each token has an owner and carries the ownership information as well. Even if there are 2000 different NFTs of a single item, all of them will have a different and unique identification code. 

Difference between NFTs and Crypto & Fiat currencies

Even though both are digital assets, NFTs are unique and represented through blockchain technology. Cryptocurrency can be traded and used for transactions, but NFTs cannot be exchanged or replicated. 

What is an NFT marketplace?

As the name suggests, an NFT marketplace is a place where you can sell and buy NFTs. There are many different types of NFT marketplaces, such as closed, open, and proprietary. Depending on the niche you want to invest in, you can also find NFT marketplaces dedicated to art, music, or gaming. 

Why use NFTs

NFTs have several benefits, but most importantly, they allow artists to establish ownership of their creations. This makes sure that they are secure and cannot be duplicated. NFTs can also be used for tracing the ownership of a certain piece back to its original digital asset. 

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Examples of NFT

Some of the best examples of NFTs would be the famous 4 Nyan Cat Gif, Beeple’s “Everyday: The First 5000 Days”, William Shatner’s memorabilia, Grimes’ WarNymph, Jack Dorsey’s very first tweet, Cryptokitties, and many more. 

What Is the Purpose of NFTs?

The main attraction of an NFT is its uniqueness, but, of late, other use cases of NFT are being experimented with. NFTs are mostly used in the art, games, music, and sports memorabilia niches. Combining NFT and AR (Augmented Reality) technology has helped create digital fashion collectables where different creators can work on a single piece of digital wearable. When it’s sold, they share the profits. 

Other than that, there are also event organisers who can mint NFT tickets for various events. The use cases of NFTs are slowly expanding, with their application spreading across more and more domains.

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Growing Popularity of NFTs

The main attraction of NFTs is the unique ownership that comes with it. When someone buys an NFT art piece, they know it’s theirs. An artist can ensure that their art is not stolen or used without permission with the help of NFT. These are some of the reasons why NFTs are so popular. 

Even though they have been around for some time, NFTs started garnering attention in 2017 when the blockchain-based game Cryptokitties first launched. This game allows players to breed unique cats and trade them with other players virtually. In 2021, the creator of Cryptokitties, Dapper Labs, launched the NBA top shot. This is when the popularity of NFTs started exploding. 

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Have NFTs Entered the Mainstream?

NFTs are still a niche topic with a lot of confusion surrounding them. NFT as a concept is quite tricky to grasp, leading to the majority staying away from it. However, since the beginning of this decade, there has been a blast in the number of people who have bought or sold NFTs. Hence it may be assumed that even though NFTs are not fully mainstream, they will soon become so. 

NFT Properties 

An NFT is programmable, portable, and indivisible. The programmability of NFTs makes them like software, which means you can easily add different functionalities to them. 

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Applications of NFT 

Many applications of NFTs are already in widespread use in several industries like gaming, music, and art. For example, artists can digitally create art and monetise them through NFTs. They can also sell these unique pieces to collectors. On the other hand, you can create and trade virtual assets like virtual real estate and other items in the game through NFTs. The scopes of the applications of NFTs are still being tested, but they have already gained traction in the last few years. Some use cases of NFT are:

  • Ticketing 

NFT can become the future of event ticketing. Tickets for highly anticipated events are hard to get, especially because bots buy tickets in the bunch to sell them in secondary markets at much higher prices. NFT can act as a pass to events and help artists sell their tickets directly to the audience, thus, reducing the number of scams. 

  • Virtual Real Estate 

The concept of the Metaverse is still debatable, but it seems to be the future. Many people are investing in virtual real estate through NFTs. Virtual land, much like real-world land, is limited, and buying land through NFTs in these spaces enables people to create things in those virtual spaces and sell them in the form of NFTs. 

  • Music

Musicians worldwide are turning to NFTs to preserve their music, album, memorabilia etc. Musicians now can tokenise their songs and make more money through them without getting any third parties involved. 

  • Gaming 

There are a lot of blockchain-based games which lets players earn money through playing the game. The players can win in-game assets for completing various challenges. These assets can be land, costumes, weapons or avatars. They can take them out of the game and sell them on various marketplaces to earn money.  

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What Is NFT Art?

There are no visual differences between NFT art and digital art. However, NFT art enables artists to ensure they cannot be duplicated online. It also allows them to sell their artwork on different NFT platforms without going through self-promotion or creating their brand on social media. They can directly contact a buyer and sell their art easily. 

Ethereum and NFTs – How Are They Different?

Ethereum is a type of cryptocurrency, much like Bitcoin. They are both fungible cryptocurrencies, while an NFT is non-fungible by nature. This means that even though they are created through similar programming, one Ethereum can be traded for another as they all have the same value. But, each NFT is unique and thus cannot be valued equally in exchange for another NFT. 

What Are Penguin Communities?

Pudgy Penguin is a viral NFT community offering its members various benefits and advantages. These benefits include access to exclusive Telegram channels and Discord servers that you can use to talk to other NFT owners and members. Many other NFT projects have their own communities set up. These communities help members share their ideas or sell and buy artworks as they please. 

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Step-by-step Guide to Buy NFTs

If you want to venture into investing in different NFTs, here is what you have to do: 

  1. Get a digital wallet where you can store your NFTs and cryptocurrency. 
  2. Depending on the types of cryptocurrency your NFT provider allows, you have to buy some cryptocurrency. You can do this via apps like PayPal, OpenSea, Kraken etc. 
  3. After this, you can move your cryptocurrency to your wallet, which is now ready to be exchanged for NFTs. 

How Safe Are NFTs?

NFTs are non-fungible tokens that use blockchain, which cannot be hacked. However, on the other hand, the software that stores the keys to these NFTs can be hacked, or the device that the keys are stored on can be destroyed. So technically, NFTs are as safe as their keys. 

Popular NFT Marketplaces

There are a lot of NFT marketplaces that are quite popular. These include OpenSea, Rarible, NBA Top Shot, Foundation, etc. Each of these platforms has its own rules, and all of them are hosts to many creators and collectors of NFTs. But traders must be cautious and thoroughly research anyone before they engage in business. 

NFT Scams

The main goal of NFT scams is no different than any other scam — to con you out of your money. While doing any type of transaction on NFT marketplaces or communities, make sure to do your research so that you can stay away from scammers. Scammers have previously gotten a hold of people’s login IDs to get into their crypto wallets and also scammed artists and sold their artwork elsewhere. 

Scammers have been known to mint fake NFTs, also known as “mimic NFTs”. These digital files, unlike real NFTs, have no ownership attached or any value and are sold for huge amounts. 

Conducting auctions without delivering the NFTS is yet another way scammers dupe buyers.

Creating fake reviews to lure in buyers is another way NFT scams occur. In this method, scammers provide false information about NFTs and use celebrity endorsements to dupe buyers into believing in the authenticity and value of the fake NFTs.

Future of NFTs

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The scopes for NFTs are truly endless. Starting from art to music, gaming, and written content, pretty much everything present on the digital platform has the potential to become an NFT. It is 2023, and the boundaries of NFT are already being pushed to new heights every day. As of 2023, over 10,000 active wallets engage with NFTs daily, with 6000 unique purchasers entering the NFT marketplace. According to speculations, the NFT market is predicted to reach $80 dollar by 2025 from $24.9 billion in 2021.

Conclusion

In the coming years, NFTs will play a significant role in the digital economy. Hence, those interested in digital assets must make it a point to study and understand NFTs. NFT can be a bit hard to grasp for beginners, but it has much potential to become mainstream as more people join the NFT trend daily. 

If you want to become a data science professional, the upGrad Executive PG Programme in Data Science & Machine Learning from University of Maryland is just for you. This PG programme can help you make better data-driven decisions and improve your data science and ML skills. Join the course to gain a solid foundation in cryptocurrencies, NFTs and more. 

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Rohan Vats

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Software Engineering Manager @ upGrad. Passionate about building large scale web apps with delightful experiences. In pursuit of transforming engineers into leaders.
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Frequently Asked Questions (FAQs)

1What is NFT in Crypto, and how are they different?

NFTs and cryptocurrency are similar in the way that they both use blockchain technology. But cryptocurrencies like Bitcoin and Ethereum are fungible, meaning they can be traded for one another as they carry the same value. On the other hand, all NFTs carry a unique token that no other NFT has, making these digital assets one-of-a-kind.

2What is NFT art?

NFT art is very similar to digital art, but the main difference is in the ownership of a piece. When an artist creates an NFT of an earpiece, they own it and can sell it on an NFT marketplace.

3Is NFT legal in India?

NFTs are legal in India and come under the Income Tax Act 1961. NFTs are also included as Virtual Digital Assets. Any income you may have through trading NFTs will be taxed at 30%.

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