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NFTs Explained: An Easy-to-Understand In-Depth Guide

Imagine buying a piece of digital artwork on the Internet at a reasonable price and getting a unique digital token known which proves your authority over the artwork you bought. Wouldn’t it be great? Well, that opportunity exists now, thanks to NFTs.

NFTs are currently taking the digital art and collectables world by storm. Just as everyone worldwide believed Bitcoin was the digital answer to currency, NFTs are now pitched as the digital answer to collectibles. Asa result, digital artists are seeing their lives changing thanks to the massive sales to a new crypto audience.Â

If you are interested in NFTs and want to explore more about what they are, you have come to the right place. Let’s dive in and see what all the fuss is about!

NFT means non-fungible tokens (NFTs), which are generally created using the same type of programming used for cryptocurrencies. In simple terms these cryptographic assets are based on blockchain technology. They cannot be exchanged or traded equivalently like other cryptographic assets.

Like Bitcoin or Ethereum. The term NFT clearly represents it can neither be replaced nor interchanged because it has unique properties. Physical currency and cryptocurrency are fungible, which means that they can be traded or exchanged for one another.

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Cryptopunks is a notable example of an NFT. It enables you to buy, sell and store 10,000 collectibles with proof-of-ownership.

As sometimes happens with innovative technology, NFTs did not just come out of the blue and become popular overnight. It leads to the question of when the first NFT came into existence.Â

According to some, Colored Coins, which was initiated in 2012, has the honor of being the first NFT. In the words of investor Andrew Steinworld, he said that one might argue that the Colored Coins were the NFT that first came into existence. Colored Coins exhibited a major leap in the capabilities of Bitcoin, however, they had a downside too. They could represent only some values if their worth is agreed upon by everyone. The scripting language of Bitcoin did not enable this type of behavior within the network it is in.Â

Some argue that “Quantum” NFT by Kevin McCoy minted on the Namecoin Blockchain on 2nd May 2014 is the first rightful owner of an NFT title. A project called “CryptoKitties” by Dapper Labs on Ethereum was the implementation of NFTs widely recognized as the first of its kind. When the 2017 crypto boom happened, those digital cats were priced at 600 Eth (or USD 172k) and mainstream attention was drawn globally. Since then, ample NFT projects have come up with a huge amount of success.

Blockchain refers to a method of documenting data that ensures its security and integrity. This makes it impossible or difficult to modify, cheat or hack the system. A blockchain is essentially a digital documentation of transactions that is disseminated and replicated across a network or computer systems that uses blockchain technology

These are two concepts that can be related closely but also can pose some difficulties when combined. Fungibility pertains to a commodity or asset’s ability to be exchanged easily for another similar unit without any difference in quality or value. Blockchain technology, however, creates a transparent and immutable record of transactions and ownership.

For instance, if a certain cryptocurrency is involved in an unlawful activity, it may be told to be non-fungible or tainted, which means that it cannot be used interchangeably with other units of the same cryptocurrency. This leads to a loss of liquidity or value for the asset that is affected. However, a lot of solutions are currently being developed, like mixing privacy or services-focused cryptocurrency, to address this problem and to ensure fungibility while preserving the security and fungibility of blockchain technology.

Now that you’ve taken your initial steps in understanding what an NFT is, you should continue on and learn about how an NFT works.

The NFT world is relatively new to people. Here are some examples of NFTs that exist today:

People interested in Crypto-trading and people who like to collect artwork often use NFTs. Other than that, it has some other uses too like:

Even celebrities like Snoop Dogg, Shawn Mendes, and Jack Dorsey are taking an interest in the NFT by releasing unique memories and artwork and selling them as securitized NFTs.

One of the most popular non-fungible tokens in recent days is NBA Top Shot, a partnership between Dapper Labs (makers of the CryptoKitties game) and the National Basketball Association (NBA). The NBA licenses individual highlight video reels, among other content, to Dapper Labs, and they digitize the footage and make it available for sale to consumers. Each reel shows a video clip, such as a famous player’s basketball dunk, some featuring different angles and digital artwork to make them unique. Even if someone made a perfect copy of the video, it can be instantly recognizable as a counterfeit. The venture has already generated $230 million in sales, and the company just also received $305 million in funding from a group that includes Michael Jordan and Kevin Durant.

These unique NBA moments are minted and released into the marketplace via “pack drops.” The most common sell for only nine dollars, but more exclusive packs can sell for much more.Â

Now that you’ve understood what is NFT used for, and the various ways you can benefit from it, let’s take a look at how it is specifically different from other forms on cryptocurrency.

NFTs or Non-Fungible Tokens are a kind of cryptocurrency that represents a one-of-a-kind digital asset or unique piece of artwork. Fiat and cryptocurrencies are mainly used for transactional purposes and are fungible, which means each unit can be interchanged. Being created on blockchain technology, NFTs allow the transfer of ownership and transparent ownership. They allow artists to monetize their creations made digitally and thus have gained huge popularity. Crypto and fiat currencies, on the other hand, are used mainly as a store of value or medium of exchange. While there are certain similarities, the unique features of NFTs make them different from traditional currencies.Â

It is a marketplace that is a public Blockchain platform. Though it is in its early stages, this marketplace is gaining popularity and inspiring businesses and developers to construct a marketplace.Â

NFTs have actually been around since 2015, but they are now experiencing a boost in popularity thanks to several factors. First, and perhaps most obviously, is the normalization and excitement of cryptocurrencies and the underlying blockchain frameworks. Beyond the technology itself is the combination of fandom, the economics of royalties, and the laws of scarcity. Consumers all want to get in on the opportunity to own unique digital content and potentially hold them as a type of investment.Â

When someone buys a non-fungible token, they gain ownership of the content, but it can still make its way over the Internet. In this way, an NFT can gain popularity — the more it’s seen online, the more value it develops. When the asset is sold, the original creator gets a 10 percent cut, with the platform getting a small percentage and the current owner getting the rest of that revenue. Thus, there is potential for ongoing revenue from popular digital assets as they are bought and sold over time.  Â

Authenticity is the name of the game with NFTs. Digital collectibles contain distinguishing information that make them distinct from any other NFT and easily verifiable, thanks to the blockchain. Creating and circulating fake collectibles doesn’t work because each item can be traced back to the original creator or issuer. And, unlike cryptocurrencies, they can’t be directly exchanged with one another (like baseball cards in real life) because no two are the same.Â

So, with all the fuss made over NFTs, is it accurate to say that they’re now mainstream? This article makes a strong case for believing that NFTs are now baked into the public consciousness. It doesn’t hurt that a number of high-profile celebrities have ventured into NFT waters.

While perhaps it may be premature to say “Yes, NFTs are definitely mainstream now,” if they continue on this trajectory, 2022 could be the year where we know that NFTs are here to stay.

One can consider a variety of unique digital assets based on personal preferences and interests at the NFT supermarket. Digital art is a popular category that includes unique pieces made by upcoming and well-known creators. Collectibles can be picked up too. These range from one-of-a-kind in-game items to virtual trading cards. Recent times have also seen sports-related NFTs like game highlights or limited edition player cards gain popularity. One can also explore virtual gaming and real estate assets that allow the buyers to trade and own game items or digital land. It is of utmost importance to conduct research on the value and authenticity of an NFT before purchasing it. This is due to the fact that the market is still evolving and is subject to volatility.Â

NFTs applications can be found in several industries, such as gaming, art, sports and music.  The creators of the art world are enabled to monetize their art created digitally and provide a unique record of ownership for collectors that is verifiable. In the same way, NFTs can be used to trade and create virtual assets in the gaming industry, including virtual real estate and in-game items. NFTs can be beneficial to the music industry by creating one-of-a-kind digital collectibles, while in sports, they can offer fan experiences and limited-edition memorabilia. Besides these, NFTs can also be used to verify and authenticate the ownership of physical assets like real estate and luxury goods.

Although NFTs are created using the same kind of programming language as other cryptocurrencies, that’s where the similarity ends.

Ethereum blockchain makes it possible for NFTs to work for several reasons:

Pudgy Penguin is a popular non-fungible token community, a cryptocurrency subcategory representing ownership in a unique asset: 8,888 penguins on the Ethereum blockchain, organized into one collection. Pudgy Penguin is just one of many communities out there that offer benefits and other advantages to members, such as having a membership on a shared Discord server or gaining access to a private Telegram channel that lets you talk with other owners.

Many NFT projects have their own communities, where members can collaborate, share ideas, and support or buy each other’s projects or art.

Having understood what NFTs are used for and its specific advantages over other cryptocurrencies, you might want to venture into buying NFTs. If so, you will need to acquire some essential items before you do it:

Bear in mind, that many exchanges charge a small percentage of your crypto purchase transaction as fees.

Once you’ve got your wallet ready, all you need to do is to buy NFT. Currently, the largest NFT marketplaces are:

With the growing popularity of NFTs the potential for fraud and scams is also growing.Â

Scammers use various methods to cheat buyers. These include using false information to sell NFTs, making fake NFTs and conducting auctions without any intention of delivering the NFTs. These scams can make buyers lose a lot of money.Â

Creating fake NFTs or “mimic NFTs” is one of the most common scams. In this, a digital file similar to NFT is created, but it has no ownership or value and is then sold for a large amount of money.Â

Scammers also use false information, such as fake reviews or celebrity endorsements to create a false sense of value and authenticity.Â

Another scam involves scammers conducting auctions without delivering the NFTs.Â

To safeguard themselves, buyers should research the authenticity of the NFT and the seller and buy only from reputed sellers and marketplaces.Â

NFTs are transforming the digital world by providing a way to verify ownership and authenticate digital assets by forging new pathways for investors, creators and collectors. NFTs are unique digital assets that can represent anything from music to digital art to in-game items and virtual real estate.Â

One of the most important advantages of the NFTs is that the digital creators get to monetize their work which was difficult to do before. NFTs provide a way of creating verifiable ownership and scarcity, making digital art and other digital assets more collectible and valuable.Â

Moreover, NFTs can potentially transform the gaming market by making a new market for virtual assets. Players can now sell, trade and buy virtual items with ownership that is verifiable. This enables new economic systems within games and new forms of gameplay.Â

Furthermore, NFTs can create new opportunities in the music industry by enabling artists to monetize their work apart from traditional channels. NFTs can represent concert tickets, unique digital collectibles and even ownership rights of songs.Â

NFTs are transforming the digital world by offering new methods of monetizing and authenticating digital assets. They can create new markets and opportunities across multiple industries by making them fast-evolving technology.

NFT has enhanced media exposure and special perks for aspiring artists on social media. Recently, Jack Dorsey, the CEO and co-founder of Twitter, with his very first and famous tweet, “just setting up my twttr,” and Vignesh Sundaresan, famously known as “Metakovan,” bought 69.3 million dollars worth of NFT art on Beeple.Â

Owing to its increasing popularity, people are now willing to pay hundreds of thousands of dollars for NFTs. Â

Like David Gerard, author of Attack of the 50-foot Blockchain, many experts in the crypto industry say that around 40% of new crypto users will use NFTs as their entry point. As a result of its growing popularity, NFT could represent a more significant part of the digital economy in the future.

NFTs can represent any asset digitally. It can be online-only assets such as digital artwork or real assets like real estate. Some examples are in-game avatars, digital/ non-digital collectibles, tickets, domain names, and more.Â

Most non-fungible tokens can be purchased with Ether only. So, owning and storing them in a digital wallet is the primary step. You can buy NFTs via an online NFT marketplace such as OpenSea, SuperRare, and Rarible.Â

NFTs that use blockchain technology like cryptocurrency are generally secure. Their distributed nature makes NFTs nearly impossible to hack. The only security risk is that you could lose access to your NFTs if the hosting platform goes out of business.

Fungibility is a term from economics describing the interchangeability of products/ goods. For instance, an item such as a dollar bill is fungible when it is interchangeable with any other dollar bill. Contrastingly, non-fungible means the item is unique or distinguishable. For example, if you take a dollar bill and have it signed by a famous artist, it will become unique. Â

NFTs or non-fungible tokens are digital assets based on blockchain technology. Anything can become an NFT—a piece of art, sports memorabilia, or even a tweet.Â

NFTs are digital files. They can be a jpeg of a piece of art, real estate, or a video. Turning files into NFTs helps secure them via blockchain to make buying, selling and trading efficient, reducing fraud considerably.Â

Like cryptocurrencies, non-fungible tokens also exist on a blockchain. It confirms the ownership and unique identity of the digital asset. A technology similar to Bitcoin and Ethereum is used to build NFTs. In fact, Ethereum is the widely accepted crypto in the NFT market.Â

NFTs are considered a safe investment option. These tokenized assets are accessible to everyone. They empower you with basic usage rights. Moreover, most buyers invest in them because they believe the assets will hold value in the future.Â

Some of the best ways to maximize the return from NFTs include Renting, Earning royalties, Trading NFTs, NFT gaming and Adopting NFT-powered yield farming.Â

Experts suggest that NFTs can be a good investment because you can resell them for profit. Several NFT marketplaces allow sellers to get royalties for their sold assets. However, proper research is necessary before investing so that you can gauge whether it suits your demands. Â

Both cryptocurrencies and NFTs use the blockchain network for ownership verification. However, unlike a cryptocurrency, an NFT can’t be directly exchanged with another NFT. NFTs are sold but not traded like securities on digital exchanges. In contrast, cryptocurrencies can be traded like securities.

NFT art is digital art tokenized in the blockchain, much like any other NFT object. Since the artwork is totally digital, buyers, sellers, and traders eventually transact in the metaverse. NFT art also has a single original, just like there is with physical art.

Thanks to this “What is an NFT?” tutorial, you have now seen everything you need to know about what an NFT is, how it works, its uses, and how you can buy them.

Whether you’re an experienced Blockchain developer or just an enthusiast who wants to explore more about NFTs, cryptocurrencies, and blockchain, you can enroll in Simplilearn’s Professional Certificate Program in Blockchain. This program helps you learn and explore more about cryptocurrencies, blockchain, and all the associated technology, accommodating all levels of experience.

Do you have any questions for us? Please feel free to drop them in the comments section of this article, and our experts will get back to you as soon as possible.

Ravikiran A S works with Simplilearn as a Research Analyst. He an enthusiastic geek always in the hunt to learn the latest technologies. He is proficient with Java Programming Language, Big Data, and powerful Big Data Frameworks like Apache Hadoop and Apache Spark.

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