An NFT: What it is and How it Works

Blockchain technology has been developing drastically with many applications and attracting more and more new users. The amazing technology has been utilized in education, agriculture, medicine, and especially trading. You may have known about coin and token, but how about NFT, a newly emerging term?

What is an NFT?

A brief history of NFTs

In 2012, there was a need to store documents such as certificates, stocks, or licenses on blockchain leading to the birth of NFTs in 2017. It was the first time NFTs are used under the ERC-721 standard on the Ethereum network. It was not until 2021 that the glorious era of NFTs started.

Definition of NFTs

An NFT (Non-fungible token) is a type of digital asset on blockchains. Every NFT has its own identification code and is used to represent a real-life asset such as a drawing, a song, or even a house. Therefore, they are unique and cannot be replaced or exchanged equivalently as usual tokens.

Clearly explained, if I have one USDT and you have another USDT, we can exchange for each other because basically, they have the same value, which means they are fungible. On the other hand, when I have an NFT and you have another NFT, we can trade our NFTs by using cryptocurrency or fiat but we cannot make any equivalent exchange because they have different values. That’s why they are called “non-fungible tokens”.

Since NFTs are created on the blockchain, they obtain securable features such as immutable, sustainable, and explicit. Every NTF once minted on a blockchain cannot be altered and will be permanently stored on that blockchain’s public ledger that can be seen by everyone. Besides, an NFT cannot be split into smaller parts just as a coin or a token.

How does an NFT work?

NFTs run on a blockchain just like coins or tokens, but the difference is that NFTs cannot be traded equivalently. An NFT has its own value, but the price is set by the market. An NFT can be sold at a better price when it is scarce and many people want to have it. Sellers should know how worthy their products are to set suitable fixed prices or they can choose to sell by auction.

Blockchain is well known for its decentralization. That means when NFTs are minted on a blockchain, creators can really own their works. Recently, most NFT marketplaces adopt a policy to offer NFT authors a passive income called loyalty. Moreover, when traded, every NFT transaction will be recorded, which enhances its transparency.

As mentioned earlier, an NFT’s price can be volatile as cryptocurrencies depending on the market. If you want to trade an NFT, you should consider carefully the project and the blockchain of that NFT. Most NFTs are now minted and stored on the Ethereum blockchain, one of the most popular and prestigious blockchains. Some of the prominent NFT marketplaces are Opensea, Binance NFT, SuperRare, Rarible, etc.

NFTs’ use cases

NFT is now widely used in various aspects including gaming, collectibles, fashion, ticketing, and especially metaverse.

Gaming

NFTs are mostly used in gaming to represent characters’ skin or weapons. Gamers can actually own their in-game items. With multi-chain technology, they can even send their items to different accounts in other games easily.

Collectibles

Many artworks are now created and sold as NFTs, which helps to reduce counterfeiting and damaged by shipping. NFT is durable and will never be lost on the blockchain so it is the best solution for artworks and collectibles to maintain their quality forever.

Ticketing

Due to its uniqueness, an NFT can be used as a ticket to enter a music or sports event to reduce forgeries.

Metaverse

The metaverse is known as a virtual-reality space generated by computers in which people can interact with each other. NFTs play a vital role in accessing the metaverse. Every NFT is a representation as a key for users to get into the metaverse.

Bottom line

With the development of blockchain technology, NFTs have emerged as a necessity. NFTs have played an increasingly important role in entertainment and authenticity. The future of NFTs seems to be very bright and promising. However, if you want to invest in an NFT, you need to have some background knowledge and carefully consider many aspects to ensure you will make a profit.